Been There, Done That!
EL SEGUNDO, CA (Sept. 14, 1999) -- The stock market is correcting. My screens are plummeting. Time to sell?
Well, if you put your last penny in the market, maybe. Otherwise, we Foolish investors are in for the long haul. One investor, who I'll call John, is ready to bail. John told me, "The market's sinking, Y2K is coming. The start of that long overdue big bear market is upon us."
Is John right? There is no way of knowing. However, history is on the side of the Foolish, not those like John who get emotional with every turn of the market.
For example, let's look at the PEG4 semiannual screen for a January start. If John had invested in this screen in January 1987, and reinvested all his money every year, he would have turned $10,000 into $1.2 million dollars, not including fees and taxes at the end of 1998. In making this money, he would have been through plenty of times worse than the present.
His first year, John would been a victim of the 1987 market crash. Between October and December of 1987, John would have lost over 29% of his money. If he had started October with $10,000, he would have ended December with $7,100.
If he had given up then, he'd have about $12,000 today, including bank interest, instead of $1.2 million. Beginning in 1988, John's PEG investment would have moved right along for a while... until the summer of 1990. From July through September of 1990, John would have lost 25.3% of his money. It wouldn't be long until John's PEG investment would have taken another hit. From April through June of 1991, the PEG lost another 17.8%. If John had quit then, he would have been one sad camper because, even though he took that 18% hit during the spring, by December John would have finished the year with a 105.1% gain.
By now John might have been accustomed to these big hits while making great returns. However, he still would have faced more drops, including a 33% drop in the fall of '95 and a 15% drop last summer. But by stomaching the losses, John would have ended up way ahead.
Even when you hit paydirt (something possible only in our dreams) by selecting the best workshop screen for each time period, you still would have had to sit through three losses of more than 25% over the past 13 years.
If you look at the monthly returns, the drops can be even more scary. We don't have monthly returns for the PEG4 strategy, but we do for the Relative Strength-26 week strategy. Starting in 1987, an investment of $10,000 would have grown to over $750,000 by the end of 1998 without one losing year. However, as you can see below, in every year but two, an investor in this screen would have endured periods where the portfolio dropped, anywhere from 5% to 41%:
Oct'87 -41% May'88 -9% Oct-Nov'89 -12% Aug'90 -14% Jun'91 -11% Apr'92 -21% Oct'93 -12% Mar-Jun'94 -26% Dec'95 -5% Jun-Jul'96 -16% Oct-Dec'97 -18% May'98 -14%Despite these setbacks, an investor in this screen ended every year with a gain. But be honest, if you had been following the RS-26 strategy and had seen your portfolio drop by 26% between June and July in 1994, would you have had the guts to reinvest in that same strategy? How many times would you have jumped out of the market or out of this screen? If you bailed at the end of each of these periods, you would have lost every single time. Immediately after each of these periods, the screens started heading back up.
This is why Fools never invest money they will need in the short term. The losses can be dramatic and panic will set in. When investor's panic, they tend to sell at exactly the wrong time.