Investment Lessons From The Recent Past

By: Tom Madell | Wed, Jul 1, 2009
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Summary: Most investors have learned to make certain assumptions. In this article, I will present a chronology of events over the last few years which seem to demonstrate that it often pays to question such assumptions by looking at things from a different perspective. A few of the things to be learned from the events of the last several years are:

Year after year, going all the way back to 1999 when I started my free Mutual Fund Research Newsletter, I have attempted to give readers convincing arguments as to why they should "think outside the box." However, trying to change the way people think about investing has never been an easy task.

One of the best ways to illustrate thinking differently is to review a small sample of what has transpired over the last few years as presented in my prior Newsletters. This enables us to see directly how looking at things differently from consensus opinions would have assisted readers through what proved to be a series of "unforeseen" events. Some of these happenings were not nearly so unforeseen to those who, rather than accepting what most people believed, viewed events using "a different set of eyes".

Looking Back Chronologically

As recently as July 8, 2008, we were still officially in a long-running bull market. It was only until the S&P 500 Index finally reached a 20% drop the following day that we knew for sure of its end. Unfortunately, for many people whose thinking might have closely paralleled the consensus, the transformation from bull to bear, and subsequently, from good times to deep recession, seemed to catch them seriously off guard. As a result, their investments suffered far more than they would have had these investors been more able to part ways with the consensus, and by so doing, more accurately see what were detectable warning signs.

In fact, my Newsletters had already fully made the case for danger during the period beginning as early as July 2006. In order to have done that, it was important to have been able to free ourselves from some of the firmly held, but essentially wrong, views that are frequently held by investors. In what follows, we will use quotes from selected issues of this Newsletter to illustrate some of the events that transpired, what the consensus view was, and then update what subsequently unfolded. We will also add other updates for helping investors decide where we think things will likely go from here.

Note: Almost all forecasts we make in our Newsletters (unless we specifically state differently) refer to our opinion as to what might happen over the following several years. Given that some time has passed since we wrote the direct quotes shown below, each preceded by ***, the quotes allow you judge for yourself as to the usefulness of what we consider our "outside the mainstream" approach. You can click on the dates to review the entirety of each specific Newsletter.

July 2006

Oct. 2006

Apr. 2007

July 2007

On our Alerts page, we stated:

Oct. 2007

Background: This was the month during which the market topped out, although the actual top occurred about a week after we published the Oct. newsletter. The Newsletter was headed "Change Is Upon Us" and focused on our outside the box view that "future fund category performance [eg. Large Growth, Small Value, etc.] is more predictable than the overall market." This led us to state:

Update: At the time all these quotes from the Oct. '07 Newsletter were written, as mentioned above, the stock market was still in the 2002 - 2007 bull market and our current recession had not even been born. The US recession was only officially declared and announced to the world on Dec. 1, 2008, a full year after it was now acknowledged to have begun. (So much for counting on the reported news alone to help one decide about the appropriateness of one's investments!) By "thinking outside the box," well ahead of the crowd, we were better prepared than the consensus for the new investing environment that lay ahead.

Jan 2008

Background: Right near the top of this Newsletter under "Topics Covered", we wrote "2007 Returns Show Potential Warning Signs of a Bear Market." The gist of the article: "...the falling off in consistently positive performance in 2007 from 2006 may indicate that the best days of the 2003-2007 bull market are now history." Some further quotes:

March 2008

Background: After dropping consistently since mid-2003, unemployment began edging up again in mid-2007 and has been rising ever since. As stated above, stocks had started falling in early Oct. 2007. This led us to uncover and make the following non-mainstream observations:

Update: Since unemployment has continued to rise with no end currently in sight, unless a fall in the unemployment appears close, the implication is that the recession is not likely to end as soon as some now anticipate. Stocks, however, after hitting their lows on Mar. 9, 2009, appear have priced in that the recession will end within the next 2-3 mos. since stocks typically begin to recover as much as 6 months or so before a recessionary downturn ends. If the recession doesn't end by Sept., it would follow that stocks could fall back to their March '09 levels.

Apr 2008

Background: In March '08, the market seemed to be stablizing from its near 5 month drop, leading many to believe that the skies were clearing. We said:

Are we still in a secular, long-term bear market? I don't know. Only time will tell, but IF the S&P 500 drops back down to where is was in mid-March (that is, around 764; it is currently at about 919, as of 6-30), we would again have dropped 20% into, at a minimum another temporary bear market, which would confirm that, very likely, we are still in a long-term bear market.

June 2008

Background: As stock prices had improved over the prior few months, prices for high quality bonds had begun slipping in spite of several further cuts in interest rates by the Fed. Many investors began to assume the "mini" bond bull that had started more than 9 months earlier was now history. But, based on our long stated view that once started, investment trends tend to last considerably longer than the majority expect, we wrote:

July 2008

Background: A year ago, we discussed on-going research to identify criteria for making successful BUY, SELL, or HOLD decisions regarding the major mutual fund categories. Although our research followed the start of the Oct. '07 bear market, we applied what we learned to judge what one might have done had they been able to use our current findings in deciding what to do at the beginning of Oct. 2007, a time when stock prices were touching new highs. Here's what we said:

Update: Obviously, stocks have been down considerably over the last year, many bonds up nicely, and cash only minimally positive. (See our comments about Large Growth performance above under the Jan. '08 Newsletter.)

Using our newly designed research tool, all the major categories of funds are, as of the end of June 2009, classified as HOLDs, except Energy, and most International stock funds, esp. Emerging Markets, which are currently viewed as SELLs.

Please visit our website to see our current specific recommendations in more detail.



Tom Madell

Author: Tom Madell

Tom Madell, Ph.D.
Mutual Fund Research Newsletter

Mutual Fund Research Newsletter is a free newsletter which began publication in 1999. It has become one of the most popular mutual fund newsletters on the Internet, as shown on the "Top Sites" page for Mutual Funds News and Media Newsletter websites. Tom Madell, the Publisher, is a researcher and writer, as well as a long-term investor, whose investing articles have appeared on hundreds of websites, including the Wall Street Journal and USA Today, Morningstar, and in the international media.

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