Anchorman, and The Loss Aversion Conundrum

Last week Intel Corporation reported quarterly earnings that surpassed expectations.  The stock rose 8% to close at $68.47 per share.  On CNBC that day, the commentators were discussing about whether Intel stock would soon be back to its all-time highs.  Most thought that it was just a matter of time before it recovered its highwater mark of $74.87.  Hardly a noteworthy matter you may think—a discussion about a stock’s potential to rise 10%.  But the caveat is that Intel last traded $74.87 back in August 2000. 

Bill Clinton was still president in August 2000.  My wife was pregnant with our first child, who is now a freshman in college.  So, I guess if you’ve been anchored to recovering your highwater mark in INTC stock, it’s been a long wait.  In full disclosure, if you include dividends, a holder of Intel stock would’ve recouped his or her highwater level back in May of 2018.  But either way it still proves a valuable lesson about drawdowns and the hidden volatility of equity markets.

Intel is not alone in terms of large cap stocks which have been underwater for nearly 2 decades.  General Electric has never recovered its August 2000 highs, and doesn’t show any signs of getting there soon.  Currently, GE is 60% below its Dotcom level prices, and that includes dividends received.  The Dotcom boom represents such an extreme overvaluation of stock prices that even stocks like General Electric got massively overvalued.  Three other stocks that are still underwater 19 ½ years later are Morgan Stanley, Citigroup, and AIG.  Two of those stocks, AIG and Citi, were so diluted after the 2008 Financial Crisis that it is doubtful/questionable that they will recover those 2000 levels in my lifetime (I’m 47 by the way). 

“Ok, I get it,” you say.  “Stocks are risky, but I’m diversified through an index fund.”  True diversification can eliminate or reduce much of the terminal risks associated with owning an individual stock.  But let’s face it, stocks are not unlike people.  We’re born, we float around life uncertain what the future holds, only certain that it doesn’t end well.  Many companies die in infancy, some die at middle age, some live biblically long lives, while still others are like that friend who got married and was never heard from again.  Either way, for nearly all the publicly traded companies in the world we can be pretty sure that they won’t be around 100 years from now. 

Index funds help reduce this risk because they spread the bets out among many different stocks.  Index funds that track the S&P 500 also begin to “kick” stocks out of their holdings before they vanish completely when their market capitalization falls below the top 500 in the country.  So, in a way there is a bit of “risk management” involved in indexing.  But that still doesn’t eliminate much of the risk of solely investing in the stock market.  The S&P 500 has had a few lengthy periods of being underwater for extended periods of time.  Following the 1929 market crash, the S&P took 25 years to recoup its highwater price level!  It only took it roughly 12 years for the S&P 500 to fully recover from the 2000 tech bubble collapse, while it took the Nasdaq 100 over 16 years. 

Drawdowns and time spent underwater are factors which greatly effect financial plans because they simultaneously attack both our money and our time, both of which are in finite supply.  Seeing markets that go up for years on end and getting more willing to assume risk as a result of seeing rapidly appreciating markets is part of what creates bubbles and ultimately creates large corrections.  Being nimble is and adaptive to market climates and dynamics helps avoid prolonged periods of drawdowns, where periods are marked not by months, but by years or decades.   

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