It is not just the James Glassmans (co-author of the 1999 bestseller Dow 36000. More than 10 years later, the Dow is still stuck at the same level) of the world who do enormous damage to investor portfolios. Well-meaning folks such as David Trahair manage to inflict similar damage through their well-intentioned but incorrect prescriptions. Back in 2009, Mr. Trahair published a book with the title Enough Bull (reviewed here). In it Mr. Trahair counselled investors to dump their stock holdings and stick the proceeds in ultra-safe GICs. The message found enormous resonance with investors whose portfolios were battered and bruised by a brutal bear market that cut the value of their portfolios in half in a matter of mere months. Doubtless, many investors took Mr. Trahair’s message to heart and dumped their stock holdings and moved to safe investments. Let’s see how it would have worked out.
Mr. Trahair cites the example of the TSX Composite, which declined from its closing value of 15,073 on 6/18/2008 to 8,155 on 11/17/2008. It was a stunning decline and one we would probably be telling our grandchildren about. But, let’s see what happened since then. A little over 2 years later, the TSX Composite closed at 13,443 on 12/31/2010. In other words, the index dropped 46 percent over a six month period and gained 64 percent over the next two years. If you include dividends or better yet, reinvested dividends, investors in the Canadian stock market would have gained more than just the increase in the price levels suggest. Investors who followed Mr. Trahair’s advice would have locked in their losses and missed the ensuing recovery entirely.
Another example cited in Enough Bull to warn investors of the perils of the stock market is the decline in the price of Apple (NASDAQ: AAPL) from US$199.83 on 12/28/2007 to US$90.58 on 01/09/2009. No doubt that period would have been trying for Apple stock holders. But considering that Apple was recently trading at US$342, I doubt long-term stock holders are complaining about the blip in Apple’s stock price.
The moral of the story here is not that investors should be piling into stocks at all times ignoring the nay-sayers. Rather it is that investors in equity markets must be prepared to withstand sudden and significant erosion in the value of their stock holdings. They should not be surprised when stocks do just that and then react with extreme and drastic portfolio changes.