In the fall of 2009, I was in my mortgage broker's office to iron out the details of my new home refinancing deal. He knew I worked for EWI, so when we were done he asked the inevitable question: "So, what do you think about the stock market?"
At the time the DJIA was around 10,000. "We have a guy here at the office," said my broker, "who bought stocks back in the spring and since has made $300,000. We all hate him."
What brings that 2009 episode to mind was the interview I saw just this morning on CNBC. "I think we're in a long-term bull market," said the guest. "What do you mean by 'long-term'?" asked the CNBC anchor. "Because, you know, stocks are trading today where they were in the late 1990s."
Here's what's interesting: Stories of an office nouveau riche -- who had the foresight to buy stocks at a low -- are what will most vividly stick in investors' collective memory.
But it takes a sober reminder like the one from the CNBC anchor to realize that stocks have gone nowhere for over a decade.
Which brings me to the point EWI's Robert Prechter makes in his latest (April) Elliott Wave Theorist. The new issue is filled with market insights (as always) but here's the one that stood out to me in particular:
Read this report from Eleanor Laise of The Wall Street Journal, dated December 31, 2009, the last day of the 2000s:
"The decade’s best performing U.S. diversified stock mutual fund [is] Ken Heebner’s $3.7 billion CGM Focus Fund, which rose 18.2% annually and outpaced its closest rival by more than three percentage points."
That’s a gain of 18.2% annually, compounded, an amazing performance, especially for a decade in which the S&P lost value. Question: How much money did investors in this fund make over the full ten years?
Figure 15 shows the growth of a $100,000 investment in the CGM Focus Fund based on annual average growth of 18.2%. It more than quintupled in value to $532,000. But this table does not answer the question I asked. It shows the growth of money in the fund, but I asked, “How much money did investors in this fund make?” And the answer, again from the article, is:
"The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30..."
Say what? Somehow, the actual experience of investors in this top-performing fund was an 11% annual loss, compounded. Over the ten-year period, then, the average investor in CGM Focus Fund turned $100,000 into $31,200 for a total loss of 68.8%. This is 94% less than the growth of money in the fund (see Figure 16).
Prechter then goes on to explain this huge discrepancy. You can read the details in the April Theorist, but it comes down to one factor: herding.
The herding impulse among investors is so important -- and so underestimated -- that Prechter devotes the entire new Theorist to it. Read and learn from the experience of others -- today, via an online Theorist subscription. Start here, risk-free.