By: Larry MacDonald

Despite doubts earlier expressed about the stock-market rally off November lows and the resilience of bank stocks, it nonetheless is disconcerting to watch their collapses. At times like these it helps to have a sanctuary, a quiet place to regain perspective.

That refuge is my library of investing books. Last night, the respite came from William Bernstein’s The Four Pillars of Investing – specifically Chapter 6: ‘Bottoms: The Agony and the Opportunity.’ Referring to the vicious bear markets of 1932 and 1974, he writes:

“The rewards of fishing in such troubled waters are staggering. For the 20 years following the 1932 bottom, the market returned 15.4% annually, and for the 20 years following the 1974 bottom, 15.1% annually.”

How to handle the panic? Here’s Bernstein again:

“At a minimum, you should not panic and sell out – simply stand pat. You should have a firm asset allocation policy in place. What separates the professional from the amateur are two things: First, the knowledge that brutal bear markets are a fact of life and there is no way to avoid their effects. And second, when times get rough, the former stays the course; the latter abandons the blueprints, or, more often than not, has no blueprints at all.” 

Bernstein wrote his book in 2002, but I’m sure he would agree it’s quite the distinction for the Boomer generation to get caught up in two bubbles in quick succession:

“The Great Internet Bubble will not be the last the last of its kind. But if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of their senses, sometimes around the year 2030. If the current generation gets caught out again, we should be very disappointed, as no previous generation has been so dense as to have been fooled twice. But then again, the Boomers have shown a singular talent for gullibility, and there is still plenty of time.”