“Yesterday is history. Tomorrow is a mystery. But today is a gift. That is why it is called the present.”— Old saying, recently revived in Kung Fu Panda

I watched Kung Fu Panda last weekend as part of my son’s 10-year birthday party. There were some good quotes in it, including the one above. Another one I liked, also from the wise old turtle Master Oogway: “Your mind is like water. When it’s agitated you can barely see clearly. But once you become quiet and are in peace, then everything becomes clear…”

Certainly, the market’s recent dramatic swings have scrambled the heads of many investors. Mostly, it’s been a nasty slide down — a history-making drop. And that will make a lot of people give up. (From the November 24 issue of Wall Street Journal, “‘I just don’t have the stomach for it anymore,’ says [semiretired computer programmer Eugene] Hibbs, 66 years old… Now, Mr. Hibbs is sitting on Treasury bills.”) But now is the time to really pay attention. It’s been a history-making drop, and it may also seed some equally breathtaking opportunities.

Last week’s rally notwithstanding, this bear market has few precedents. Really, you have to look back to the 1930s. According to Barron’s, at the low on November 20, the S&P 500 has given back a decade worth of gains. Even after surge on Friday, November 21, 2008 would still be the worst year for stocks since 1931, when they dropped 53%. In the whole of the 20th century, no decline has exceeded 50%, save for the 1929-32 bear market. The S&P 500 is off 45% from its October 2007 high — that’s after last week’s rally.

Whether our bear market looks ultimately more like 1929-32 or 1937-38 is an open question, of course. The former went on to post a total loss of 86% top to bottom. The latter, though, rallied and made up 50% of the losses in the next six months. Another hopeful message: The average time to recoup a bear market loss has been 22 months, excluding the 1929-32 collapse. As with the big crash, so with the rebound — it will come when people least expect it.

Resource stocks look like they’ve already had their 1929-32 style crash in just the last few months. Many resource names are already down 80% or worse from top to bottom. It’s incredibly ugly out there. Even companies that looked like they were in decent financial shape only a few months are now scrambling to raise liquidity and stave off a financial crisis.

A strong balance sheet means that financially, you are in control of your own destiny. It means you don’t need to raise money, nor do you have a looming debt coming due soon. It means you’re going to be a survivor.

It’s going to come down to the survivors. The upside could be spectacular on the other side for them.

Regards,
Chris Mayer
December 1, 2008

Bear Market 2008: What the Crashes of the 1930s Reveal about the Present was originally featured in the Penny Sleuth.