When I first started investing, some 30 years ago, I ran across an early Warren Buffett market observation. This one was on the 1950s bull market.
From 1950 to 1956, the Dow Jones Industrial Average (Dow 30) ran to 500 from 200. You’re looking at a 16.5% average annual rate of appreciation. By the end of 1956, many investors were nervous. Surely, a major correction loomed after such a strong run. Time to sell and head for the hills until a significantly lower price prevailed after the major correction.
Warren Buffett observed – correctly – that those investors who sold in 1956, headed for the hills, and waited for a significantly lower price are still waiting to this day. No major correction occurred.
At the beginning of 2016, chatter of an impending market correction filled the air. After all, the bull market in stocks, which began in early 2009, was getting long in the tooth. 2016 would mark the beginning of the eighth year of an up-trending market. What’s more, Morningstar data tell us that bull markets have lasted an average of 97 months – roughly eight years – over the past century.
But averages can mislead. If we focus on more contemporary time frames, we find that the previous bull market lasted five years – late 2002 through late 2007 – and produced a 5,870-point gain in the Dow 30. The bull market before that lasted nearly a decade – late 1990 to early 2000 – and propelled the Dow 30 12,000 points higher to 16,000, nearly quadrupling its value.
Unlike in the 1950s, the subsequent bear market that followed the 2002-2007 bull market produced a punishing pullback. The 2007-2009 bear market lasted roughly 18 months and scrubbed off nearly 50% of the Dow 30’s value. (Tired of worrying about bulls and bears? Click here.)
But this is all rear-view mirror stuff. You couldn’t have known the correction would be so swift and so punishing in 2007, nor could you have known how swift the subsequent recovery would be. Within a year after the market bottom in March 2009, the Dow 30 had regained 40% of its value.
High-Yield Investments Fall Out of Favor
That said, even when there is no major market correction, there can be sub-market corrections. An investing style or a business sector simply falls out of favor.
For example, REITs and other high-yield investments fell out of favor last year. Two of our High Yield Wealth REIT recommendations – Government Properties Income Trust (NYSE: GOV) and Gladstone Commercial Corp. (NASDAQ: GOOD) – were down, and down in a meaningful way. Government Properties shares were off 46%; Gladstone Commercial shares were off 35%. The beat-down in price lifted both REITs’ yields into the double digits.
Yes, I suppose I could have avoided the indignity of riding the downward spiral by employing a stop loss. But why? I knew that both REITs were in no danger of cutting their respective dividends. And if I had been stopped out, I would have missed the subsequent dividend payments. (Some of the very best REITs can be found right here.)
More important, I would have missed the subsequent price recovery that occurred in 2016. Government Properties shares are up 70% from the lows hit in mid-January; Gladstone Commercial shares are up 35%. How could I have possibly timed a return so brilliantly?
What Warren Buffett Knows
I couldn’t have, so I stuck with what works. I adhered to a historically productive investment strategy – income investing – as opposed to flitting about on market undulations and speculation. I’m glad I did.
For most of 2015, high-yield income investing was persona non grata. In 2016, high-yield income investing was elevated to the belle of the ball. Every new High Yield Wealth recommendation over the past 11 months shows a positive return today. Of those 11 recommendations, half were legitimate high-yield investments.
We could see another punishing market correction like the one in early 2007. Or, we could see an almost imperceptible market correct that followed the 1957-1958 recession. (The Dow 30 lost 13% of its value, but in six months had recaptured all the lost ground. Within 18 months the Dow 30 was up 55%.)
I don’t know what turn the market will take in the short term, but I know what works in the long term, like Warren Buffett. That’s why I won’t risk being the guy waiting around 60 years to return to the market.