Losses in the stock market are a feature, not a bug – and we have another grim yet timely reminder of that. When Charlie Munger was asked in 2009 about how worried he was that stocks had fallen by 50%, he is reported to have said “Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
In this piece, Ben Carlson gives hard data about market drawdowns to show how much of a norm it is actually to see such losses.
“So roughly 53% of all calendar years for the S&P 500 since 1950 have experienced a double-digit correction. And more than 91% of the time there was at least a 5% correction or worse.
Thirty-seven of the past 70 years have seen an intra-year double-digit correction in the stock market. Surprisingly, 22 out of those 37 years saw stocks finish the year with a positive return overall. And 13 of those years with double-digit corrections saw the S&P finish out the year with double-digit gains.
This means even when stocks have a decent year to the upside, you should plan on experiencing some downside to get there. Years like 2017 and 2019, where the worst drawdowns were -2.8% and -6.8%, respectively, are the outliers not the norm. The market is far more likely to see some serious losses on the way to earning gains than a smooth ride up the entire way.
As an investor, you have to get used to existing in a state of drawdown because that’s where the market is the majority of the time. Since 1928, the S&P 500 has hit new all-time highs in roughly 5% of trading sessions. If we invert this number, that means 95% of the time investors are in a state of drawdown.
This time may feel different because the coronavirus has the potential to wreak havoc on the global economy. No one knows how bad things will get. Volatility begets volatility in the stock market so investors should prepare themselves for more wild swings in price to both the upside and the downside as people work through updates on this outbreak.
But this is nothing new. There has always been volatility in the stock market and there always will be. That’s guaranteed as long as humans are the ones making buy and sell decisions.
In the short-term, the reasons for market sell-offs feel like they matter a lot. In the long-term, investors tend to forget the specific reasons stocks fell in the past.
In the short-term, market downturns feel like they will never end. In the long-term, all corrections look like buying opportunities.
Regardless of how long this correction lasts, to win in the stock market over the long haul you must be willing to lose over the short-term.”

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