Stock prices wobble. Stock markets wobble too. Sometimes it’s more like a tremor. In any case, it’s a daily thing and investors need to know this.
I’ve been reading some old Peter Lynch interviews and articles he wrote from the late ’90s and early 2000s. Peter Lynch is known for his often misinterpreted “invest in what you know” philosophy. To him, part of owning stocks meant knowing what you own (meaning work and research).
He also meant knowing market history and Lynch knows his well. He’s better at rattling off historic market stats than most.
In the interviews, Lynch was emphatic that investors need to know that stock prices move – and not always in the direction they want. Investors don’t necessarily need the why behind it, just that it does happen repeatedly. In other words, it’s normal. And Lynch had the stats to back it up.
I thought a few of his talking points were worth repeating here (keep in mind, Lynch’s stats are a few years old – 14 to 20 years – but still relevant).
On the history of market declines and corrections.
The markets had a 10 or 11 percent return, compounded over the last 40 or 50 years, let’s say. But the returns are quite volatile, inter-year. For example, there have been 95 years so far this century. Fifty times, the market has had a decline of 10 percent or more. This does not mean 50 “down” years – the market might have been up 26 percent at one point in the year, finished up 4 percent for the year, and had a correction in the middle. So in 50 declines in 95 years means that about once every 2 years, the market has a 10 percent correction…That’s going to get your attention, and it’s probably going to scare a lot of people.
Of the 50 declines of 10 percent or more this century, 15 have been a decline of 25 percent or more. Fifteen declines in 95 years is about once every 6 years…That certainly will get your attention. I haven’t seen much in human nature that’s changed in the last 400 years, so there will be these corrections every 2 to 6 years. And what are you going to do when that happens! If you’re prepared for it, you don’t panic.
You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready – you won’t do well in the markets. If you go to Minnesota in January, you should know that it’s gonna be cold. You don’t panic when the thermometer falls below zero.
On the history of economic uncertainty and recessions.
Since WWII there have been 7 recessions. We’ve had two major wars (Vietnam and Korea), we’ve had the Persian Gulf crisis, we’ve had major changes in the Supreme Court, in Congress, changes in Presidents. Everyone whose attempted to make money by trying to predict these events, or the ramifications of these events, has wasted their time.
In the last 50 years we have had many periods of economic prosperity and many periods of uncertainty. Despite 9 recessions, 3 wars, 2 Presidents shot (one died and one survived), 1 President resigned, 1 impeached, and the Cuban missile crisis, stocks have been a great place to be.
What I do know about the stock market is that it looks forward. That’s right, forward…But every economic recovery since World War II has been preceded by a stock market rally. And these rallies often start when conditions are grim.
On the history of company earnings and stock prices.
Since World War II, despite nine recessions and many other economic setbacks, corporate earnings are up 63 fold and the stock market is up 71 fold. Corporate profits per share have grown over 9% annually despite the down years. Nine percent may not sound like a lot but consider that it means that profits mathematically double every eight years, quadruple every 16, are up 16 fold every 32 years and are up 64 fold every 48 years. Even if earnings rates slow to 6-7%, the compound gains will still be impressive over 10-20 years.
People who have made money in the stock market usually bought companies that have done well over time…So if the companies that make up the S&P do well in the next 10 or 20 years, you will make money. If you think those companies will be making less money in 10 years, then the stock market is not the place to be.
I think you have to learn that there’s a company behind every stock – and that there’s only one reason why stocks go up: Companies go from doing poorly to doing well or small companies grow to large companies.
That’s what the 1990s teach us: If the companies do well, the stocks do well. For every company that does badly…there are companies that do very well… You have to say to yourself: The reason I’m putting any of my money into mutual funds is because I think over a period of time companies…will be making more money in the future and new companies are going to come along…and they’re going to be making more money. That’s been the history of America through 100 years, particularly in the past 50 years. That’s the lesson.
On the history of market bubbles and bursts.
If all people learned from this boom and bust is that we had this amazingly overpriced market in March of 2000, well, that’s not much of lesson, is it? Go back to the 1880s, the 1920s. You have these periods of craziness. Should the lesson be you should never own stocks?
Of course not. But it’s a good reminder that investors can get swept up in greed and fear and drag the market with them, but eventually, the market moves on.
Prodigy Guest Spotlight: Peter Lynch 2/6/1996
Peter Lynch Market Commentary – Fidelity 9/20/2001
Peter Lynch: Why He’s Buying Now – Money Magazine 1/4/2003
10 Lessons Learned From Peter Lynch