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Posted
4/5/2001
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The Speculator
For stocks, the sun will come out --
someday
Rewards await those who invest when Wall Street looks like
Desolation Row; 12-month declines are usually followed by
substantial gains. But then again, what's down doesn't always go up
right away.
By Victor
Niederhoffer and Laurel Kenner
If winter comes, can
spring be far behind?
--
Percy Bysshe Shelley, Ode to the West
Wind
The S&P 500 has now
declined for four straight quarters, with a cumulative loss of 23%.
That hasn't happened in a generation. It has occurred only twice
since 1960, both times as the economy was slowing or heading into
recession.
Coming after such a long decline, the first two
days of the current quarter were enough to squelch even diehard
bulls: Nasdaq ($COMPX)
futures lost 12%, S&P futures fell 5% and the Dow ($INDU)
lost 4%.
Yet we're not going
to give up our approach to the market, summed up in the Victorian
scientist Sir Francis Galton's dictum: "Count, count, count." Or, as
P.J. O'Rourke said, "To mistrust science and deny the validity of
the scientific method is to resign your job as a human. You'd better
go look for work as a plant or wild animal."
The grinding pain of long market collapses
distinguishes them from sharp "take out the canes" panics, such as
the ones that occurred in the third quarter of 1987, when the
S&P 500 ($INX)
lost 23%, and the second quarter of 1962, when it lost 21%. (We
focused on the S&P today, because the Nasdaq began in
1971.)
Rewards await for
buyers
Investors who hobbled down
to Wall Street to buy after those short panics were rewarded. But on
the rare occasions when the market hits Desolation Row, it appears
to those in the midst of the fray that every burst of optimism seems
destined for punishment.
One
thing is certain: The reputation of Alan Greenspan as the Great
Helmsman of the economy is deader than Mao. Listen to Larry Ritter,
the eminent baseball historian and author of financial texts, who
sat on the New York University committee that granted Greenspan a
doctorate:
"The Doc gets an RF
(a Retrospective F) for obvious reasons: His fastball has lost its
snap and he can no longer keep his slider in the strike zone. The
fat lead he once had has evaporated. Time for the manager to send
the Doc to the showers and replace him with a fresh
arm."
We wholeheartedly agree,
and note that we have been saying as much since last April. If only
the Doc would have taken our advice and retired back
then.
Dark humor, if not
despair, prevails in our e-mails from readers.
"At least the Romans had the good grace to provide
music and booze while the world burned," wrote Tim Melvin, a
Baltimore stockbroker. "Somebody call the Fed and tell them to send
over some Bushmills and Cole Porter."
Reader Christopher Guida inquired whether we're
sure that our approach to the market, which rests partly on seeing
what happened in the past, be it in the market or heroic tales
ancient or modern, is appropriate "for the modern, highly lethal
financial battlefield." The heroic style of investing, he suggested,
is looking like Napoleon's push toward Moscow.
"Hey guys, I can only think of one good trade
here," wrote James Lackey, the Florida day-trader we profiled in
last week's column, as he headed off with his wife and 5-year-old
for several days of Sea World, Busch Gardens and fishing on Sanibel
Island. "If you have not asked for a break on trading commissions or
a raise, do it now."
A losing
dance
Better take the kids
somewhere fun, we think, than to become a victim of St. Vitus' dance
-- the metaphor that reader Guida suggested for the market. We
looked it up, and learned that St. Vitus' dance -- Sydenham chorea
-- is a symptom of rheumatic fever and involves movements that are
involuntary, jerky and purposeless.
We're not the smartest people in the world, but we
do know investing that way is a sure road to
ruin.
"I'm beginning to think
we are an anthill that has been torn up by a little child, and that
everyone is rushing around, looking for the person in charge," wrote
Michael Stallings. "I think Lackey has it right. Get away for a
while. The carnage can make you crazy."
This poignant letter from a reader named Ken best
captured the spirit:
Vic, I'm having a bad day. The fact that a
hundred million or so people feel the same is small consolation.
Tell me another story, like the one about AOL going up gazillions of
percents.
I like to garden and will plant my seeds. I
sometimes liken my stocks to gardening in contrast to your epic
journeys, which I also enjoy. I will seek refuge in the garden. I
wish I had the same conviction about the market cycles as I do about
the seasonal ones that bring and take life in the garden.
We were reminded by
Ken's letter that no winter lasts forever. The trees here in
Connecticut are still bare, but the golden afternoon sun holds such
a lovely promise of summer that we felt propelled almost against our
will to look at what happened in the two quarters after those long,
gray declines.
The
four-quarter drop that started in 1973's fourth quarter was even
worse than the current one, ending with a 41%
loss.
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The four-quarter drop that started in 1973 was
even worse than the current one. The decline that began in January
1969 wasn't as severe, but it lasted longer. On both occasions, the
next two quarters were up, with the average rise
13.7%.
|
The 30% decline that began in January
1969 wasn't as severe, but it lasted longer: six
quarters.
Two quarters
after a 4-quarter drop in S&P 500 Index
1969-70 Decline
| Dates |
% Chg |
Next 2 Qtrs |
% Chg |
| 1Q-69 |
-2.3 |
3Q-70 |
15.8 |
| 2Q-69 |
-3.7 |
4Q-70 |
9.4 |
| 3Q-69 |
-4.7 |
Average
|
12.6 |
| 4Q-69 |
-1.1 |
|
|
| 1Q-70 |
-2.6 |
|
|
| 2Q-70 |
-18.9 |
|
|
| Average
|
-5.5 |
|
|
1973-74 Decline
| Date |
% Chg |
Next 2 Qtrs |
% Chg |
| 4Q-73 |
-10 |
4Q-74 |
7.9 |
| 1Q-74 |
-3.7 |
1Q-75 |
21.6 |
| 2Q-74 |
-8.5 |
Average |
14.8 |
| 3Q-74 |
-26.1 |
|
|
| Average |
-12 |
|
|
2000-01 Decline
| Date |
% Chg |
Next 2 Qtrs |
% Chg |
| 2Q-00 |
-2.9 |
2Q-01 |
? |
| 3Q-00 |
-1.2 |
3Q-01 |
? |
| 4Q-00 |
-8.1 |
|
|
| 1Q-01 |
-12.1 |
|
|
| Average |
-6.1 |
|
|
On both occasions, the next two quarters were up,
with the average rise 13.7%.
Two occurrences are not, of course, enough for
drawing conclusions. (And we're not suggesting that buying after
four down quarters is good a idea, as the fifth and sixth quarters
of the 1969-70 slide had declines of 2.6% and
18.9%.)
We also looked at what
happened in quarters after the last 19 quarters where the S&P
500 declined more than 5%.
Quarter after 5%+ decline in S&P 500
Index
| Date |
% Decline |
% Chg. next quarter |
| June
73 |
-7 |
4 |
| Dec.
73 |
-10 |
-4 |
| June
73 |
-8 |
-26 |
| Sept.
74 |
-26 |
8 |
| Sept.
75 |
-12 |
8 |
| March
77 |
-8 |
2 |
| March
78 |
-6 |
6 |
| Dec.
78 |
-6 |
6 |
| March
80 |
-5 |
12 |
| Sept.
81 |
-11 |
5 |
| March
82 |
-9 |
-2 |
| Sept.
85 |
-5 |
16 |
| Sept.
86 |
-8 |
5 |
| Dec.
87 |
-23 |
5 |
| Sept.
90 |
-15 |
8 |
| March
94 |
-5 |
0 |
| Sept.
98 |
-10 |
21 |
| Sept.
99 |
-7 |
14 |
| Dec.
00 |
-8 |
-12 |
The average change for the next quarter is a 4%
rise, with 79% of the occasions up. The average variability of the
change is a mere 7%.
|
Recent Articles
• Even
a bad market rewards risk-takers, 3/29/01
• Riches
to rags and back again, 3/22/01
• Questions
about the wild market? We've got answers,
3/15/01
more...
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Shooting smart threes
Amid all the despair, we offer this letter from
Lee Henkel, formerly general counsel of the Internal Revenue Service
and current head of the Niederhoffer Henkel mergers-and-acquisitions
firm. He's been an associate of Vic for more than 30
years.
In case you missed the great win Monday night by
Duke to be National Basketball Champs, I wanted you to know that
their style of play produces a lesson for success in both life and
investment in the market. Duke has shot more three-point attempts
than any college in history. To shoot from far out is closely akin
to taking a risk in your investments. Without this strategy, Duke,
being shorter and younger than most teams, never would have been No.
1, nor would they have won the NCAA Tournament.
The message is not simply
to take risks helter-skelter but to carefully analyze the situation
and then take the calculated risk to win. Coach K did not let his
guards shoot three-point attempts at will but only when they were
well positioned and clear of those guarding
them.
Certainly this is true of investing in this wild
market of today. Without risk, none can really make a profit. But
the risk must be taken at a time when the risk taker is financially
sound (well-positioned) and when he is clear of distractions that
might cloud his judgment.
As we have said many times before, it is darkest
before the dawn. In our March 1 column, we advised buying five
low-priced stocks over the next four weeks: Cygnus (CYGN,
news,
msgs),
Good Guys (GGUY,
news,
msgs),
Laser Vision Centers (LVCI,
news,
msgs),
Microvision (MVIS,
news,
msgs)
and Qad Inc . (QADI,
news,
msgs).
The portfolio is roughly unchanged since we recommended it, and we
believe it has a reasonable chance of showing a return commensurate
with its risk over the rest of the year.
At the time of
publication, neither Victor Niederhoffer nor Laurel Kenner owned any
of the equities mentioned in this
column.
MSN Money's editorial goal is to
provide a forum for personal finance and investment ideas. Our
articles, columns, message board posts and other features should not
be construed as investment advice, nor does their appearance imply
an endorsement by Microsoft of any specific security or trading
strategy. An investor's best course of action must be based on
individual circumstances. |
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