History suggests that, over longer periods of time, financial markets
are principally driven by themes and valuations. Consider the focus
on conglomerates and the "nifty-fifty" in the 1960's and
1970's or globalization and technology in the 1980's and 1990's.
such as these have captured the attention of market participants
over extended periods of time, but each time new market leadership
as overstretched or over popular themes are replaced.
History also shows that economic growth alone does not drive share
prices. This is, perhaps, best illustrated by the period from 1965
to 1982, when the Dow Jones Industrial Average ended the period at
the same level as it began 17 years before, but at the same time the
GDP growth in the US totalled 370%.
During the past century, the US market, for instance, has had 53
corrections of 10% or more, roughly one every two years. There have
been 15 corrections
of 25% or more, roughly one every six years. Setbacks and hiccups,
otherwise known as market volatility, are normal elements to market
history and should be expected in the future.
The successful investor understands that short-term transitory events
tend to undermine a well-planned long-term strategy. The following
chart shows that, over the past 50 years, markets tend to bounce back
remarkably well following a year of negative performance. Only once
has the market been down in two consecutive years. Investment discipline
- the ability to prevent emotion from overtaking reason - are hallmarks
to a successful investment method.