I would like to express a few thoughts upon reading Richard Russell's July 24, 2009 observations which you have quoted in your blog, and in particular related to his following words:
At the outset, we can see what Russell is saying: stay out of the bear markets, which also implies stay away from the bear market rallies as they tend to be unpredictable as to their reversals. Such rallies are usually not spotted by the Dow Theory in time to take any relevant action anyway.
The reason why he has made the above statements, I believe, is the fact that one should not be in stocks during bear markets. When a stock keeps declining in price week after week, month after month, what rationale is there in reaching out for dividends -- even if they were at a hefty annual rate. The bear markets devour wealth at a much bigger clip.
The Dow Theory is a technical approach to allow us to ride the bull markets and thus participate in acquiring a piece of the increasing wealth of the nation's corporate stock. This is when the compounding of dividends has any relevance. It also makes us focus on preserving capital, and letting go the search for dividends, during the bear markets.
When the preservation of capital is paramount, the return on money is not a criteria to be used for investing. If we are savvy enough to explore other asset classes, we would usually find a bull market in progress somewhere. As the saying goes: There is always a bull market somewhere. One example: Russell found a gold bull market in the making in 2001, advised the readers to get in and cajoled them to stay in all the way to-date.
Russell's views of July 24 shown above, which he has stated in alternate fashion in other writings, can be substantiated by evidence. For instance, after the Dow Theory gave a sell signal in the middle of 1929, if one had stayed out of the stock market altogether until the next bull signal, they would have preserved their capital while foregoing the search for dividends. If on the other hand, they had tried to ride the bear market rally until March 1930 which was a 50% retracement, they would have been wiped out subsequent to that tipping point. In this regard at least, the current scenario has a great resemblance to that period with our current 50% retracement.
It is reasonable to state that buy-and-hold, with or without dividends reinvested, is not a safe strategy when there is a bear market raging unless we have found a few extremely promising businesses with excellent entry points that are likely to keep growing despite the fact that everything around them in the stock market is on a crash-and-burn course. This requires finding excellent businesses that are selling at say 50 cents on the dollar -- as Warren Buffett has been doing over the past half century to a large extent. This is why Buffett has summarily rejected all technical analyses (including the Dow Theory) and has marched onward to his own drum.
Russell says, "For me, the answer is to follow Dow Theory" which means to me, "Follow the Dow Theory and stay out of the stock market's bear phases and their rallies; forgo dividends and preserve your capital during such times-- or if you must invest, find a bull market somewhere else." Otherwise, our approach will resemble trading in and out during a secular bear market -- which is what we are in right now.
"....for a long time I believed that the best way to avoid the 'being wrong' problem was compounding. Compounding worked wonderfully for years after WW II, until the horrendous bear market of 1973-74. After 1974 compounding your assets worked well until the year 2008.
Let's say you are compounding your assets (reinvesting your dividends and interest) beautifully until a full-fledged primary bear market comes along (1973-74 and again in 2008). Within a year or two your assets are cut in half, and all your compounding has gone to waste.
What's the answer? For me, the answer is to follow the Dow Theory."
At the outset, we can see what Russell is saying: stay out of the bear markets, which also implies stay away from the bear market rallies as they tend to be unpredictable as to their reversals. Such rallies are usually not spotted by the Dow Theory in time to take any relevant action anyway.
The reason why he has made the above statements, I believe, is the fact that one should not be in stocks during bear markets. When a stock keeps declining in price week after week, month after month, what rationale is there in reaching out for dividends -- even if they were at a hefty annual rate. The bear markets devour wealth at a much bigger clip.
The Dow Theory is a technical approach to allow us to ride the bull markets and thus participate in acquiring a piece of the increasing wealth of the nation's corporate stock. This is when the compounding of dividends has any relevance. It also makes us focus on preserving capital, and letting go the search for dividends, during the bear markets.
When the preservation of capital is paramount, the return on money is not a criteria to be used for investing. If we are savvy enough to explore other asset classes, we would usually find a bull market in progress somewhere. As the saying goes: There is always a bull market somewhere. One example: Russell found a gold bull market in the making in 2001, advised the readers to get in and cajoled them to stay in all the way to-date.
Russell's views of July 24 shown above, which he has stated in alternate fashion in other writings, can be substantiated by evidence. For instance, after the Dow Theory gave a sell signal in the middle of 1929, if one had stayed out of the stock market altogether until the next bull signal, they would have preserved their capital while foregoing the search for dividends. If on the other hand, they had tried to ride the bear market rally until March 1930 which was a 50% retracement, they would have been wiped out subsequent to that tipping point. In this regard at least, the current scenario has a great resemblance to that period with our current 50% retracement.
It is reasonable to state that buy-and-hold, with or without dividends reinvested, is not a safe strategy when there is a bear market raging unless we have found a few extremely promising businesses with excellent entry points that are likely to keep growing despite the fact that everything around them in the stock market is on a crash-and-burn course. This requires finding excellent businesses that are selling at say 50 cents on the dollar -- as Warren Buffett has been doing over the past half century to a large extent. This is why Buffett has summarily rejected all technical analyses (including the Dow Theory) and has marched onward to his own drum.
Russell says, "For me, the answer is to follow Dow Theory" which means to me, "Follow the Dow Theory and stay out of the stock market's bear phases and their rallies; forgo dividends and preserve your capital during such times-- or if you must invest, find a bull market somewhere else." Otherwise, our approach will resemble trading in and out during a secular bear market -- which is what we are in right now.
Written by V.S.
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