<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (July 28, 1998) -- Over three years ago, when I first began working for the Motley Fool full time, one of the most prevalent questions was whether the market was too high and overdue for a correction. Investors were nervous about investing right before "the big correction" that was being forecast by the gloom-and-doom crowd.
Lately, of course, we're hearing similar dark forecasts. Perhaps one of the higher-profile forecasters just yesterday was Barton Biggs, who suggested the market would correct 20% to 30% in the next several months. And he may well be right; no one knows for sure.
The problem I have with these predictions, though, is that they're always present when the market reaches new highs. In 1994, it's all we heard, and again in '95, '96 and '97. Nothing's new this year. When it finally does happen, these gooroos will say "I told you so." But they've been "telling us so" for the last 5,000 Dow points. Lot of good that is.
So let's look at what happens if this time the bears are right and we knock off a quarter of the Dow's value. The Dow's recent closing high was 9,338 and change. If we cut that value by 25% as Biggs suggests, the Dow would slump to around 7,000.
If you're a chart watcher at all, you'll notice that we were last at the 7,000 level for the Dow in late April 1997. So a 25% hit would take us back roughly fifteen months. Should we be frightened out of stocks by that prospect? I don't think so.
Do you remember where the market was in 1994 when the Fool first opened its doors and heard all these bears growling? Under 4,000. So even if we do lose 25% from here, we'd still be up almost 100% in four years on the Dow. I don't know about you, but suffering through a 25% correction and still sitting on an annualized gain of 19% for the last four years beats anything we could have achieved sitting on the sidelines looking for a honey pot with the bears. And that's if one only matched the Dow's returns, which as we've also heard ad nauseam, haven't even kept pace with the Standard & Poor's 500 Index recently.
My point isn't to argue with Biggs' market call. My real point is that you should ignore his and all other market calls (bearish or bullish). Predicting the market is futile. The best strategy the long-term investor can adopt is to ignore short-term fluctuations entirely, stay fully invested at all times, and if the market corrects severely, so be it. The long-term odds are still in one's favor while invested in stocks.
Current Dow Order | 1998 Dow Returns
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
07/28/98 Close
Stock Change Last -------------------- UK +1 3/16 50.06 IP -1 42.94 MO + 1/2 42.81 EK - 13/16 83.19 |
Day Month Year
FOOL-4 +0.05% 4.40% 13.37%
DJIA -1.04% -0.19% 12.98%
S&P 500 -1.49% -0.33% 16.46%
NASDAQ -1.93% 0.06% 20.73%
Rec'd # Security In At Now Change
12/31/97 206 Eastman Ko 60.56 83.19 37.36%
12/31/97 291 Union Carb 42.94 50.06 16.59%
12/31/97 289 Int'l Pape 43.13 42.94 -0.43%
12/31/97 276 Philip Mor 45.25 42.81 -5.39%
Rec'd # Security In At Value Change
12/31/97 206 Eastman Ko 12475.88 17136.63 $4660.75
12/31/97 291 Union Carb 12494.81 14568.19 $2073.38
12/31/97 289 Int'l Pape 12463.13 12408.94 -$54.19
12/31/97 276 Philip Mor 12489.00 11816.25 -$672.75
CASH $754.73
TOTAL $56684.73
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