Bambi Meets Godzilla by Tom Jacobs

In the forgotten, great and brief Bambi Meets Godzilla, Bambi frolics gently in the forest, to the sound of sweet music. Once we are lulled into the happy scene, a giant foot appears and squashes Bambi. As a college student in the 1970s, I found this sidesplitting. But then, it was the 1970s. I think.

The two-minute film pretty much tells all we need to know about investing. From the early 1980s to 2000, there was not one single stock market panic. 

(The crash of 1987 was brief and due to technical issues at the exchanges.) We were grazing in the grass, digging it. Nobody knew anything but up, up and away. We were Bambis all.

But the balloon was full of hot air, and 2000-02 and 2008-09 reminded us that markets do have cycles. Investors hadn’t seen anything like it since the devastating 1973-74 bear market, which means almost no one remembered anything bad. 

They were caught napping, because the long bull market of the so-called great moderation was an exception, not the rule. An obscure 1916 book, A Brief History of Panics in the United States, by an even more obscure Frenchman, Clement Juglar, gives us insight.  

It turns out that in the 1893-1916 period covered by Juglar’s book, there was a full-on recession at best and depression at worst every decade or so in the U.S. 

There were 16: 1814, 1818, 1825-26, 1831, 1837-39, 1848, 1857, 1864, 1873, 1884, 1988-92, 1890, 1893-94, 1903, 1907, and 1913. By the way, the late 1800s depression made the 1930s look meek.

And then, miraculously, only four to follow: the Crash and Great Depression, 1973-74, 2000-02, and 2008-09. Gosh, did the birth of the Federal Reserve System in 1913 save us from extremes for all time, turning on and off the printing machine with the skill of a Swiss watchmaker? 

Not according to one theory, which you may imagine I subscribe to. 

According to this theory of finance, the longer an unstable system is stable, the more unstable it becomes. Consider any of the balancing acts, notably those on Survivor (I get all my knowledge from reality TV). 

There is calm on the log or tightrope, then the occasional midcourse correction, and finally, if given enough time, the crash and burn. The longer we maintain stability on an inherently unstable log, the worse it’s going to be eventually.  

Bambi meets Godzilla.

Do we want more frequent gut-wrenching, community destroying, life-upending economic and stock market events? Of course not. But it stands to reason that the longer we go without them, the worse they will be. No one has repealed stock market and economic cycles. The danger is to forget that these happen, to think that the 38% drop in the S&P 500 market index and the Great Recession beginning in 2008 were rare outliers, when they are more likely the rule. 

Be prepared for this kind of event by dollar-cost averaging, weighting more to bonds if you are elderly, and keeping some cash on hand. Live like Bambi, but plan for Godzilla.