Lost Decade

[MrPanda]

Hi, some commentators like Ray Dalio and Charlie Munger are predicting that we are entering a "lost decade" for stocks, where returns on indices like the S&P 500 might return close to 0% over a period of 10 years or so (just like in the period from around 2000 - 2010). Do you think this prediction will turn out to be true, and if so , is it still possible to generate high returns on equity investments during this "lost decade" . How do you go about doing that ? Thanks alot ...

[Parsad]

1 hour ago, MrPanda said:

Hi, some commentators like Ray Dalio and Charlie Munger are predicting that we are entering a "lost decade" for stocks, where returns on indices like the S&P 500 might return close to 0% over a period of 10 years or so (just like in the period from around 2000 - 2010). Do you think this prediction will turn out to be true, and if so , is it still possible to generate high returns on equity investments during this "lost decade" . How do you go about doing that ? Thanks alot ...

 

That was a decade for stock pickers and value investors.  The indices had a very nice run for the last decade...now things turn the other way for a bit.  Cheers!

[Gregmal]

No such thing as lost decades, just lost people. 
 

For instance there’s people who did not even make money this past decade. 

[Spooky]

“People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.”

- Charlie Munger

 

“I’ve never been able to predict accurately. I don’t make money predicting accurately. We just tend to get into good businesses and stay there.”

-Charlie Munger

Edited September 7, 2022 by Spooky
Added another quote

[Viking]

If you look under the hood stock average returns the last decade (2010-2020) were likely largely driven by a handful of mega stocks: Apple, Microsoft, Amazon, Google, Facebook, Tesla etc. If you did not own these stocks you likely had a lost decade. 
 

If these mega stocks go sideways the next 3-5 years then stock indexes likely will go sideways as well. Can investors make money? Of course. How? Picking the right stocks. And there is the rub…

[Spekulatius]

Lost decades are nothing new - we had already one from 1/1/2000 (SP500= 1469) to 1/1/2010 (SP500-1127). That's a whopping -23% return in a decade for Joe Sixpack investing in index funds.

 

The 70's were worse, after accounting for inflation. I think every couple decades, one get's lost in terms of stock market returns.

Edited September 7, 2022 by Spekulatius

[Libs]

I made 20% CAGR in that 'lost decade' and I'm kind of a schmuck. It means nothing.

 

[TwoCitiesCapital]

Just now, Spekulatius said:

Lost decades are nothing new - we had already one from 1/1/2000 (SP500= 1469) to 1/1/2010 (SP500-1127). That's a whopping -23% return in a decade for Joe Sixpack investing in index funds.

 

The 70's were worse, after accounting for inflation. I think every couple decades, one get's lost in terms of stock market returns.

 

This. And they've followed periods of exceptional returns which is what 2011-2021 represented. 

 

It wouldn't shock me, given the weight of the indices, of you had another lost decade at the index level even while certain sectors (like energy and materials) go bang busters.

 

After a decade of sucking air, there are parts of the index that would need to 2-3x to have a meaningful impact on the index level returns - particularly if other constituents are actively working the opposite direction. Energy had fallen to like 2-3% of the S&P 500 but is currently having a very outsized contribution to index earnings for instance. That's why it can be up double digits for the year even while S&P is down double digits. I'd expect this might be the case for a few more years to come before the index right sizes itself. 

[Spekulatius]

27 minutes ago, TwoCitiesCapital said:

 

This. And they've followed periods of exceptional returns which is what 2011-2021 represented. 

 

It wouldn't shock me, given the weight of the indices, of you had another lost decade at the index level even while certain sectors (like energy and materials) go bang busters.

 

After a decade of sucking air, there are parts of the index that would need to 2-3x to have a meaningful impact on the index level returns - particularly if other constituents are actively working the opposite direction. Energy had fallen to like 2-3% of the S&P 500 but is currently having a very outsized contribution to index earnings for instance. That's why it can be up double digits for the year even while S&P is down double digits. I'd expect this might be the case for a few more years to come before the index right sizes itself. 

The classical example of index distortion  due to a bubble is the Canadian stock market  index in 2000, which had a heavy dose of Nortel (which went bankrupt) and JDSU (which went so close to being a zero that it doesn't matter). I think the two together were over 60% of the index at some point.

 

We could see a mild version of this in the US, if Fangs and tech fails to deliver returns. that's the problem with market cap weighing 0 it tends to exaggerate money flows and at some point , you can end up with a bubble because all the bubble stocks dominate the large cap index (think Tesla, SAAS, AMZN, META, GOOGL etc).

 

I don't think GOOGL and META are bubble stocks, but it is possible that they as a group perform miserably. The average Joe will have trouble avoiding carnage in these circumstances. I guess investing in Foreign markets or small caps is a potential way out.

 

As for @Libs statement that it does not matter, I don't agree with this statement. It may not matter for him as an active investor but a lot of us have a portion of their capital in 401K's where you can only chose index funds and maybe some actively matched funds. Many hug the SP500.

 

Also one needs to keep in mind, that for every outperformer, there has to be an equally underperformer, because obviously not everyone can outperform in aggregate.

Edited September 7, 2022 by Spekulatius

[fareastwarriors]

14 minutes ago, Spekulatius said:

It may not matter for him as an active investor but a lot of us have a portion of their capital in 401K's where you can only chose index funds and maybe some actively matched funds. Many hug the SP500.

 

What Should those folks do then? Not invest in SP500 index funds? 

 

For me, I'll recommend they should DCA into those Funds every paycheck and measure performance over decadeS and whole working life and longer.  

 

 

 

Edited September 7, 2022 by fareastwarriors

[DooDiligence]

1 hour ago, fareastwarriors said:

 

What Should those folks do then? Not invest in SP500 index funds? 

 

For me, I'll recommend they should DCA into those Funds every paycheck and measure performance over decadeS and whole working life and longer.  

 

 

 

 

The 401K fund choices from my previous employer were terrible. Fortunately, I discovered that they allowed employees switch to a self directed Fidelity Brokerage Flex account, which opened up a whole universe of equity and fund choices. No micro-caps or options trading allowed, but I'm not interested in those anyway. I left that employer around 2017 and last year I finally got around to rolling the Flex account into an IRA. It was a massive pain in the butt to get done, but it eventually happened. FWIW, OneAmerica sucks hard.

 

This may not be an option with all employers but it's worth asking your HSE department.

Edited September 7, 2022 by DooDiligence

[Spekulatius]

10 minutes ago, DooDiligence said:

 

The 401K fund choices from my previous employer were terrible. Fortunately, I discovered that they allowed employees switch to a self directed Fidelity Brokerage Flex account, which opened up a whole universe of equity and fund choices. No micro-caps or options trading allowed, but I'm not interested in those anyway. I left that employer around 2017 and last year I finally got around to rolling the Flex account into an IRA. It was a massive pain in the butt to get done, but it eventually happened. FWIW, OneAmerica sucks hard.

 

This may not be an option with all employers but it's worth asking your HSE department.

The vast majority of employers don't have such a self directed option. I have asked my former employer about this and the HR person responsible plain out told me that they wont do it, because of concerns about liability. They are afraid of employees blowing up their accounts etc.  If index funds perform terrible that not their problem - they can't get sued for that.

[Spekulatius]

1 hour ago, fareastwarriors said:

 

What Should those folks do then? Not invest in SP500 index funds? 

 

For me, I'll recommend they should DCA into those Funds every paycheck and measure performance over decadeS and whole working life and longer.  

 

 

 

DCA works if you are starting out. It does not work well, if you have a lot of money in your account and new annual contributions are <5% of the total to put it in a plain number. In the latter case, the performance of your portfolio starts to matter much more than the new contributions.

 

If you are concerned about index funds not performing well, I think you need to find ways to diversify out - maybe international funds, small caps, bonds - pretty much everything that does not hug the SP500 index. I don't think there is another choice really. You could also consider to start Roth IRA's instead of contributing to 401K (if your money is tight, if not you can do both). Or even consider changing the employer to be able to roll over your funds in a self directed IRA, if nothing else works.

[FCharlie]

On 9/7/2022 at 4:52 AM, MrPanda said:

Hi, some commentators like Ray Dalio and Charlie Munger are predicting that we are entering a "lost decade" for stocks, where returns on indices like the S&P 500 might return close to 0% over a period of 10 years or so (just like in the period from around 2000 - 2010). Do you think this prediction will turn out to be true, and if so , is it still possible to generate high returns on equity investments during this "lost decade" . How do you go about doing that ? Thanks alot ...

If you are an index investor who buys only once and never sells, it's easy to have a lost decade. But the term lost decade implies the market went nowhere, which is really misleading. From 2000-2002 the market dropped almost 50%. From 2002-2006 there was a really strong rally back to the highs of 2000, followed by the 2008-2009 crash which took us back down to the 2002 lows. Then it took until 2013 to recover from 2008-2009 back to the 2000 highs. Put it all together and an index investor saw no gains for thirteen years.

 

That said, however, this was a great time for value investors who bought things like tobacco and energy stocks. I had 30% of my money in Philip Morris/Altria from 2000-2010 and it blew away everything else I had. But that was starting from a point where it had about an 8% dividend yield and a mid single-digit PE. I believe RJ Reynolds Tobacco had a 15% dividend yield in the year 2000 and they kept raising the dividend year after year because there was nothing actually wrong with their core business. Rather it was just completely unpopular relative to things like Cisco, Qualcomm, and Wal Mart which were all trading at 50-100 times earnings. Today you could argue that we have a similar situation where popular stocks like Amazon, Microsoft, Tesla and others will go nowhere for a decade or longer, but you have other really profitable companies that trade for a fraction of their liquidation values like banks and real estate companies that could do extremely well going forward.

 

If you believe we are heading into a lost decade, you have to avoid indexes and pick individual stocks. And if you don't want to pick stocks and only feel comfortable buying indexes, then you have to buy or average down after they have significant drawdowns and be willing to cash out or lighten up when everything is going great.  A decade is a long time. There will be plenty of opportunity.

[james22]

15 minutes ago, FCharlie said:

There will be plenty of opportunity.

 

Less so if one is retired.

[thepupil]

it wasn't a lost decade for everything, even very broad indices of other asset classes/geographies would have helped the diversified investor. 

 

I think it's important to have diversity of types of ideas/assets etc (if drawdown sensitive). I'm not great at this, have very strong US bias. 

 

[maxthetrade]

On 9/7/2022 at 12:45 PM, Parsad said:

That was a decade for stock pickers and value investors.  The indices had a very nice run for the last decade...now things turn the other way for a bit.  Cheers!

 

Exactly, there are no lost decades for stock pickers! In 1999 I had very low expectations and what followed was my best year ever in 2000. Today is somewhat similar, it's not difficult to find reasonably priced stocks today.

[no_free_lunch]

I agree on the 2000-2008 period presenting opportunities but will it look like that or could it be more like the 2008-2012 period which was a lost half decade.  For Berkshire and for many value investors that I followed at the time, they were completely flat over that period.  That was a broad decline and I don't see why a true lost decade would not be similar.   It seems that with the prior lowering of interest rates, a lot of asset growth was moved forward, it's got to be a major headwind now that interest rates are reversing.   I will keep doing what I'm doing but I'm not super optimistic.

Edited September 10, 2022 by no_free_lunch

[Gregmal]

On a year by year basis I don’t think one has ever passed where there haven’t been glorious opportunities at various points. So it’s like decade schmecade, who cares? The market is what you make of it. It’s only lost if you let it be. 

[Libs]

I vividly recall in one of Peter Lynch's books, that Taco Bell went up 15X in the teeth of the 70's bear market. There is always some opportunity, as Greg says.

[crs223]

During 10-year periods where the indices go nowhere, I recommend only buying stocks that go up.  Preferably 10-baggers.

[TwoCitiesCapital]

2 hours ago, crs223 said:

During 10-year periods where the indices go nowhere, I recommend only buying stocks that go up.  Preferably 10-baggers.

+1 

[SharperDingaan]

Buy a bond instead, and be done with the index entirely.

Both the BoC and the Federal Reserve are aggressively raising interest rates; which reduces cost to purchase, and raises the coupon on new issuances. We also know that rates are being driven high enough to defeat inflation, following which they come down again (economic theory). Simply wait for interest rates to start the decline, then buy a long-dated Treasury/Canada/Guilt at your desired maturity.

 

Above market coupon for the term of the bond, no fees, low risk (sovereign only), highly liquid, and rising in value as the market interest rate falls - zero concern with whatever the index is doing. If in Canada - annual coupon receipt marginally > RRIF minimum withdrawal requirement.

 https://cupfa.org/wp-content/uploads/2012/05/Comparing_RRIF_to_Annuity_from-RetirementAdvisor_May2012.pdf

 

Clean, simple, and idiot proof.

 

SD

[ICUMD]

My play book:

 

Guaranteed attractive returns are in paying down variable debt in rising interest rate environments.  And taking on debt in low interest rate environments to invest (conservatively).

 

 

 

[scorpioncapital]

11 hours ago, ICUMD said:

My play book:

 

Guaranteed attractive returns are in paying down variable debt in rising interest rate environments.  And taking on debt in low interest rate environments to invest (conservatively).

 

 

 

 

Does it matter if the variable debt is still yielding less than inflation?