Playing against Bull Markets

The last period of severe stress for the markets was the 1970’s. There were big down years in excess of 19% and 26% but they were followed by up years of 43% and 28%. There is a fairly consistent pattern that after any down year or two, there will be a big up year. Back then we had 28% inflation, a three day working week, Suez canal closed, Middle east war, not forgetting ‘the winter of discontent’ and petrol rationing but the average gain over the decade was still 9% for bluechips and 12% for high yield bluechips – both EXCLUDING the 10 yr compound dividend gains of probably around 2-3% pa. O’shaughnessy’s Cornerstone strategy gained an average 16% pa over the decade.

Since 1952, bluechips have had a positive ten year rolling return every year. That is to say, your return over the previous ten years has never been negative.

A lot of companies had problems back in the 70’s recessions but overall the markets went up over 100% because governments inflated the problems away. They are in the process of doing the same now with issuing bonds, printing money, Quantitative easing and all the other things that make people poorer. Over time though, surviving companies can outperform inflation because they have to put their prices up or die. If governments inflate their debts, which they always have done since forever, company prices go up and profit go up together with wages and commodity prices. It doesn’t matter whether its war or debt, the outcome is the same – companies have to outperform inflation and bond rates else there would be no investors. My point is that going against the bull is statistically very long odds.