The following was received today from a friend at Financiere Banque Nationale in Montreal. I do not assume it was authored there but it is quite interesting. The original version was in French but it appears here in English.
Les Quatre Loups (The Four Wolves)
Imagine if it were 1948, just after World War II ended, as had the Great Depression. Someone was jumping up and down asking you to buy the Dow or leading stocks when the PE ratio was below ten and their dividend yield was between six and eight percent. What would you have thought then? You would have looked at the past, extrapolated into the future and determined that person was crazy. At the time the Dow was 161, (when its previous high was 381 in 1929 and it would not hit that again until 1954). Richard Russell and George Schaefer were those persons encouraging everyone they could to get into the market.
Unfortunately, you would have made one of the greatest investment mistakes of your life by assuming Russell and Schaefer to be crazy. The Dow was about to begin its second legendary bull market of the century that would not end until 1966 at Dow 975.
Imagine if someone in 1971 told you that gold, which was then at $35 an ounce, would be at $887.50 by the end of the decade. What would you have thought of them? Obviously, they were crazy, as gold had been at $35 an ounce since 1933. Again, most people extrapolated the past into the future and decided not to buy gold. Oh, yes. Richard Russell, James Dines, Harry Schultz and Jim Sinclair were those crazy people.
Well, you would have made the second greatest investment mistake of your life. In 1980 the Dow was between 800 and 850 and gold was at $887.50.
1974 or 1982
Let us move to 1974 or 1982. Imagine that someone was jumping up and down asking you to buy the Dow or leading stocks when their PE ratios were below 10 and their dividend yields were between six and eight. What would you have thought of them? You would have looked at the past, extrapolated into the future and determined that the person was crazy. Oh yes, Richard Russell was that person encouraging everyone he could to get into the market both times.
The Dow would experience the greatest bull market that the world had ever seen. It went from either 577 in 1974 or 795 in 1982 to 11,722 in 2000. Unfortunately, you once again had made one of the greatest investing mistakes of your life. To make it worse, you got into the market starting in 1998 or 1999 and you experienced horrific losses.
Now in 2003, what should you do? Sit on your losses and hope the market comes back or look now to see where the next great bull market is? Well, most people will sit and wait for another two to seven years before they do anything and then they will sell their stocks at exactly the wrong time and buy into the peak of whatever bull market is occurring to compound their error.
Today – 2003
Once again imagine today in late 2003 if someone told you that gold, which is at just over $400 an ounce, will be at $3000 - $10,000 an ounce by the end of the decade. What would you think of them?
Obviously they are crazy, as gold has been below $400 an ounce since 1996 and below $500 an ounce since 1983. Again, most people would extrapolate the past into the future and determine that they are crazy.
Oh yes, once again Richard Russell, James Dines, Harry Schultz and Jim Sinclair are those crazy people.