Peter Tanous is one of the manager selectors better-known to the public, having written a book of interviews with successful money managers. In an op-ed in yesterday's WSJ, he argues that it will likely take longer than expected for US stocks to re-reach their October 2007 highs.
The reason for this is firstly, that stocks have fallen a lot. If you assume the bottom occurred on March 9, the S&P has to go up by 131% to reach its earlier high.
Secondly, if stocks were to rebound quickly, that would imply very high compound annual rates of return during the rebound period, annual rates which have seldom occurred historically.
The lesson, Tanous concludes, is that the recovery in stock prices is likely to take longer than hoped for, that investors should reduce their expectations accordingly, and that they should avoid increasing the risk of their investments in an effort to recover their losses more quickly.
I don't disagree with the article, but I have the following comments:
1) A good Baynesian (I hope I'm not misusing this term--NateCarrFan, help me out. Maybe I should say "a good conditional probability theorist") would have looked at how many times the stock market has compounded at high rates over a multiyear period given a substantial bear market immediately prior.
2) I think the piece dwells a little unwisely on sunk costs, which are nearly always irrelevant to the task of an investor investing today. "Sunk gains" are pretty irrelevant too--whether a stock has gone up or down in the past should be of little import. What really matters, what should most occupy the attention of investors, investors in investors, and their clients, is the current expected returns of an investment based on its price, its intrinsic value, and the alternatives available today and in the future. Even the greatest investors often elide this distinction--they'll say "I quadrupled my money in two years on this name so I sold it." What they should have said, and what you hope they thought when they analyzed it, is "I sold it because at that price, its expected return was not as good as the alternatives available at the time and/or expected to be available in the future."