'The Long and Winding Road'

'That leads to your financial salvation', as Paul McCartney never sang

Friend,

What is a bear market? It’s when the share prices of The Great Companies of The World (GCOTW) fall by 20% or more.

Since 1970 (54 years and counting), there have been 12 of these horrors (and they are emotionally horrible)¹. One every four to five years.

Aside from a brief bear during The Wuhan-Lab-Leak-Bedwetting, we haven’t had a prolonged bear market for over a decade.

We’re probably overdue for one (in no way guaranteed, blah blah blah). Maybe we’re already at the start of one (I’m currently holidaying on The Continent, and my emissaries tell me of turbulent times back in God’s country).

We should prepare accordingly. How?

By doing absolutely nothing.

Let me explain.

“The only thing new in the world is the history you don’t yet know.”
Harry Truman

The 54 years since 1970 to now is a decent slug of time. It could easily represent a typical work-retirement arc:

• 25 or so years of what we financial boffins call accumulation work saving (putting money into pensions, ISAs and other things)

• 30 years of decumulation retirement spending (taking money from pensions, ISAs, and other things).

To keep things simple, let’s assume you were a callow 35-year-old investing £10,000 into the GCOTW 54 years ago.

A very bumpy road

In that time, you would have experienced a hellish ride involving the 12 bear markets mentioned earlier. These are the actual peak-to-trough declines for each one:

1. Fall of 22%. Your £10,000 is worth £7,800

2. Fall of 46%. Your £7,800 is worth £4,212

3. Fall of 27%. Now £4,212 is £3,075

4. Fall of 24%. The £3,075 is £2,337

5. Fall of 26%. £2,337 becomes £1,729

6. Fall of 21%. Your measly £1,729 is £1,366. Remember, you started with £10,000

7. Fall of 51%. The £1,366 is whittled down to £670

8. Fall of 59%. Now it’s just £274

9. Fall of 23%. £10,000 now sits at £211

10. Fall of 20%. £211 becomes £169

11. Fall of 34%. £169 now £112

12. Fall of 27%. Your portfolio is worth £81.

After 54 years and 12 bear markets, your £10,000 is reduced to the cost of just over two KFC party buckets.

At this stage, as a 90-something-year-old with nary a pot to you-know-what-in, you’d be suicidal anyway (because going to the children on bended knee for money is beyond horrible, worse than spending time in a locked room with Piers Morgan), so why not go out on an artery-hardening binge of the Colonel’s filth?

You wash down your finger-lickin’ diabetes-in-a-tub with a large glass of absinthe and perhaps look for someone to sue. Good luck with that: your financial adviser from 1970 sold up in 1990, had a wonderful retirement, and dropped dead at age 100 in 2020.

Thankfully, we’ve only seen one side of this story so far. Put down that deliciously seasoned lump of fried fat and undercooked thigh. It’s time to buck up the mood somewhat.

The road winds this way - AND that

Of course, things didn’t pan out like the above (thank the Lord). And here’s the rub: markets can go up just as easily as they can go down. More easily, in fact.

In reality, your £10,000 from 1970 is now worth a tad more than two KFC party buckets. It’s somehow grown to just under £3,000,000, which is a compounded annual return of 11.1%.

But how did it do this? How did it grow nearly 300 times when, every five years or so, the latest nasty bear chopped it down at the knees?

It’s because the bits between the recurring bears were the longer-lasting, mood-enhancing, performance-boosting wonders known as bull markets.

Source: https://am.jpmorgan.com/gb/en/asset-management/adv/insights/market-insights/guide-to-the-markets/?slideId=equities/gtm-uk-en-wrldbullbear

My definition of a bull market is when share prices - without warning, for they cannot be foreseen - go on a long "up" period for no real rhyme or reason. And bull markets typically last longer than bear markets. Their ferocity in the life-affirming ascent tends to top the bulls’s depressing descent.

We don’t know when the ascents are coming—we can never know—but we can know they will come. Similarly, we must know that the Great Companies are no less great than before in a likewise unforeseeable bear market. They are just being temporarily valued less.

For example, regardless of each company's share price in a bear market, you will still buy the latest great trinket from Apple or Samsung.

The Great Companies don’t change in a bear market; our psyches change. Investments don’t lose money; investors lose money. Panic, sell, turn paper losses into real. Rinse and repeat.

You have to stay on the winding road

All of that is a long and winding way of saying this: to get the 11.1% annual return over five decades and more, you had to sit through and stomach the gut-churning 12 bear markets along the way.

No bear markets, no 11.1% return. No bear markets, no financial salvation. We get life-changing returns because of bear markets, not despite them.

Do you want some of that? It’s yours. It’s waiting for you. You “just” need to own and keep owning slices of the Great Companies. It's easy to say but hard in practice because… humans.

The journey to financial salvation is winding and long. At times, your vehicle—your mind—might drift to the very edge of the road and stare down into the abbyss, into the valley of the bear.

It is your choice as to whether you tumble into it.

In 1970, two years after Paul McCartney wrote his tune, contemporary Jim Morrison penned the lyric, “Keep your eyes on the road and your hand upon the wheel.”² The sunlit uplands are there for those who, through bull and bear, stay on the road, pulling away from the valleys with serene indifference (well, maybe with some angst and the help of an empathetic, caring financial adviser).

The next bear is coming. We don’t know when and have no idea what will cause it before the event. We won’t know when the bear will end. We do know that the DLM (Dying-Legacy-Media), comprised of such hail-fellow-well-met types as Beth Rigby et al., will portray it as the end of times.

It won’t be.

Have you got the stomach for it? Are you ready for the ride?

1. Using the MSCI World Index as our proxy for The Great Companies of The World (GCOTW). All returns quoted here are based on this index, with dividends reinvested.

2. “Roadhouse Blues”, from the excellent 1970 Doors’ album “Morrison Hotel”, a return to form after their weakest album “The Soft Parade” the previous year. As you were.