The Market Was a Decent Buy Going Into Lehman

Who’s up for a heterodox post?

We’re coming up on the sixth anniversary of the stock market’s peak of October 9, 2007. I was looking at some data and I realized something I had never noticed before: the stock market became a decent buy several months before Lehman Brothers went under in September 2008. In fact, if you went into the market by mid-January 2008 and—yes—bought and held, you would have made out okay. Most of the market’s excess was burnt off by then.

Note that I said “decent buy,” not “outstanding” or “outrageous,” but decent. I’m basing this on the market’s performance since then. Sure, I understand different people have varying opinions on what a decent return is, but I think my methodology is one that many people would find reasonable. That’s my goal, reasonable. I’ll try to be as dispassionate as I can.

First, I took the Wilshire 5000 Total Return Index. That’s the broadest measure of the U.S. stock market, and it includes dividends. I then divided it by the CPI to get the “real total return.” I then divided that by a tend line growing at 5% per year. That means that whenever the line is moving up, the real total return is more than 5% per year. If the line is going down, it’s less than 5%–and perfectly flat, we’re making 5% on the nose.

Here’s what we get:

To make it easier to read, I set the end point (Friday) at 100. So if you jumped into the broad market anytime the line in the chart above was below 100, investors would have made more than a 5% real return. By the time Lehman fell, the index was all the way down to 83. Outside a few minor exceptions, the index was below 100 starting on January 15, 2008.

Here again, people might quibble with 5%. Historically, the number has been higher. Jeremy Siegel is known for the Siegel Constant of 7%. Unfortunately, I think that 7% figure is unduly biased by America’s post-war prosperity. I’m going for what I think is reasonable, and that’s why I chose 5%. Basically, it’s 2.5% from real GDP and 2.5% from dividends.

I often tell investors to not worry about being the greatest investor of all time. Instead, think about being a good investor. Of course, now we learn of the all the gurus who predicted the financial crisis. Yet you didn’t need to have knowledge of that sort to make money. Just some patience and discipline.

Henry Blodget recently wrote that he thinks the stock market will crash, but he’s not selling. That opinion may seem odd but if you had felt the same way in March 2008 (and held the entire market), you would have done okay.

Not amazing. Not fantastic. But you’d be just fine today.

Posted by Eddy Elfenbein on September 30th, 2013 at 9:26 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.