Wednesday, June 10, 2009

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Does History Repeat? This is About Average Stock Market Returns

If you have been hearing stock market news on radio, or TV channels like CNBC you must have heard this phrase “Is history going to repeat this time?” There are a lot of popular phrases about stock markets that these anchors use at suitable times. Today I am touching upon one of such phrases. It is a famous question “Does History Repeat This Time?

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There are several circumstances for which this phrase is applied. It can be about bull markets when everyone feels good. It can be about bear markets when everyone feels bad. It can be just about anything that happens in the stock market but remains in the pages of history. Overall for the current situation I am more in interested in that part of history that gave good average stock market returns. Can that history repeat in the future?

Why You Should Ask This Question to Yourself?

I have several reasons to ask this question. Many market participants still believe that history can repeat and we can continue to see good stock market returns in the coming decades. But my analysis does not indicate so. I feel that those good times are gone now. Atleast some parts of the world might face a harsh reality in the future.

Many people advice you to invest in stocks for long term just for one reason. That is based on the history so far. The stock market has consistently given pretty good returns on average per year compared with any fixed income investments. This is the reason why people tend to think that in the long run stocks will outperform all other types of investments. So it feels good to go for long term.

After studying stock market history independently and later studying in the perspective of industrial revolution of the 20th century, I had to agree with certain experts who are making calls for an alternative future. Though I don’t completely agree with them, I still feel that there is a difference in the present situation and the historical times when bull markets flowed in cycles one after another.

Warren Buffet Squeezed the Best Out of Modern Civilization!

The last half of 20th century was a great time for the average American. That was exactly the time when Warren Buffet entered the scene. He too could have lost but with the sound principles he follows, he made it big by the 21st century. Even in the group of people who follow sound principles of stock trading or investing, Buffet should be considered unique for he made such a success that is not yet matched by any other investor or trader.

Buffet squeezed the most out of the outcome of Modern Civilization indirectly. If we were to take a long term perspective of say another century, the future does not seem to be the same anymore. But don’t get disheartened. We don’t need a century of time or a life time to trade. We just need little time out of our life to make the most out of stock trading.

Does History Repeat This Time?

There are a lot of things that are happening simultaneously that pose threat for our future. Depletion of natural resources like oil and natural gas, global warming effects, deforestation effects, water scarcity and pollution, great economic disasters etc. all are happening about the same time in this century. The doubt remains, does history repeat this time?

I very much doubt about the repetition of history as it is. We may not get powerful bull markets like we got in the past century. After the great depression 1.0, there were three powerful bull markets of all time. One is during the 1955 bull markets, second during the 1967 bull markets, third was the longest (almost a quarter of a century) during 1984-2007. The last one was the longest and also most yielding bull market that ended like a bubble though not completely similar to the great crashes of 1933s.

In the immediate term there are fears about bankruptcies of largest banks in the history. This is really something that one needs to worry about because when they go down it is not just them but they are also going to pull everyone down, especially the innocent people because the governments are standing by them giving them full support.

It is like supporting a naughty child who creates lot of troubles finally ending up in trouble when the child blackmails parents by crying. Instead of punishing the stupid and criminals, for idiotic reasons the governments of today are only trying to help them – especially the United States government. By doing so they are posing great risks for their national debt and tax money.

This can eventually have disastrous consequences that I cannot dare to imagine. Many financial and political experts have already drawn out their visions about the future of US. I can’t believe completely in them but to a certain degree they are valid. They speak about how the United States will break down into small countries much like the United States of Soviet Russia did in the last century.

Not History, It is Uncertain Future…

Whether this happens or not, still there is a lot of reason to worry about the future of the stock markets. There is a great threat for the industrial civilization. As many claim this to be great depression 2.0, history may repeat but for down side. By looking at the type of actions the governments are taking to avoid another great depression or any recession, it seems the future will not be a repetition of history but it is going to be even more uncertain ride.

By making it uncertain even the people who are intelligent and well planned for the future are also going to get affected. Thanks to the lot of intelligent feeling people who are influencing the lives of every citizen.

If You Are A Stock Trader?

When it comes to a stock trader there is less to worry about. If you are a long term investor you should certainly worry about the future of the economy. This is because a long term investor only trades for one or two times but has to do that with great caution and analysis. When things do not turn out as expected, the long term investor has to shutdown or end up with wrong bets.

But if you are a stock trader, there is less to worry to about the future of the economy or the stock markets. It is because the time frame is small and a trader can switch between long term – medium term – short term to even day trading time frames. This is a unique advantage of the trader compared to a long term investor.

By reducing the time frame a trader creates more opportunities and flexibility to trade maximally best bets. But the long term investor has only one option. As the time frame can be small, even if the history repeats like it did several times in the past, it does not really matter for a trader. A stock trader, having the opportunity to do more trades in a given time period, gets to experience a variety of situations. Thus he/she learns to handle new unexpected situations as well.

Next time when you watch a TV program and the anchor asks - is history going to repeat this time? Don’t worry about what they are saying. If you are a stock trader keep in mind that you have more options to handle any kind of future. Of course except certain days like we had in the last year January or October. But they happen rarely so they will get compensated by later trades.

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