Stock Market: A Look Back - Learning from Personal Experiences

If you don't learn from your experiences, no amount of books or seminars will help you improve your returns. Let's take a look back at the latest bear market.

The Dow peaked above 14,000 in September 2007. It declined steadily to 10,000 by October 2008. Do you remember what was being said back then? Bernanke, who was busy fighting inflation by raising interest rates, repeatedly told Congress that the economy was just fine. Real estate was not in a bubble, just taking a rest. We had $4.00 gas and oil was going to $200.00, maybe even $400.00.

What did you do? Did you sell to protect your 2003-2007 gains (which was nothing to sneeze at), or did you let complacency set in because your proper asset allocation would protect you from a downturn?

Do you remember what happened next? Oil peaked around $175.00; the bottom fell out of the stock market in October 2008; the real estate bubble burst; Bernanke shut up and scrambled to slash interest rates; and the pundits who just months before had seen no reason to worry declared that we were going into another great depression, with the most farsighted ones seeing the end of capitalism as we know it. A scared country proceeded to elect a socialist president.

What did you do? Did you stay calm, as your advisor urged you to do, or did you sell in a panic, before the Dow dropped to 5,000?

The Dow bottomed in March 2003 just below 6,500, undercutting the 2002 lows and wiping out a decade of gains. Mr. Obama set out to "fundamentally" transform this country because capitalism had failed. The pundits saw even darker days (and years) ahead. Were you glad you had sold? Did you feel lucky you had managed to salvage what was left of your 401(k) (that by then had become a 201(k))? Because if you did, you probably missed the upturn that took the Dow from 6,500 to a recent high of 9,400, a 44% return in under 5 months!

The lessons are surprisingly simple:

- Very little of what is said about the stock market is accurate.

- Very little of what is predicted ever happens.

- There is always a delay between something happening and your reacting to it. In most instances you are probably too late, buying high and selling low.

What are you to do?

For one thing, start looking at what the market does, not what somebody says it should be doing. And while it is futile to try to predict the future, using past experiences is always helpful.

Remember what happened back in 1993 when Bill became president and Hillary set out to reform healthcare? Medical and drug stocks tanked because the stock market hates uncertainty, and nobody knew what HillaryCare was going to do to the country.

Well, now there is ObamaCare. It would be reasonable to expect medical and drug stocks to be tanking again, right? But they are not. Even medical insurance stocks, the culprit of American healthcare woes in Mr. Obama's book, are doing just fine, thank you very much. And many small biotech stocks have been on a tear. Why? Because the market does not believe the healthcare reform will pass. At least not in its current form.

Now, you can dissect thousands of pages of learned opinions to figure out what will happen to healthcare or you can take a glance at the market. Still think they may be right and you may be wrong? Well we just saw the results of that.

It's your money.