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Do Stocks Always Go Up In the Long Term?



March 04, 2008 – Comments (13) | RELATED TICKERS: EWJ

This is one of the fundamental tenets that many people espouse, especially in the picks to short the ultrashorts.

20 years later, the Nikkei is at about half of the level it reached in 1988.  And 18 years later, it's still a good 70% less than it was from the top.

Now, it is unlikely that this will happen to the dow nominally, because the US government has made it a priority to prop up asset prices, whereas the japanese did not do this in the early 1990's.

Just wanted to show everyone that there is no guarantee in any time frame that the stock market always goes up in the long term.  I always get squirrelly around people who use the words "long term" without a definite time frame of x amount of days, months, or years.  Because yes, maybe in 100 years real estate will get back to it's 2005 levels - so it's true, in the long term it may go up.  But in the long term, there is only one true guarantee, and that is that we'll all be dead.


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13 Comments – Post Your Own

#1) On March 04, 2008 at 5:17 AM, zygnoda (26.71) wrote:

haa   the ending is the best part..

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#2) On March 04, 2008 at 7:02 AM, dwot (97.03) wrote:

I think something that no one mentions with Japan is that not only was it a housing bubble, but it was an aging population:


Age structure: 0-14 years: 13.8% (male 9,024,344/female 8,553,700)
15-64 years: 65.2% (male 41,841,760/female 41,253,968)
65 years and over: 21% (male 11,312,492/female 15,447,230) (2007 est.)


Age structure: 0-14 years: 20.2% (male 31,152,050/female 29,777,438)
15-64 years: 67.2% (male 100,995,752/female 101,365,035)
65 years and over: 12.6% (male 15,858,477/female 21,991,195) (2007 est.)

I don't think people consider at all how the market changes when you have an enormous number of people relative to the total reaching retirement age.  These people aren't so interested in chasing returns any more, but safety and you see reduced interest in the stock market compounded with increased withdrawals. 

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#3) On March 04, 2008 at 7:21 AM, abitare (58.10) wrote:

Another look at the Dow in real not nominal terms:


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#4) On March 04, 2008 at 8:54 AM, floridabuilder2 (99.34) wrote:

i love the players on here who have lost a zillion points betting against all the ultrashorts with their (stock prices always go up theory)..........  do you think they did that with real money?  No, if they did they are broke......

by the time their bets against ultrashorts start paying off down the future, I'll be betting against ultrashorts and will be 20,000 points ahead of them........

whenever I make a good trade and make money, I always wonder who is on the other side of that trade......  now I know my answer

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#5) On March 04, 2008 at 10:32 AM, abitare (58.10) wrote:

Another look at the Dow in real not nominal terms:


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#6) On March 04, 2008 at 11:43 AM, mickeyc21 (29.82) wrote:

floridabuilder whenever I make a good trade I know who is on the other side: a Caps reading "Buffett says buy" knife catcher. Most of the blogs on here define dumb money.

DemonDoug - thanks for pointing out the obvious. Most people aren't interested in facts so your buy and holders will not even realize they haven't made money for 8 years. 

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#7) On March 04, 2008 at 4:09 PM, StockSpreadsheet (74.73) wrote:

I think Japan is an extream and specialized case.  Back at the top of their housing bubble, the land in Tokyo city alone was valued more highly than all the land in the U.S., even though Japan is smaller than California.  The banks didn't want to write off any of their debts, as that would cause the borrowers to lose face.  Since so many of the banks and industries had incestuous relationships and interlocking directorships, a lot of money was loaned technically inhouse, so a bank writing down a debt would mean that they are saying that one of their sister corporations was overleveraged, which would hurt the stock of the sister entity.  Rather than deal with the mess, write down the loans and move on with things, they preferred to keep loaning money to the companies that were technically, (if not actually), insolvent, since to do otherwise would cause loss of face for their sister entities and could precipitate a collapse of the whole house of cards.  They therefore muddled through the losses, keeping to pile on more losses, throwing good money after bad, until finally Japan's export-oriented economy coupled with the growth in the world economy finally partially pulled them out of their mess, and got them to where their economy can just now start to raise interest rates and maybe deal with the whole mess.  They could partially do this due to Japan's unusually high savings rate and the average Japanese's willingness to accept ultralow interest on their savings accounts instead of chasing higher interest rates in other nations, (such as the U.S. or the European nations).

The above scenario is not true for the U.S., I don't believe.  I don't think our housing got inflated to nearly the same degree.  Our financial institutions have been much more aggressive in writing off the losses than the Japanese ever were.  We don't have the huge savings rate for our banks to muddle through the mess without dealing with it, and American's are more likely to chase returns in higher interest bearing accounts overseas than the Japanese were willing to do, so will not have the patience to earn low returns while our banks throw good money after bad.

This is not to say that I don't think that the U.S. isn't in for a very rough time ahead, or that I don't think that it will take years to unwind all this mess and recover from all the overspeculation that has been done in our housing market, the lax lending standards that threw a lot of good money the way of bad lending risks or any multitude of sins than are coming home to roost for the U.S. economy and will have bad effects for a long time to come.  I just think that we aren't Japan, the scenarios are significantly different so I don't think this example is as applicable as you imply.  (Though the NASDAQ is suffering through a similarly long span between a previous high and the time it takes to exceed that high, and I think that is because at least for a lot of NASDAQ stocks, they did reach the insane levels of valuation that the Japanese land values did, so have had an applicable crash and will take as long to recover as the Japanese stock market did.  I don't think this is true of the S&P500 though.)

Just my belief.  I don't bet on ultrashort funds, don't short stocks and have made money over the past 5 years and past 10 years, but I am fairly selective in what I buy, (much more so than I am in CAPS).  I do believe that you should continue to point out the Japan chart to the ultrabulls to help them possibly regain a little perspective.  I just don't think it will be as bad for us as it has been for the Japanese, due to cultural and other differences.  I could be wrong though.  Time will tell.

Take care and have a nice day.  May all your picks be winners.


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#8) On March 04, 2008 at 4:52 PM, DemonDoug (92.48) wrote:

Craig, good points.  The overall point of this blog was indeed, to remind people that there can be very long time frames where stocks give you a negative return.  I want to respond to something you said specifically though:

Rather than deal with the mess, write down the loans and move on with things, they preferred to keep loaning money to the companies that were technically, (if not actually), insolvent, since to do otherwise would cause loss of face for their sister entities and could precipitate a collapse of the whole house of cards.

Isn't this what the Fed is doing with many banks with the TAF, and what many banks are doing with homebuilders?  And isn't this exactly what BAC is doing with CFC?

I don't know what happened in japan all those years ago in terms of their financials, but while there have been some write-downs here in the US, there is still trillions of worthless debt that is maintained at full value.  And I'd be willing to bet if banks could keep their model values and loan against their fictitious asset prices they would, but nowadays many debt holders are very aggressive in going after their assets, so in reality it's external forces that are forcing the writedowns.  Also I would agree that I don't think we will go into a deflation like Japan has.  It's just not the governmental policy and the Fed policy to do that. 

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#9) On March 05, 2008 at 8:08 AM, TDRH (99.76) wrote:

One thing that concerns me is the increase in withdrawls/borrowing by US consumers from their 401K.  I am assuming this is being done because their homes are no longer ATM machines, and they need to service their debt.    In addition, our population is older, with the baby boomers beginning to reach retirement age.  Personally, I am assuming (without any documentation) that their tolerance for risk will be much lower than it has been in the past.   Combine these with the instsability of the US dollar, making our market unattractive to foreign investment and you have the makings of a continued decline.

The one thing that gives me hope, is that stock still have low P/E ratios relative to the .com bust.   Will have to see how it goes.   Good time to back up winners with stop losses.  I am currently 15% cash and looking to increase to 30%.

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#10) On March 05, 2008 at 7:36 PM, nuf2bdangrus (< 20) wrote:

Jeremy Grantham is predicing underperformance for years.  Commodoties are booming as the inflation genie is out of the bottle.  Consumers are going to be hurt on the basics, reducing discretionary income, lessening their budget for "stuff", thus lowering the price of "stuff".  Seen this movie before.  US has 70 TRILLION in unfunded liabilities, and we are on the verge of electing an administration that wants more taxes, more protectionism, and more spending.  All of those bode ill for US stocks, and in the nearererm, will spread to the world, expecially China.


Stronger countries to invst in would be Brazil, India, and Russia, as well as Malaysia.  Gold is not nearly finished, neitehr are gas and grains.  I keep missing the silver, failing to get an entry point.  BTW it has performed better than gold.  Steel will also outperform. 


Put the green pills on 'stuff stocks' 

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#11) On March 06, 2008 at 3:28 AM, camistocks (< 20) wrote:

Ah! I was about to write a post on the Japanese asset bubble and you were ahead of me. Never mind, I will still do my post.

BTW, nice post by Stockspreadsheet! 

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#12) On March 07, 2008 at 12:32 PM, FourthAxis (< 20) wrote:

Let's do it with the NASD next!

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#13) On December 09, 2008 at 2:55 AM, DaretothREdux (49.28) wrote:

bump +1 great post and great comments

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