The Business of Value Investing.pdf

70 The Business of Value Investing

One fundamental difference between the markets and the

media makes the media a poor guidepost in security selection.

The media tends to focus on the current state of affairs while markets

are anticipatory creatures. While the media focuses on the current

outlook of the economy, it is highly likely that markets begin to turn

up just when investors are being told to exit the game. As Warren

Buffett likes to quip, “ If you wait for robins, spring will be gone. ” 3

What the media failed to convey during its bleak assessment of

the economy in the late 1970s was that equity valuations had reached

decade lows and the stock market was as a cheap as it had been in a

very long time. Over the past 100 years of market activity, the market

historically has experienced cycles in which it advanced (bull mar-

ket) or declined (bear markets). Table 5.2 illustrates the various

market cycles of the twentieth century based on the performance

of the DJIA.

While the media maintains its focus on the current situation,

markets — and investors — tend to focus on the future. And when

you have a situation like the 1970s, when equities were selling at

Table 5.1 Dow Jones Industrial Average Annual Returns, 1980–1989

Year DJIA Start DJIA End % Return

1980 838 964 15%

1981 964 875 –9.2%

1982 875 1046 19.5%

1983 1046 1258 20.3%

1984 1258 1211 –3.7%

1985 1211 1546 27.7%

1986 1546 1896 22.6%

1987 1896 1938 22.1%

1988 1938 2168 11.9%

1989 2168 2753 27%

Data source: Dow Jones & Company (www.djindexes.com).

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