By now, you've probably noticed a few down market days recently. Yesterday was another one, with the S&P 500 (AMEX:SPY) down 1% and the Nasdaq down for an eighth consecutive day. The Russell 2000 exchange-traded fund (AMEX:IWM) is down more than 13% from the all-time high it set on May 5.
Individual stocks have fared even worse. Some of the largest holdings in the Russell 2000 ETF, including CimarexEnergy (NYSE:XEC), CommercialMetals (NYSE:CMC), and Level 3 Communications (NASDAQ:LVLT), are down 17%, 27%, and 28%, respectively, since the beginning of May. Even mega-cap blue chips are being dumped -- Microsoft (NASDAQ:MSFT) is down more than 11% over the past 45 days.
The downdraft in the market averages don't yet come too close to qualifying for the commonly accepted definitions of a bear market, though you'll certainly start hearing that term being tossed around (if you haven't already).
Today, I'll pilfer from an article I wrote long, long ago to reiterate that a down market is, for those with a long-term savings perspective, a welcome opportunity.
The logic of hoping for a down market
Anyone in his or her 30s, 40s, and probably 50s should be hoping for a roughly flat or slightly down market over the next five years. This is not necessarily intuitive for everybody so -- as is so often the case -- the best place to start is with a good Warren Buffett quote (this one from the 1997 chairman's letter):
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. ... This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Anyone who is employed, healthy, and not planning to retire in the next five years should be a net saver (or paying down debt) and not hoping for higher stock prices in the short run. You're simply better off being able to buy shares of great companies at fair or depressed -- not higher -- prices. Thus, since I myself fall into the category of a net saver, I consider the market to be generally helpful at the moment.
While too many media outlets seem to cover a momentary drop in the stock market as an unambiguous negative, and the specter of a longer drop as reason to panic, investors should keep in mind the words of The Motley Fool's honorary founder, William Shakespeare: "There is nothing either good or bad, but thinking makes it so" (for those keeping score, that's from Hamlet, Act ii, Scene 2).
Unfortunately, we seem as a society to have chosen to think that falling stock prices are bad. That, however, is only true for those who need to sell soon and those who think of the stock market as a way to "win" money for free. It's too bad that that notion has somehow taken hold because it's so obviously false.
If instead you think of the market as a place to which you'll be constantly adding dollars over the course of your life and of stocks as things to hold for many years, you should be praying that stock prices stop going up all the time.
Investing, at its core, is about delaying gratification. The market is really where you set aside some money, methodically adding to savings with the knowledge that over the long run the historical returns of the stock market will reward the patient investor. Instead, too often we see it portrayed as a get-rich-quick vehicle on the one hand and a voracious devourer of people's savings on the other. But neither of these is going to be true for many of its participants.
Bears aren't necessarily bad
Declines in the market are a bit like rain -- everybody knows that we need lots of rain to make things grow, but you almost never see rain being discussed as a good thing on the weather reports, do you? (Unless, of course, there's been a drought.) In the same way, periodic down or flat markets are a necessity for those in the saving stage of their lives (i.e., the majority of Americans) to be able to buy stocks that have the potential to provide future returns at an acceptable rate.
I'm not trying to prove that a prolonged bear market is a positive for everybody. Of course it isn't, particularly if it is correlated with a poor economy (not the case today, so far). I'm not oblivious to the fact that there are a lot of people who are at or nearing retirement who do benefit from a continuously rising market.
However, the notion that is conveyed so often that everyone with money in the market is and therefore should be fearful, depressed, mad, and likely to abandon stocks if they don't move up every day or every year is just wrong, misrepresentative, and terribly unhelpful. I understand how putting that story forth helps sell newspapers and keeps people's eyes glued to the tube, but I'd prefer that the space that it takes up in the media be replaced by something more useful.
This column was adapted from the May 31 Hidden Gems Daily column. You can access the entire Hidden Gems service, which includes small-cap stock recommendations, research, and market commentary, with a free 30-day guest pass. Click here to learn more.
Bill Barker does not own shares of any company mentioned in this article. Microsoft is an Inside Value recommendation. The Fool has a strictdisclosure policy.
