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AJan 11, 2012

The Great Brain And The European Debt Crisis

Andrew Hallam
The Great Brain And The European Debt Crisis

When I was a kid, Tom Fitzgerald’s The Great Brain, was one of my favourite book series. The main character was a boy genius growing up in Utah during the late 1800s. He could solve nearly any problem. He once strategized how to find two boys lost in a cave network; another time, he taught a young, victimized Greek immigrant how to whip the schoolyard bully; and he wasn’t above using his powers of observation and psychology to occasionally seek profits.

If the Great Brain were around today, and if he were at least ten years from his retirement, I think he would rub his hands at the thought of the European debt crisis, hoping that it would cause a stock market drop (maybe a big one). The Great Brain, I think, would have had a firm grip on his stock market history. And he’d likely have Warren Buffett’s view on falling stock markets memorized:

“Only those who will be sellers of equities [stock market investments] in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

As Buffett suggests, sinking or stagnating stock market levels are special treats for young investors; they’re opportunities to load up on discounted stock market assets. Like a collector, you don’t want to see the prices of your desired products increasing in value while you’re trying to collect a room full of them.

But stock markets rarely fall when the economic outlook is hunky dory. They fall or stagnate when there’s some kind of fiscal terror on the horizon. The Great Brain would probably recognize this, and he’d be rubbing his hands together with the bleak fiscal headlines pouring out of Greece, Italy, Ireland, Portugal and France.

With a sense of history, he might point out that the best 17 year period to invest money in the stock markets was between 1965 and 1982. During this lengthy period, the S&P 500 gyrated (sometimes wildly) but it didn’t make any net gains. It was a perfect time for people collecting stock market assets. But, as The Great Brain would point out, it was filled with terror.

  1. The threat of a nuclear war was palpable
  2. President Kennedy was assassinated
  3. President Nixon was impeached
  4. The markets crashed 45 percent from 1973-74
  5. The Vietnam War ravaged the dollar’s value
  6. Gold hit a historical peak as people feared the debasement of currencies
  7. Inflation averaged 10.03 percent between 1980 and 1982
  8. President Reagan was shot in 1981
  9. U.S. unemployment hit 9.7 percent in 1982

Faced with such world uncertainty, paradoxically, the only consolation young investors may have had during that time was a stagnating stock market. Putting fear aside and regularly investing in the stock markets from 1965 to 1982 would have reaped nice rewards. While emotional speculators jumped in and out of the markets during this horror-filled 17 year period, long term investors would have “collected” stock market assets, year in and year out.

And by 1982, their assets would have taken off, averaging more than 17.5 percent for the next 18 years.

If the Great Brain invested from 1965 to 1982, he would have heard the chorus of “this time it’s different; the world isn’t going to recover.” Like a popular Top 40 remix, every new generation thinks it’s a brand new song.

As a young investor, the Great Brain (if he were among the 91 percent of employed Americans) would probably welcome the uncertainty of the European debt crisis. He would invest his money, hoping that the world’s stock markets would stagnate or fall. He’d keep his investment costs low, and dispassionately rebalance his portfolio annually between stocks and bonds.

Retirees wouldn’t welcome a falling market; there’s no doubt there. As sellers of stock market assets, they’d prefer rising markets instead.

But as they say in golf, every putt makes someone happy.

The European Union’s teetering could be one of those putts.

And if the Great Brain were at least 10 years from his retirement, I think he’d be trying to hide his smile.