Just before Thanksgiving I read Jason Zweig’s WSJ blog posting “Can the Dow Go Lower?  I Hope So.”

I found the article provocative as I’m sure it was intended.  Mr. Zweig wrote that:

The famous passage from the 1997 letter is below. Following that I quantitatively model different scenarios that I think show a different interpretation of Mr. Buffett’s point.

       We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate “saver,” Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.“

However, to stick with the example, with respect to many investors, while we are not in the cattle business, we are speculating on hamburger prices.  Many investors have decades of investment activity behind them, in effect stockpiling hamburgers with the hope to sell those at a profit later on, together with new hamburgers purchased.  In these cases, while new purchases may be made at better rates, investors may never, or potentially have to wait many years, to recoup losses on previous investments made.  To be sure, the issue is much worse for people with larger savings relative to future contribution levels, and minimized for those with lower savings relative to future contribution levels, but I think many investors, even those in their 40’s and 50’s, are legitimately feeling large losses and may take reduced comfort from a present buying opportunity.

I ran two data series for portfolio performance.  The first data series reflects a “no correction scenario” where the correction didn’t take place - instead the portfolio appreciated at the “future rate of return with no correction.”  I then also ran a second series where the correction did take place and then the portfolio appreciated at the “future rate of return with correction.”  

As you’d expect, I found that if the rate of return in each scenario is the same, then the data series with a correction never “catches up.”  It moves lower in the first year and then it, and the original data series, grow by the same percentage rate, but the “uncorrected” data series is working off a higher base and thus always offers greater wealth for any time period.

The only way for the data series with a correction to catch up and overtake the uncorrected series, based on the inputs used above, was to increase the post correction rate of return.  Doing so produced the following catch up periods.

In these models I’m assuming that future contributions continue to grow at the rate of inflation, even into retirement.  And withdrawals or distributions haven’t been factored in either.  Stopping contributions and taking withdrawals can actually further push out the catch up date in some scenarios.

Based on the data  it seems to me that while the market correction may present a buying opportunity for new investments, the losses are very real and substantially higher rates of return are required going forward for extended periods of time to recoup these losses.  Unlike Mr. Zweig, I hope that the fire sale ends sooner and that a rebound happens sooner than later.

Unfortunately, a market like we’ve had the past year serves as a good reminder that for many of us we are not only consuming hamburgers, we’re in the hamburger business.