Vanguard Chairman John Brennan Commentary on Investing: Lost decade, found perspective

A few months ago, The Wall Street Journal ran a front-page story with the headline "Stocks Tarnished by 'Lost Decade.'" The article noted that the stock market was trading at the same level that it had been nine years previous and suggested that the prospect of a decade with no (or negative) returns for equities is quite real.

This is startling, perhaps, but also true.

After the dizzying tech-fueled run-up of the late 1990s, the broad U.S. stock market peaked in 2000. Since then, we've had some steep downs, ups—and downs. The market briefly reached new highs in October 2007 but retreated from those levels in the fallout from the subprime lending crisis.

Over the next year or so, as we draw closer to the ten-year anniversary of the market's 2000 high-point, the ten-year return figures for stocks and stock funds are likely to remain modest—even if the market produces respectable returns until then. Simply put, the market's peak is casting a long shadow.


Sources: Bloomberg, Vanguard.
Note: Data through June 23, 2008.

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Wintergreen Fund Semi-annual Report

The last six months have been filled with volatile worldwide financial markets that have kept all investors on their toes. The apparent freefall of some securities is providing huge buying opportunities for value investors, but at the same time the daily market fluctuations are somewhat bewildering to investors as we navigate turbulent market conditions. Wintergreen Fund has been affected by this volatile market: the Fund’s performance for the first six months of 2008 was (11.86%) only slightly better than the Standard & Poor’s 500 Composite Index at (11.91%). The market has not discriminated between high-quality and low-quality companies; virtually every stock has declined. Generally, markets reward solid, stable companies, but this year even the best companies have suffered. The movement from easy credit to little or no available credit has restricted normal business operations and slowed down speculation. We believe companies with the following three characteristics are great long-term destinations for investor capital, even though the short-term quotations are less than favorable: solid businesses that generate cash; businesses with pricing power; and businesses with rational management who create value for their shareholders.

A favorite story of mine as a child was “The Little Engine That Could” by Watty Piper. In this story, a long train needed help to get over a large mountain. Various railroad engines that had the capacity to move the train refused to help. They said the job was too big and difficult for them, and the mountain was too steep. The engines that were designed to haul heavy freight would not attempt to move the huge train. Eventually a small engine that didn’t appear to have the necessary get-up-and-go was asked for assistance and that small engine agreed to try to help the large train. Using all of its power and repeating ‘I think I can, I think I can’, the small engine got the freight train up to the top of the mountain. As the train went down the tracks on the far side of the mountain to deliver toys and treats to the children who had been waiting, the little engine repeated the phrase, ‘I thought I could, I thought I could’.

In this global market that looks too big for anyone or anything to bring it back to a more stable environment, I think that solid analysis of companies and careful accumulation of underpriced stocks has the potential to yield great rewards. Like the little engine that put its head down and worked at its assignment, the pursuit of fundamental research coupled with an appreciation of the consistency of human behavior should identify the securities that I believe will survive and thrive in the future. Now is the time when some of these companies are on sale. Although no one knows precisely when, it is inevitable that these wild bargain prices will at some point in time come to a close. When that happens, and with the benefit of 20-20 hindsight, many investors will wish they had accumulated a bigger stake in these bargain companies.

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