The Rear View Mirror
Oct 24th, 2008 by Wes
The above graph is the price history of Starbuck’s Stock. I believe this will be the typical graph of most U.S. equities in the next few years. Looking at the graph from my Crystal Ball post a few days ago I can see the trend we are entering. If we were to continue and play out the next ten years we will see SBUX continue its downward price decline until it hits 4 – 5 dollars per share and then we will see gradual increases of upward progress in the 5 – 7 % annual range for the next ten years. The irrational exuberance created in the 1980’s and 1990’s is finally washing out.
The part I would be worried about is Starbucks is currently trading at $9.50 per share. The decline to 4 dollars a share is STILL another 50% decline from today’s prices. Look at other graphs of the stocks in your portfolio and see where another 50% decline will lead your money.
I bought Starbucks in 1996 and my $2000 investment went as high as $80,000. I sold my positions in 2007 for over $60,000. If I had held the stock it would now be worth about $20,000 and I think it will go back down to about $5000 which would be a reasonable 7% annual return over the 12 years. There once was a day when a stock doubled in price every 10 – 12 years it was considered a success. Any expectations of 50% - 100% annual returns may be over for now. I remember when I bought $25,000 in Oracle in 1997. In 1999 that stock was worth over $300,000. I thought I was so smart until I heard Don McDonald, a radio host in Florida, tell his listeners, “a monkey could throw darts at a spreadsheet and make money in this market.” By 2001 I sold Oracle at about $60.000. The dot-com era ended and most of my gains went with it. The point is, I was not satisfied with a 100% gain, I wanted that other number. The Oracle graph below is what most equities will look like in 5 – 10 years. I still think Oracle could fall another 60% from $16.00 to its 1998 price of $5.00. Ouch.
The questions to ask are: What would my equities portfolio look like if it were to decrease by another 50% in the next 20 months? If I follow the “buy on the dips” advice will I be dollar cost averaging down? What are the risks I take when I do not manage my own money and let other people do it for me?
