It's funny how we're drawn to what suits us. My colleague Matt Richey -- a wee bit the cynic, I say with affection -- wrote last week on a book called Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market. Hardly my cup of tea, but I'll probably read it.
After all, investing is everything at Motley Fool Hidden Gems, and my boss -- Old Man Gardner, again with great affection -- means business. When digging for the next Wal-Mart (NYSE:WMT) or Starbucks (NASDAQ:SBUX), reading Matt Richey and his partner in crime Zeke Ashton gives you a serious edge. But Real Returns in a Smoke and Mirrors Market? Maybe I'll catch the movie.
Head in the sand
It's not that I can't read a big book filled with numbers. Nor would I dismiss out of hand author John Mauldin's warning that we've just started a dance with a secular bear that could last well into my 50s. I just prefer not to think about it. Seriously, I question this use of the past to predict the future, especially when statistics are our tea leaves.
Or perhaps I should say using some portion of the past to predict the future. For many, the fact that Mauldin charts the course of bull and bear markets over more than 200 years lends an aura of precision to his results. I have my doubts. For starters, why stop there?
In the Bible, creditors periodically forgave debts and returned the land amassed through "economic" means to its original owners. It's been argued that with the turning of the seasons, our very concept of time arose out of what passed between these emancipations, called jubilees. One thing's certain: That day of reckoning struck the landed gentry as one heck of a bear market!
It's not just arbitrary
In time, jubilee was mandated by custom to one every 50 years. Suddenly most anyone with a calendar was nailing the capital markets a half-century out, and market timing was a breeze. Times change. Moreover, I fear that -- as illustrated by my extreme example -- the further back you mine, the more the statistical significance of the data is offset by an increasing lack of relevance.
And it's not just that study periods are, at best, arbitrary. I understand that when Mauldin or some other market historian says "bear markets last on average 14 years" or "new bull markets never start with P/Es in the double digits," they're talking about modern markets. But what's a modern market? Are cycles peculiar to the period 1800-1867 really relevant to, much less predictive of, the next 20 years?
What really nags me is that, try as I might, I can't see -- in a world so dramatically different in every detail -- how the rules that govern the prices of stocks and bonds would have stayed the same. In fact, I would bet you my ox and six-shooter that we -- at least as regards our economies and investments -- have about as much in common with those who headed west with Lewis and Clark as with the Caesars (very few of whom owned stocks, I might add).
Ignore the bulls, ignore the bears
I'll bet a great deal more that I won't be out of stocks for the 11 years left of this bear market. I love dividends like the next guy, but no way am I going to spend my peak earnings years invested in money markets, bonds, and other "absolute return" investments. It's not going to happen. One way or another, I am going to be a long-term investor in stocks. It won't be easy, but I plan on making money the old-fashioned way: buying well.
And it can be done. Two of my favorite calls were buying Pulte Homes (NYSE:PHM) and upscale rival Centex (NYSE:CTX) in the late '90s. Both were great values and both thrived during the bear market (I sold too soon, but that's another story). I remember distinctly watching medical waste manager Stericycle (NASDAQ:SRCL) get away and float higher as the bear market took hold.
In fact, any number of smaller companies with great ideas bucked the broader-market trend. One thinks of superhero Marvel (NYSE:MVL) and radical clothier Hot Topic (NASDAQ:HOTT), Today, I wonder if an out-of-favor food stock like Fresh Del Monte Produce (NYSE:FDP) or a Bank of New York (NYSE:BK) -- though hardly a small fry -- might not see me through if the patterns hold and things do get rough from here.
We work from the bottom up at Hidden Gems and look closely at valuation, bear market or bull. It's important to find great businesses, but buying cheap bails you out in a savage bear market. Who knows where the market will be tomorrow, six months, or even one year from now. If you want to use history as your guide, consider this: There are near-term winners and losers, but over the long haul, those who have bought and held -- not sold -- stocks have been rewarded.
It's different this time
In a moment, expansive even for The Simpsons, a house falls on barkeep Moe Szyslak's face, magically reversing his surgery-enhanced good looks. Moe can't help asking, "Why'd it go back to my old face? Shouldn't it have turned into some kind of third face that was different?" Moe, I know the feeling.
About halfway through the great bear market, I started hearing dire predictions that we should expect year after year after year of the "average" historical return of 6.7% -- and that such predictions weren't meant to be dire. What I don't get is why after a record bull market and a savage bear, we should somehow return to some "average historical return?" I can't tell you what the market will return next year, but I can tell you what it won't: 6.7%.
There's a notion that the greater fool on Wall Street is the euphoric sap who declares that this time it really is different. I never understood this and I don't understand it now. Of course, this all came to me as I sat with my cat on the porch, smoking a pipe and reading (in this case, Matt Richey's latest), just like my dad used to do. But that's neither here nor there. Look around. It's always different. Besides, my old man hates cats.
Paul Elliott keeps tabs on Tom Gardner and prowls for next big things at Motley Fool Hidden Gems . Click here to take a free trial. Sadly, he owns none of the shares mentioned. The Motley Fool is investors writing for investors.
