Investment advice often comes with the caveat that “past performance is not indicative of future results.” This phrase has been reiterated so often that many investors may not take it seriously. However, after six years in a bull market, it’s time for a thoughtful reassessment.
The stock market has gained an almost predictable momentum, with widespread expectations that it will continue rising for a seventh consecutive year. The bullish sentiment surrounding recent achievements is palpable, and the bull market appears to charge forward with enthusiasm.
This relentless momentum resembles the fervor with which Napoleon Bonaparte’s army marched towards Moscow during the 1812 Russian Campaign. Much like the Grande Armée, today’s investors may feel invulnerable. Such unfounded confidence can often lead to dire consequences.
Last Friday, global markets experienced a significant downturn. The NIKKEI 225 in Japan fell by 232 points, followed shortly by a 310-point drop in Germany’s DAX. Finally, the DOW ended the day with a loss of 279 points. What should we conclude from this?
Perhaps it was just a blip in an otherwise upward trajectory. The DOW did regain 208 points on Monday. Nonetheless, Friday’s events might serve as a warning: it could be time to act before panic sets in.
Setup for Slaughter
Like military campaigns, stock markets are highly variable. Strategies that succeeded in the past may not yield the same results today—or tomorrow.
Indeed, Napoleon’s early victories ultimately set the stage for his downfall. He achieved numerous wins across Europe using an envelopment strategy, which involves attacking both flanks of an enemy force. Yet, this approach only works effectively against an advancing opponent.
The Russian army did not comply. Instead, it engaged in smaller skirmishes and retreated toward Moscow. While the French triumphed in battle, they experienced a strategic loss. This approach pulled them deeper into Russia, relying on a supply chain ill-equipped to sustain such a large army. Then, the harsh winter arrived…
About 432,000 French soldiers embarked on the march to Moscow in June 1812. Just six months later, only 10,000 survived to return to France, with many perishing in the Battle of Borodino, while others succumbed to starvation or the freezing climate.
Clearly, Napoleon and his Grande Armée might have fared far better had they opted to remain at home and cultivate their lands. Yet, their past victories set the expectation for yet another triumph. A decisive victory against Russia appeared to promise dominion over the entire continent, an opportunity too tempting to resist.
One Bear Market from Disaster
“For several years, a pullback has been a buying opportunity,” remarked Mike Murphy, CEO of Rosecliff Capital, amid last Friday’s market turmoil. “Historically, I’ve been inclined to invest on the dips; professionals recognize this trend, resulting in progressively smaller pullbacks due to increased investment when they occur.”
Yet, Murphy’s reliance on the age-old strategy of ‘buying the dip’ has begun to falter. The history he references only accounts for the past six years, a time frame that offers a narrow perspective. A wider lens reveals several occasions in this millennium when purchasing on dips has proven disastrous.
Napoleon’s experience during the Russian Campaign demonstrated his fallibility. His reputation as a military strategist suffered greatly, and his forces lost their morale. After the humiliating defeat at Waterloo, he could never regain his former authority and was ultimately exiled to the island of Elba.
A multitude of mistakes occurred, but the most egregious was initiating the campaign itself. This reckless overconfidence set the stage for the collapse of French power.
“One must change one’s tactics every ten years to maintain superiority,” Napoleon once said. History later illustrated that ten years can be far too long to adapt.
In the same way, those who steadfastly adhere to ‘buy the dip’ strategies are merely one bear market away from catastrophe.
Sincerely,
MN Gordon
for Economic Prism
