By Jason Zweig | Dec. 11, 2016 6:47 pm ET
Image credit: “The Life of a Hunter: A Tight Fix,” Currier & Ives (after Arthur Fitzwilliam Tait), ca. 1861, Crystal Bridges Museum of American Art
It isn’t quite true, to paraphrase Tolstoy, that all bull markets are alike but each bear market is unhappy in its own way. But investors do need to realize that the past rarely repeats exactly. The bear market of 2008-2009 was V-shaped: a steep, swift 50% loss followed just as unexpectedly by a sharp upslope that more than tripled stock prices (at least for now, anyway). The bear market that began with the Great Crash of 1929 was shaped more like a cliff above jagged canyons: Stock prices fell 89% in 35 months, then rocked up and down for years. And the bear market of 1973-1974 was a slow-motion mudslide that seemed interminable until, without a whiff of warning, it ended with an explosive rise in stock prices.
So there’s no particular reason to think that if the stock market crashes again, a mindless strategy of “buying the dips” will tide you over. The market could keep dipping until you can no longer stomach buying anymore. You should never underestimate how much patience and courage it can take to outlast a bear market. Having the right strategy won’t do you any good if you turn out to have under-anticipated how much pain and regret you will feel over your losses.
In this piece, from May 1997, I interviewed several veteran fund managers who survived the 1973-1974 market. With survivors of that crash harder and harder to find nowadays, and with stock prices today back in the stratosphere, it seems timely to take a walk down this particular branch of Memory Lane. I can’t say it too often: There’s no better time to think about losing money than when you are making money. As the Dow Jones Industrial Average nears 20000 for the first time in history, investors could be lulled into complacency. And it always seems harder to endure sharp losses after basking in easy gains.
Learning from the Bear Market of 1973-1974
By Jason Zweig
Money Magazine, May 1997
Lately, the stock market has been giving me the heebie-jeebies. U.S. stocks haven’t had a 10% setback for more than six years — and they are running afoul of the first law of finance: In the long run, returns must revert to the average. After gaining nearly 20% a year since late 1990, someday stocks have to slow down — or even crash — to get back to their typical long-term annual return of 10%.
To find out what to expect if the market’s 2% drop on March 27 leads to a free-fall, I talked with six leading fund managers who survived a real crash. I don’t mean 1987, when stocks dropped 23% on Oct. 19 but finished up for the year. I’m talking about the last genuine bear market: nearly a quarter of a century ago, in 1973 and 1974, when Standard & Poor’s 500-stock index fell 45%.
The veteran managers I spoke with agreed on one thing: Don’t believe anybody who says that a prolonged stock market crash can’t happen again. “It will happen, damn it,” growls James E. Stowers Jr., founder of Twentieth Century (now American Century) Funds. “Market reactions are normal.”
And how do these vets remember the last enduring crash? Unlike the short, sharp shocks of 1987 and 1990, the 1973-to-1974 slump seemed endless. The Dow Jones Industrial Average (which lately has been swinging wildly around the 7000 mark) began 1973 at 1020. But then, in a crescendo of calamity, war broke out in the Mideast, oil prices quadrupled, Richard Nixon resigned over the Watergate scandal, and inflation hit an annual rate of 12.2%. By December 1974, the Dow had plunged to 616, a 27.6% drop for the year.
“It was so painful,” says William M.B. Berger, chairman emeritus of the Berger Funds, “that I don’t even want my memory to bring it back.” Avon Products, the hot growth stock of 1972, tumbled from $140 a share to $18.50 by the end of 1974; Coca-Cola shares dropped from $149.75 to $44.50. “In that kind of scary market,” recalls Bill Grimsley of Investment Company of America, “there’s really no place to hide.” Sad but true: In 1974, 313 of the 318 growth funds then in existence lost money; fully 123 of them fell at least 30%.
“It was like a mudslide,” says Ralph Wanger of the Acorn Fund, which lost 23.7% in 1973 and 27.7% more in 1974. “Every day you came in, watched the market go down another percent, and went home.”
Chuck Royce took over Pennsylvania Mutual Fund in May 1973. That year, 48.5% of its value evaporated; in 1974 it lost another 46%. “For me, it was like the Great Depression,” recalls Royce with a shudder. “Everything we owned went down. It seemed as if the world was coming to an end.”
A real crash is scary, all right. While you can’t escape one unscathed, you can take steps to reduce the pain. My suggestions:
Rein in risk. Don’t buy volatile aggressive growth funds unless you’re willing to endure a lot of pain while waiting for a rebound. In 1973-74, growth funds lost 46.4% on average; stodgier growth and income funds fell 29.9%.
Spread your bets. It’s easy to forget the importance of balancing your portfolio with cash, bonds and foreign shares. Last year, investors poured $222 billion into stock funds but only $12.6 billion into bond funds. In 1973-74, intermediate-term bonds and cash both went up, and foreign stocks fell slightly less than U.S. shares.
Be realistic. No one can tell you when the next big one will hit. On Jan. 7, 1973, the New York Times asked eight Wall Street pundits for their market forecasts. “Virtually everybody believes the market will move somewhat higher,” noted the paper. Virtually everybody was wrong. Today, most people expect any setback to be quick and shallow. The simple truth: Always be prepared to lose some money.
Don’t panic. By selling into a bear market, you turn your paper losses into real ones. You don’t have to be a veteran of 1973-74 to know that; as I noted last month, many aggressive growth fund shareholders lost money even in last year’s bull market — because they sold during the summer slump.
But that’s only half the tragedy. Panic sellers also miss out on the earliest, biggest gains once stocks rise from the dead. “At the bottom, you’ve got to own stocks,” says James Stowers. “God, they went north!” Stowers’ American Century Growth shot up 42.5% in 1975 and 61.1% in ’76. Chuck Royce of Pennsylvania Mutual, whose directors had been urging him to fold the fund, earned a phenomenal 121.1% in 1975 and another 49% in 1976.
And consider John B. Neff, who retired as manager of Vanguard Windsor at the end of 1995. Neff’s 31-year record of beating the market by more than three percentage points annually is unrivaled. After losing 25% in 1973 and 16.8% more in 1974, Neff gained 54.5% in 1975 and another 46.4% in 1976. “A noticeable portion of my cumulative outperformance,” says Neff, “came in those two years alone.”
So don’t try to time the market. Just hang on tight, and ride out the bear until it finally turns back into a bull.
Definition of BEAR in The Devil’s Financial Dictionary
For further reading:
Chapter Seven, “Fear,” in Jason Zweig, Your Money and Your Brain