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Market Lab Report - Human Innovation Always Trumps Fear - 120 Year Chart of the Stock Market

Click twice on the image to view a high-resolution version.

It just goes to show that human intelligence, creativity, and innovation has outdone fear in every case so far. That said, while markets have always recovered, it can take years to breakeven if you bought at a peak. This is yet another reason why buy-and-hold is NOT a safe bet nor is dollar cost averaging major averages especially when it comes to multi-year sideways markets. The key is to find those stocks that are likely to outperform due to their cutting edge technologies or groundbreaking services. 

That said, only if each year was a day in the above chart which spans 120 years, would it be a relatively safe bet to buy-and-hold, dollar cost average, or buy on the dips. From trough-to-peak, a 697-fold gain or 69,600% gain would have been achieved in just 120 days (instead of 120 years).

This price rise is somewhat similar to bitcoin except the Dow took much longer to achieve this huge return and still does not come close to the price rise in bitcoin since it was created in 2009.

If you bought a dollar worth of bitcoin in 2009 at an average price of 0.001, it would be worth close to $5 million today. If you bought closer to the lows of 2009, or 0.0001, it would be worth more than $10 million today. There is nothing that even comes close to this price rise over that brief span of time.

The power of compounding in stocks, while not close to the rise in price of bitcoin, still can compound at a fast rate. It explains how a select few have taken a small sum, such as $10,000 and run it up into more than a million after taxes over a period of a few years. In working with legendary investor William O'Neil for a number of years, it confirmed that there is always method the madness. One colleague at O'Neil's firm, Dan Morris, retired at age 33 after averaging high double digit percentage gains for nearly a decade. My KPMG audited returns were just the beginning.

But keep in mind that markets can change in material ways. As one of several significant examples, quantitative easing from 2009 onward rendered obsolete many relied upon indicators.

The key is to remain fluid when it comes to market strategy. So while trading your core strategy or strategies, always be ready to make adjustments if necessary. If I'm making any material adjustment to any of my strategies, I first make sure the adjustment will increase reward while keep risk at similar or lower levels across multiple market cycles. This means your testing period should span many years. 

At Virtue of Selfish Investing, we strive to teach investors how to fish rather than to give them the fish. Our strategies keep in sync with the ever-changing markets. See our archived reports HERE.
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