Several journalists have recently reported that the latest incidents in the Middle East have caused some American investors to take money out of the stock market until things “cool off” a little bit. This got me thinking.
First, if investors are holding off on their investment decisions until peace is obtained in the Middle East, they may have a while to wait. The last correspondent to record anything about peace in that region was a man named Matthew St. Matthew to be precise. The Pax Romana, that time of relative peace due to an expansive empire which witnessed the Incarnation of Christ, was probably an exceptional time to invest. However, though it might be excellent dinner conversation in the finest dining establishments in Italy, there is no reason to expect a rebirth of the Roman Empire any time soon.
Second (and I hope this doesn’t spoil your day), there is always trouble in the world, and somehow American investors have made money anyway.
However, in the course of the past ten years, several people have told me, “You’d have to be an idiot to buy stocks!”
Again, this got me thinking: “Do idiots buy stocks?”
To answer this question, I hopped on the Internet and did some research. On July 8th, 1932, the Dow Jones Industrial Average (the benchmark for United States stock market activity) closed at 41 not 4100, just 41.
The end was at hand only an “idiot” would have bought stocks in the middle of the Great Depression.
Twenty-two years later, on December 28th, 1954, after living through the Great Depression, World War II, and 2,956 radio episodes of The Lone Ranger, the “idiot” saw the Dow close at over 400, meaning that, had he remained invested in Dow stocks, he made over ten times his money by simply staying invested and watching his stocks go up, and his dividend checks come to his mailbox.
He was lucky, but you’d have to be a idiot to buy stocks in 1954, knowing that Khrushchev had come to power in the Soviet Union, communists had just seized control of North Vietnam, and tensions were growing in the Middle East. Of course, the “idiot” saw the Dow reach 800 ten years later in 1964, but once again he was just lucky. As the saying goes: “Even a blind squirrel can sometimes find a nut.”
Not only was 1964 a leap year (meaning that there was one more day for things to go wrong), poverty was such an epidemic that year in the United States that President Johnson declared “war” on it, and later approved bombing raids on Vietnam. Plus, tensions were growing in the Middle East. Smart investors were not buying stocks in 1964 only the “idiot” was buying.
In 1986, the “idiot” saw the Dow reach 1,600. Of course, in 1986, the smart people told him: “What an idiot! It took you 22 years to double your money!” Although the idiot was too shy to point this out, he had received 22 years of dividends, which meant that he had received income every single year for 22 years, and doubled his money.
The year 1986 was a heady time for bears and CD buyers. There was just no way the stock market was going to rise in an environment in which the Chernobyl nuclear plant exploded in Ukraine, peace talks between President Reagan and Gorbachev broke down in Iceland, the Iran-Contra affair was reported, and tensions were growing in the Middle East. The idiot stood his course, because he’s an idiot.
On May 3rd of 1999, the Dow hit 11,000. That meant that between 1932 and 1999, the “idiot” had made approximately 268 times his money, or to express this as a percentage, he had earned about 26,800% on his money, plus dividends. Of course, 1999 was a terrible year to invest. You had the Y2K scare, the president was facing impeachment, former KGB officer Putin was appointed head of the Russian Federation, and tensions were growing in the Middle East.
As this is written, the Dow is hovering around 11,000. People aren’t too excited about investing right now. They’re saying: “Why should I invest now? Cereal is five dollars a box, the war in Iraq is a mess, it’s too expensive to drive my car, and, as if that weren’t enough, there are growing tensions in the Middle East. Only an idiot would buy stocks now!”
There’s always someone “smarter” than the “idiot” your grandfather who remembers the Great Depression; some guy who gave a great seminar explaining why a bear market was right around the corner; your brother who recently read an article explaining why the stock market was “overbought,” etc., etc., etc. And yet, as smart as they are, they never seem to have as much money as the “idiot.”
I wonder why that is?
John Clark is a registered investment advisor and a nationally recognized expert in the field of ethically responsible investing. You may email him questions for this column at jclark@lasalle-st.com or call him directly at 1-888-764-2423.
(Historical data courtesy of Wikipedia.)