A lost decade, but not for everyone

Eventually, stocks like Google, Apple and many we don't know about will lead us back above the mean

One of the best posts I read this week was from Fortune's Andy Serwer. In it, he noted:

At the end of 1999 the Dow was around 11,400. Today the Dow is at 8,400, which means the index has fallen some 26%, a decline of almost 3% per year. With just one year left in this decade - even if 2009 is a humdinger - it is increasingly likely that first 10 years of this century will be one big washout for investors. A lost decade.

I've been thinking about that since I read it midweek. A lost decade in which if you owned the Dow, you'd have lost money on stocks.

But there's a problem with indexes and that is the average doesn't really tell you that much. So I want to look at the Dow stocks and figure out which ones were big winners this decade and which ones were big losers.

Here's a list of the 30 current Dow stocks. Let's take a look at six of them;

3M
Citigroup
GM
Intel
J&J
United Technologies

3M is up a bit in the "lost decade" about $10 or a 20% gain in almost 9 years. Nothing to get too excited about but not a loser.

As most everyone knows, Citigroup is fighting for its life right now and is down at least 90% since the start of the "lost decade". But for most of this decade, it was flat. The drop has all come in the past year.

GM's chart looks quite a bit like Citigroups and it should. It is also fighting for its survival. One difference though is that GM has been in slow decline all decade and then dropped off a cliff this year.

Intel's chart is interesting. It's a loser this decade as well, down almost 80% in the decade. But all of its decline happened in the first three years of the decade reflecting the technology meltdown in the first part of this decade. Since then, it's bounced around a lot but isn't down much more.

Finally, a real winner. Johnson and Johnson has made a slow and steady climb all decade, and is up (even with the recent market meltdown) by about 33% over the past nine years. Even so, that's less than 4% per year.

I'm glad to see we found a good chart before this exercise was over. United Technologies is down 40% in the past year but is up around 60% for the decade so far.

So what this shows is the Dow is a mixed bag. A few disasters (GM, Citigroup, Intel), a bunch of so so stocks (like 3M) and a some winners (like J&J and United Technologies).

I looked at a few other stocks as I was doing those charts and there's a lot of yuck in the Dow. IBM, HP, and Wal-Mart are all down for the decade. It's not really clear to me how the Dow has enough positive energy to withstand the blowups in AIG, Citigroup, and GM. As a group, the Dow looks pretty tired to me.

The point I was trying to make with this post is that the decade we are in has not been lost for everyone. We may have to go outside the Dow to find the best examples. Lets look at two of my favorite stocks; Apple and Google.

Apple has taken two big hits this decade (the tech meltdown in the early part and the recent market bust) and is still up 3.5x in nine years. The run Apple has had from early 2003 to late 2007 is one of the most impressive runs I've seen.

Apple's run mirrors Google's run. If you had only owned two stocks this decade, Apple and Google, you'd be a happy investor. Google stock has completely blown up in the past year (down 60%) but it is still up 2.5x from its IPO in mid 2004.

When I think about what's really going on in this "lost decade" it occurs to me that we are finally witnessing the impact of the end of the industrial era and the emergence of the information era. That's not to say every "information stock" has done well. Intel and Microsoft have been a disaster. IBM and HP are down for the decade to date. But we also have to realize that the late 90s drove all information stocks up to crazy levels in anticipation of exactly this shift taking place. The market got it right, but as usual it overshot.

If we go back to Andy's post which got this whole exercise started, he made the following point about what happens after the "lost decade":

at some point stock price returns will revert back up to the mean. In fact, to revert to the mean, stocks will at some point have to exceed the mean, in other words go up more than 8%. I know it could be years off, but you see my logic. It's just math.

And if that does happen, I don't think it will happen in tired stocks like many in the Dow. It will be stocks like Apple, Google, and companies we don't even know about yet that will lead us back out of this downturn. And I bet there will be a bunch of companies from what we used to call the "emerging markets" that will lead us out of this mess. I think I'll call them the "emerged markets" from now on.

I am an optimist, I guess you have to be one to be in my line of work. Even in the midst of the worst downturn in my lifetime, I am thinking about what's next, how we are going to make money in the next run. Because as Andy points out, there will be one and we should be using this downturn to position ourselves well for when it comes.

(For more from Fred, visit his blog)

(Image source: Thesettlementchannel)