Equity investors suffered through a difficult decade in the 2000s, with many investors seeing little or no returns for the greater part of the decade. Martin Pring, Joe Turner, and Tom Kopas co-authored Investing in the Second Lost Decade: A Survival Guide for Keeping Your Profits Up When the Market Is Down to guide us through the next lost decade of 2010-2020. The primary argument is that we are in a secular, or long-term, bear market for equities that began in 2000, and since most secular trends last for 20 years or more this bear market should continue for the rest of this decade.
The book’s these is told through a fictitious couple, the Smiths, who retired in 2000 and who face the challenge of needing income from their retirement savings while navigating the challenges of an equity bear market and low interest rates that are set to rise. Very few assumptions about the reader are made in the book, so if you are unfamiliar with the term “secular” or business cycles, these are explained in detail.
Are there still opportunities for profit in a secular bear market or should investors simply park their money in cash and wait it out? According to Pring, Turner and Kopas investors can hope to profit in secular bear markets. but they must be nimble and use cyclical trends to rotate between assets. Buy-and-hold works well in secular bull markets, with shallow drawdowns and an otherwise rising tide lifting all boats. However, secular bear markets are a more challenging environment – drawdowns can be more severe and downtrends can last for extended periods of time, resulting in lower overall returns, especially for the buy-and-hold investor.
Not only do the authors argue we are in an equity secular bear market but they also see interest rates rising in the near future and the potential for an increase in inflation (which, if we did decide to park our money in cash would quickly reduce our purchasin gpower). For fixed-income investors, rising rates lead to lower fixed-income prices leading to capital losses. With equities in a long-term bear market and interest rates set to rise, readers may at this point find themselves despondent.
The authors argue there is hope – commodities should serve as a hedge against rising inflation and help offset some of the losses investors could experience in other asset classes. They also present a strategy for rotating among major asset classes – cash, bonds, equities, and commodities – based on shorter-term cyclical trends that are based on the business cycle and typically last 4-6 years.
Cyclical trends exist within longer-term secular markets, thus even if we are in a 20 year (or more) equity bear market, asset classes including equities can have shorter-term bullish phases. The authors present a system comprised of simple indicators for indentifying cyclical trends, potentially providing readers an edge on when to over or under-weight equities, bonds, commodities, and cash.
One of the drawbacks of the book is the attempt to reach a multitude of audiences, leaving the book at times drifting between the perceived knowledge base of the reader. Novice investors might relate to the Smiths and will find the secular/cyclical explanations useful. However, the technical trend indicators and data points used to recognize market trends and then implement a trading strategy could be overwhelming for some investors. More experienced investors may find parts of the book slow, but the indicators used to identify cyclical trends are useful information. The appendix is also a must-read, with several indicators and strategies present in-depth for those wishing to manage their own tactical cyclical investment strategy.
Investing in the Second Lost Decade makes an important argument with monumental implications – that we are in the middle of a secular bear market. Their argument has implications for all investors in all asset classes as profits will be harder to attain during a secular bear. However, success is possible if investors have the knowledge and tools to recognize shorter-term cyclical trends.
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