Is Suze Orman Bearish?

Oh dear. In a recent interview with CNN's Larry King, financial guru Suze Orman dropped what some might consider to be a bit of a bombshell: She said, "I think it is very possible that we could go down another 10% or 20% -- not possibly right now, but sometime within this year."

I can hear the uproar already. Some will think she's being irresponsible, predicting a big market drop. Those would be the people who don't listen or read very carefully, since she only said it might happen. Some people will think that she's just wrong because the market already dropped some 40% last year, so how much more could it possibly drop?

Well, to those people, I'll point out that a big drop in one year doesn't prevent a further big drop in the following year. That can happen, and the second drop can sometimes be bigger than the first. Of course, sometimes the market will rebound strongly right after a big drop. Check out these returns for the S&P 500 for some examples:

1930    (25%)
1931    (43%)

1937    (35%)
1938    31%

1973    (15%)
1974    (26%)
1975    37%
1976    24%

2000    (9%)
2001    (12%)
2002    (22%)
2003    29%
2004    11%

So, I have to agree with Ms. Orman -- the market could drop again this year, sharply. We should all be aware of that possibility, and act accordingly. It's dangerous to assume any kind of coming performance in the near term.

But wait!
She also said, as we at the Fool have long said, that you shouldn't keep money in the market that you'll need in the next five or so years, and that the market is best used by people who invest in it regularly over decades. I agree.

But I disagree with some of Ms. Orman's advice. When presented with the example of a 65-year-old asking if he should get out of the market now, having lost more than a third of his portfolio's value, she suggested that he should, because he "[needs] this money." To that, I'd say, "hold on a sec!" Yes, a 65-year-old in retirement will need some of his money now, and some next year, and so on. But he stands a chance of living another 20-30 years, so surely a decent chunk of his portfolio might remain invested in the market, expecting eventual further growth. Why pull everything out now, at a market low point?

That would be a classic example of buying high and selling low, the opposite of what investors should be aiming to do. In the table below, look at how some familiar names performed during a recent bear market and the bull market that followed it (remembering that so far, bull markets have, eventually, always followed bear markets). I picked some prominent companies from a variety of industries:

Data: Yahoo! Finance. Percentages reflect total growth or shrinkage from beginning of 2000 to end of 2002, and beginning of 2003 to end of 2005.

There are interesting lessons in there. For one thing, the market as measured by the S&P 500 rose by nearly the same percentage in the latter three-year period as it fell in the earlier three-year period. (Of course, remember that once a stock falls 40%, it needs to gain 67% in order to get back to where it started.)

The table clearly shows how significantly some companies can recover from market downturns -- and also that some companies will buck various trends. Merck, for example, took a sharper fall during the bull market than it did in the bear. That's a reminder that while companies are indeed influenced by the state of the overall market, they're also individual entities, each with its own challenges and performance. Merck stock did very well in 2006 and 2007 before tanking with the rest of the market in 2008. But it also took a dive in 2004, when it was facing lawsuits and bad press over its arthritis drug Vioxx, was cutting thousands of jobs, and had relatively few new drugs soon coming to market. The stock has gained ground, though, in investor sentiment, earning four stars in our CAPS stock rating service.

What to do
So, if a 65-year-old left much of his money in the market at the end of 2002, defying Ms. Orman's advice, he would have seen it rise in value -- and then fall again in 2008. Will 2009 bring another crash? Maybe. It could. But it may also bring a surge. As long as you don't need some of your money for five or even 10 years, you may do best by leaving it in the market -- and adding to it over time.