This is a month of painful anniversaries. In October 2007, the Dow hit its all-time high of more than 14,000. October 2008 marked the beginning of a crash that brought it down to less than half that level. An epic rebound recouped most of those losses, but here we are in October 2010, still 23% below 2007's peak.
Mark that down as Exhibit A: Markets have been savagely beaten over the past three years. The media will repeat this statistic over the next few weeks until it drives you crazy.
As well it should. Consider this: As I write, the Dow trades at about 10,800. That's actually higher than it sat in July 2006 -- not including dividends earned during that four-year stretch.
Let's mark that down as Exhibit B: Markets have actually done all right over the past four years and change. Yet I'll guarantee you that not one major newspaper will mention that.
One more example. In 2000, the Dow traded at more than 11,000. Today, it's a little less than that, representing an average yearly loss over the past decade. The media repeats this painful statistic ad nauseum.
But in 1995, the Dow traded at around 4,500. So over the past 15 years, it's returned roughly 6% per year -- plus dividends. By historical standards, that's not too bad. Yet how often do you hear the media hailing the market's success over the past 15 years? Never.
See what I'm getting at? Returns over a given period are only as useful as the starting points are reasonable. If you use bubble peaks as starting points, returns will be as misleading as they are ugly.
For context on our current nostalgic fascination with Dow 14,000, let's remember how we got there. In March 2007, the Dow traded at about 12,100. Around that time, the subprime debacle started rearing its head. New Century Financial went bankrupt in April -- the first big subprime casualty. People were starting to get nervous. Yet the Dow began a seven-month, 2,000-point ascent. Why? Maybe this is revisionist history, but as I remember it, the economy's widening cracks got investors thinking that the Federal Reserve was about to start intervening with free cash for all -- typically great news for markets. Buy, buy, buy! It was the classic "Greenspan put."
Of course, they were mostly right, and the Fed soon brought out the liquidity howitzers. But since the banking sector's problems were about solvency, not liquidity, the Fed's valiant 2007 actions did little to stanch the economy's bleeding. Investors were giddy about the thought of liquidity, but they were almost perfectly wrong about its effectiveness -- which became apparent as we entered 2008. The entire 2,000-point rally that pushed the Dow from 12,000 to 14,000 was based on a very short puff of optimistic hot air.
Yet we continue to use Dow 14,000 as our starting point to measure today's returns, as if it serves as the equilibrium of rationality. Why? And why do we keep pretending that Dow 11,000 a decade ago -- the peak of the largest stock bubble in modern history -- is some sort of sanity baseline to measure against? These are both crazy starting points for comparing current results. Returns for those who didn't start investing at peak moments of market greed have actually been fairly positive. Yet you'll rarely hear that mentioned in the newspaper.
In the end, markets will treat you as poorly as you allow them to. If you start investing when valuations are high, the ensuing years will hurt. If you start when they're cheap -- or even fairly valued -- you'll probably do all right. In that sense, you're not enjoying a return on stocks so much as a return on sanity.
Today, there's almost no debate against the notion that high-quality large-cap stocks are cheap. Companies such as ExxonMobil
So please, as the rest of the media dwells relentlessly on the market's terrible returns of the past three and 10 years, join me today in celebrating how well it's done over the past 15 -- and how well it's set up to do over the next decade.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
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Fool contributor Morgan Housel owns shares of Microsoft, ExxonMobil, and Procter & Gamble. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.