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The Best 3 Years You May Ever See

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CNBC had just finished a whirlwind tour of guests opining on how bad the market's outlook was, but had time for one more. "The reason the market can't make a bottom is that the bottom in the economy is far away," the guest from Barclays warned. "We're still not seeing any signs of life. ... Things will get worse before they get better."

"So what's your strategy?" host Maria Bartiromo asked.

"Stay defensive," came the reply.

That morning, Kevin Hassett -- co-author of the infamous Dow 36,000 -- wrote an op-ed in Bloomberg declaring, "It is no wonder that markets are imploding around us. Obama is giving us the War on Business."

Investor Bill Fleckenstein chimed in with his thoughts. "A market for window-shoppers only," he wrote.

Two days later, Nouriel Roubini, the NYU economist who called the economic collapse, would issue his next forecast: "How Low Can the Stock Market Go?" his article in Forbes asked. "Lower ... much lower," was his answer. "Expect ... new lows reached in the next months and the year ahead."

It was March 9, 2009 -- exactly three years ago today.

The S&P 500 hit 666 that day. Adjusted for inflation, it was the lowest level since 1992.

It was also the market bottom. An epic rally has since sent the S&P to 1,365, or a gain of 105% in three years.

How does that stack up historically? In short, sensationally. Since 1871, there have been 1,661 rolling three-year monthly periods (January 2000-January 2003; February 2000-February 2003, etc.). The period from March 2009 through March 2012 ranks as the 31st best, or the 98th percentile.

Interestingly, the next best period was from 1996-1999, which returned 101.5%. In other words, the last three years have been a better time to invest than the famous bull market of the late 1990s.

Those are the numbers. What have we learned from them? One big lesson sticks out to me.

As blogger Eddy Elfenbein recently wrote, "[No] one likes to admit this but the last three years have been great for buy-and-hold."

With the crash of 2008, and ensuing rebound, came a widespread belief -- presented as almost axiomatic -- that the practice of buy-and-hold investing was dead. More volatility allegedly meant investors could no longer just buy companies and wait indefinitely; you had to be able to get in and out to score good returns. "When will Wall Street and the financial media admit it? Probably never," Sy Harding wrote in Forbes. "But buy-and-hold as a strategy is dead and gone, if ever it was a viable strategy."

But buy-and-hold only looks dead if you start investing when stocks are expensive. Yes, if you purchased stocks in 2000, when the S&P traded at 40 times earnings, you suffered a lost decade. That's how investing works. Those who bought when valuations were more reasonable in 1995 and held through today have earned an average return of 8.3% a year (including dividends). Those who bought in 2003 have since earned 5% a year -- not bad, considering we suffered the worst recession in 80 years, an oil spike, two wars, financial scandal, global terrorist attacks, record deficits, a downgrade of U.S. debt, and a near shutdown of the federal government. Even those who bought in 2006 have earned 3% a year ever since. The jarring drops of the last several years only victimized those who willingly became victims by selling into them.

Buy-and-hold still works if you buy good companies at good prices. That has always been true; it's just easy to forget during boom years. The higher valuations are when you begin investing, the lower your returns will be afterward. Nothing about the past few years has changed that. If anything, the explosion of volatility has been a blessing for smart buy-and-hold investors, providing some of the best buying opportunities of the past century. The 31st best, to be exact.

For more on the recession and its impact on the stock market, check out my latest e-book, 50 Years in the Making: The Great Recession and Its Aftermath, on Amazon or Barnes & Noble. It's short, packed with information, and costs less than a buck.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2012, at 3:28 PM, slpmn wrote:

    If you started investing in 1995 with X amount, and put X in at the start of every year, you end up with the same return as if you had invested annually in something yielding 5%. That's using the annual large cap total return data published by Ibbotson. If you instead use only the capital appreciation portion (which is probably more realistic since some of us actually spend dividends), it's like a 2.9% return. And that's assuming no taxes.

    Factor in the massive volatility equity investors face and the market has been a really mediocre investment for a long time. At a minimum, the real world return is nothing like what is commonly advertised.

    Finally, think of the weatlh generated by public companies since 1995. If the retail investors have received 3-5% return over the period - where has the rest of the money gone? That's something worth thinking about.

  • Report this Comment On March 09, 2012, at 11:34 PM, DonkeyJunk wrote:

    ^ This underlines the benefit of finding good companies as opposed to relying on mutual or index funds.

  • Report this Comment On March 10, 2012, at 4:00 PM, wolfmansbrother wrote:

    "Finally, think of the weatlh generated by public companies since 1995. If the retail investors have received 3-5% return over the period - where has the rest of the money gone?"

    You raise a great point there. Investors would do well to keep in mind that management's interests may not coincide with those of owner's. Executive compensation has reached stratospheric heights and no longer seems to be tied to performance in many cases.

    Moreover, we tend to give management the benefit of the doubt that they will use our capital wisely to drive long-term growth, but as Ben Graham pointed out way back in the thirties, retained earnings don't always manifest in a commensurately higher stock price. We'd probably do better to take a more skeptical attitude and press CEO's to justify holding on to our profits, rather than distributing dividends or buying back stock when it's undervalued.

  • Report this Comment On March 11, 2012, at 3:32 PM, JohnnyEvers14 wrote:

    I would be interested to see a comparison of the stock market to other styles of investing. So many times articles like these are written to promote the market, so the reader must take even the positive data skeptically.

    How do stocks compare to the following baskets.

    1. 100 pct gold.

    2. 1-year CDs, continually rolled.

    3. A common portfolio of the 70s -- a quarter each in commodities, real estate, cash and large cap stocks.

    4. Oil.

    Etc., etc.

  • Report this Comment On March 11, 2012, at 3:49 PM, TMFMorgan wrote:
  • Report this Comment On March 11, 2012, at 7:59 PM, alix17 wrote:

    Yes! Finally! I'm so tired of reading how people have to work forever now because they lost their retirement funds in the recession - I just used the Fool's philosophy of investing in great companies and holding. I didn't sell a thing during the recession, yes my Roth IRA went down about 40%, but rebounded beautifully, and the stocks that I BOUGHT in 2009 are doing fine (Apple, anyone?). Buy and hold companies that you believe in. I learned that from the Motley Fool.

  • Report this Comment On March 11, 2012, at 9:29 PM, cbaines2 wrote:

    Great article Morgan!

    Chris Baines

  • Report this Comment On March 11, 2012, at 9:38 PM, portefeuille wrote:

    ... and since June 2009 you knew what the trend line of the rally looks like ->

    from here ->

  • Report this Comment On March 11, 2012, at 9:42 PM, belowtheblues wrote:

    I have to agree with alix17 who wrote earlier today. There have been so many wonderful stocks that the Fool has recommended and you could obtain this information without a subscription. Buy and hold will never go away as long as there are great stocks that provide a great product or service promoted by exceptional management that has shareholder interest in mind.

    The Fool has recently recommended a number of stocks that have paid off handsomely since the crisis at the end of 2007 and to the untrained eye may not look so good at the moment. An older mentor of mine always reminded me to look for stocks that have a good product, low debt and a global appeal.

    Furthermore, there are a number of stocks that have truly excelled since the crisis. The climate and opportunity today is a combination of research, buying capability and the Fool excels at helping the individual investor understand the basics. I just wish some of the interactive brokers would give me $1 million with $8,000 down as some "gamblers" received from mortgage brokers as recently as 5 years ago.

  • Report this Comment On March 12, 2012, at 2:07 PM, DJDynamicNC wrote:

    It's admittedly been a few good years across the board, so that will skew my results, but I've never been disappointed with the directions in which the Fool has pushed me to start researching.

    And as always, it's important to remember that you don't make or lose a dime until you sell.

  • Report this Comment On March 12, 2012, at 2:41 PM, nornironsteve wrote:

    I find the 'lost decade' statistic a bit misleading and not really applicable to most people. If you'd

    a) been sitting fully in cash in 2000

    b) plumped that cash into the market at its peak

    c) investing it into an S&P 500 index fund

    d) and never added a further penny to it

    then yes, you would be one of those unfortunate souls who have had to endure this period, but who really invests like that ? Dollar cost averaging into this lost decade has actually been pretty rewarding, and as pointed out some individual stocks over the last 3 years have performed exceptionally ( CMG, yay !) The people I think it has hurt most have been those who saw the market soaring during the late 90s and decided to retire around 2000 based on the assumption of further appreciation of their current holdings. And I think those people are quite angry today. I'd like to see the Fool do some analysis as to how various age brackets view these last 12 years, assuming they have been bold enough and have had the resources to continuously invest over them.

  • Report this Comment On March 13, 2012, at 3:21 PM, kopperlis123 wrote:
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