I was twelve years old when the first Dirty Harry movie came out, starring a very young Clint Eastwood as a no-nonsense cop who foiled bank robberies while eating a hot dog. In the film, a serial killer was on the loose in San Francisco, killing random victims for sport. The only guy who could take down this maniac was a cop who played outside the rule book.
Movies like Dirty Harry tapped into the angst of those days: in 1971, crime rates were rising in America, the country was embroiled in the Vietnam war, faith in government was at a low ebb, and pessimism ruled the day.
Recently, stuck for entertainment, I rented this blast from the past. It struck me then that the film (in addition to providing some thrills) had a few things to say about finances as well. If you want to get a glimpse of the long-term effects of inflation, pick any 40-year-old movie and listen to people talking about money.
In Dirty Harry, for instance, our hero—having got shot in the leg by one of the lesser villains—is being tended to in the emergency room. When the doctor pulls out scissors to cut away the pant leg, Harry tells him not to even think of ruining his $29 designer trousers.
In another scene, the mayor gets a note from the killer, demanding an outrageous sum in order to stop his crime spree: “One hundred thousand dollars in small bills.” The mayor is aghast. “Where does he think I can get that kind of money?!”
Of course, a hundred grand is still nothing to sniff at today; that kind of money is still hard to come by. But in 2010, an action flick had better pick a figure that makes at least someone in the audience gasp.
Back in 1971, the stock market was creating a few gasps. The S&P500 index, which measures the 500 largest stocks in the United States, stood at an even 100 points. It was headed for an impressive fall over the next few years. By 1974, the U.S. economy was dealing with high inflation, uncompetitive industries, and the costs from Vietnam. The S&P500 index plunged from the dizzying heights of 100 all the way down to 63 points.
The investors of the 1970s were justifiably scared of the stock market. They were getting hit by a double whammy: inflation was eating away at their spending power, and the market plunge was wiping out their hard-earned dollars. Surely anybody with any sense was pulling their cash out of this losing game. If stocks were out, then treasury bills were the place to be—or even just hiding your money under the mattress. “At least I’m not losing anything” was a familiar refrain then.
Fast-forward nearly forty years, and we apparently have a very similar situation today. Governments worldwide are in debt, China seems to be kicking our industries to the curb, and pessimism is again running high. The world stock market has had ten years of zero return; and to top it all off, we had that gut-wrenching “market correction” at the end of 2008 and the early part of 2009.
In light of this, you may be tempted to dismiss the whole “buying stocks” thing as another misadventure waiting to happen. That might be so, except for one perverse detail: somehow, amid all the market carnage of the last forty years, the S&P500 has gone from the dizzying heights of 100 in 1971, to the depressing low of 62 in 1974, to the inexplicable heights of 1100 today. (Which is itself a comedown: back in 1999, it stood briefly at 1500 points).
It’s certainly annoying that something as unpredictable as the stock market could give you back 11 times your money over four decades, a typical investing lifetime. And if that eleven-fold return isn’t frustrating enough for the doomsayers, those of the bearish persuasion must also contend with the fact that over that same time frame, the S&P500 paid more in dividend income than any GIC or T-Bill earned in interest.
Fortunately, nowadays we’re all likely to have long investing lifetimes, so maybe we can do even better over the next 40 years or so. One lesson to be learned from the mayor in Dirty Harry is that you need an awful lot of growth to keep a pile of money looking like a pile of money. The stock market may have its faults, but it’s one of the few ways to get the growth you need.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
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