Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 8

Jumping frogs and rhyming markets

Who is the greatest market analyst of all time? Some will nominate Benjamin Graham. Some may opt for his student Warren Buffett. I liked Ron Brierley in his day, although his lustre has faded.

But towering above them all is Mark Twain. Mark Twain, you may ask?  Wasn’t he a writer and a Mississippi riverboat poker-shark? What does he know about markets? Well, everything apparently.

"The Celebrated Jumping Frog of Calaveras County" is an 1865 short story by Twain, his first success as a writer, bringing him to national attention. In it the narrator tells a story about a gambler betting on a jumping frog.

In this story, Twain pens an immortal line for stockmarket scholars about his favorite theory: “no occurrence is sole and solitary, but is merely a repetition of a thing which has happened before, and perhaps often ...”

Like Twain, we have asked ourselves, “Haven’t I seen this all before?” At an individual level this is usually called déjà vu and can strike with incidents in life, memories triggered by visits to different places, smells or sounds.

On a bigger canvas, this is called historic recurrence and is the repetition of similar events in history often separated by long periods of time. The concept of historic recurrence has been applied particularly to the rise and fall of empires and the continual and relentless wars that erupt between tribes and nation states. Nowhere is this better observed than in the history of Afghanistan. Since the time of Alexander the Great, this beautiful but blighted region has been subjected to continual periodic invasions where the invader always and inevitably loses and goes home with its tail between its legs. If G.W. Bush had been a student of historic recurrence, much American blood and treasure (and a not inconsiderable amount of Australian) could have been saved. Alas, he doesn’t appear to have been much of a student of anything!

While people often say, “History repeats itself" in cycles, this is never exactly true. This was also appreciated by Twain, obviously a student of the long cycle, when he wrote, "History does not repeat itself, but it does rhyme."

Recurrences take place due to sometimes subtle and not readily identifiable circumstances. Some of these factors may not be understood at the time the event is occurring and may only become apparent years later. The reason for the recurrence will often be hotly debated. Nowhere is this better evidenced than in the stockmarket.

As the chart below shows the stockmarket may not be repeating history but it’s rhyming, with all the exuberance of a Wordsworth poem.

 

The Australian equity market is presently repeating a performance pattern similar to the mid 1970’s recovery. It’s not performing exactly the same way, but it’s close. It is now 65 months with a 25% decline since the Australian equity market peaked in late 2007. Over the same time frame (65 months) from the pre-decline peak in January 1973 to March 1978, the All Ordinaries Index had fallen by approximately the same amount as shown in the chart. Both periods experienced peak to trough reversals of more than 50%.

The chart shows the returns from the All Ordinaries Index post the 1973 and 2007 peaks. As is readily observable, the moves in the two periods tend to mirror each other. Let’s say it is not repeating itself but it sure is rhyming.

“So what?”, you may ask. The model, if it is a true example of historical recurrence, may predict the course of the sharemarket over the next couple of years. Or it may not.

Why would this rhyming model work? Simple. The stockmarket is a barometer of human emotion and particularly human frailty. It registers them all … fear, greed, lust, paranoia, confusion, panic, herd-mentality, envy and disappointment. It’s a big human stew but the ingredients never change so the taste is the same, although it comes to the boil at different times. “Gee haven’t I tasted this somewhere before?” The ingredients never change because people never change. Not really. Not even over long periods of time.

The herd always charges off together in one direction then just wait, what’s that sound you hear? It’s the herd charging back again in the opposite direction. They head off over the hill. What is the only thing you know for sure? That given time you will see them all come thundering over that same hill heading in the direction they first came from. Humans, like jumping frogs and migrating wildebeest, never change. The graphs from 1973 and 2007 demonstrate this.

Writing novels and playing poker on riverboats, while consuming large quantities of whisky, does not a great market analyst make! Or does it? I think I’ll try it.

 

Kieran Kelly is Managing Director of Sirius Fund Management and has over 30 years’ experience in fund management and sharebroking.

 


 

Leave a Comment:

     

RELATED ARTICLES

Why long term investing is not easy

Who wins? Australians investing in US shares

Who wins? Australia versus US in local shares

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.