Thursday, August 12, 2010

Shooting Star Month

Each summer we get a special treat. In mid-August, the earth’s orbit passes near the asteroid belt, resulting in the season of shooting stars. We see far more shooting stars in August than any other month. Shooting stars are really meteors that enter the earth’s atmosphere and burst into flames. All we have to do to see this annual show is gaze at the night sky in mid August: the odds are we will eventually see one. If we stay long enough, we will see several. It’s a seasonal thing, tied to the orbit of our earth around the sun.

But, in order to see it, we have to look up. And most of us spend our busy lives attending to our earthly affairs; we rarely have time to gaze upward at the night sky.

I wonder who first discovered Shooting Star Month. Ancient literature has many references to the heavens. The Greeks seemed to have particular wisdom in this area: was Shooting Star Month discovered by an ancient Greek who spent a lot time looking up? In order to notice the August shooting star phenomenon, he would have had to look up all year long. Only then could he notice the increase in shooting star activity in August. And he would have to verify his work by looking up over several years. Discovering nature’s patterns is difficult work.

But, once some noble hard working Greek discovered the phenomenon, it becomes easy for the rest of us to participate in his genius and enjoy August’s shooting star show. All we have to do is read about it somewhere, wait for mid August and look up at night. The hard work had been done long ago.

In my investment book, Beyond the Bull, I discuss the phenomenon of using other people’s knowledge for our own financial benefit. Is there a financial pattern that someone may have observed long ago, that we might be able to use for our own well-being. Is there a Shooting Star Month in the financial world?

It turns out there are many examples of such occurrences in the money world. The most relevant right now is known as secular alternation. Secular alternation refers to the tendency of the stock market to alternate between long term secular bull markets and long term secular bear markets. This financial gem is the key to planning our investment futures. Here are examples of how secular alternation has worked for the past 100 years or so:
1. In the late 1800s, there was a rail road boom in North America. This rail road boom gave rise to a stock market boom that ended in 1906 when that secular bull market ended.
2. 1906 to 1921: this secular bear market included World War 1 and hyper-inflation in Germany. [15 years]
3. 1921 to 1929: the roaring 20s produced a short powerful secular bull market. [8 years]
4. 1929 to 1942: the US stock market experienced a secular bear market accompanied by a depression and a world war. [13 years]
5. 1942 to 1966. Secular bull market. [24 years]
6. 1966 to 1982. Secular bear. [16 years]
7. 1982 to 2000. Secular bull. [18 years]
8. 2000 to now. Secular bear. [10 years so far…]

During the secular bull markets, the stock markets went up a long way. Those who bought stocks and simply held them as long term investments did well during these times. The secular bear markets either took stocks down a long way or took them sideways for a long time. Simply buying stocks and holding them resulted in either severe or minor losses. In the long term secular bull markets, investing in equity mutual funds was profitable. In the secular bear markets, it was not. Secular alternation dictates which investment strategies make sense at any given time.

What makes sense in a Secular Bull Market? Ordinary stock market investors can buy reasonable stocks and hold them for extended periods. In a rising market, that strategy works. “Buy and Hold for the Long Term.”

What makes sense in a Secular Bear Market? Ordinary stock market investors have to buy reasonable stocks when they are depressed in price and sell them when they are reasonably priced. “Buy Low, Sell High.”

What makes sense today? We have been in a secular bear market for ten years. If stock market investors have been buying low and selling high, they have had great opportunities to earn solid investment returns. If investors had been holding stocks for the whole ten years, they have been disappointed. They feel like the sky gazer who looks for shooting stars in January.

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