I just had the thought… given that for every buyer of a share of stock there’s a seller, ultimately—in some sense—there’s always a winner and a loser. Not that both can’t profit from their ownership in the same security, it’s just that—since its share price will not stay the same—over some span of time the seller either missed out on further gains (in which case he’s the loser in the exchange) or the stock traded lower in the wake of their transaction (in which case—for as long as the security remains below the transaction price—he wins and the buyer loses)…

Here’s a 30-year chart of the S&P 500 Index (disregard the volume bars at the bottom; that’s an interesting topic for another time): (click to enlarge)

So, clearly, the 1999 seller remained the winner for a good 8 years. Right? Actually, upon closer inspection we’d have to say that the 1999 seller—given that the 2007 high mark (prior to the most recent bear market) was virtually the same as 1999’s—was the winner for a good 12 years. Right? Well, no… not exactly. We gotta factor in dividends.

Here’s a 30-year chart of the S&P 500 Total Return Index (factors in dividends):

So, when we consider the complete picture, the 1999 seller remained the winner for a shade over 6 years. Although, just a couple of years later—after the “Great Recession”—he was once again looking pretty smart. Right? Well, yeah… but not necessarily. What if the buyer happened to be one of those crazy people who just kept on buying, no matter what the market did—perhaps through a 401(k) account. Or maybe she had an asset mix—like 60% stocks and 40% bonds—that she rebalanced two or three times a year. In either case, she’d have been a frequent buyer of stocks throughout the 1999 through 2002 period. In the latter case, she’d have been a seller (but only back to 60% stocks each time) from the spring of 2002 through 2007, then a buyer until March 2009, then mostly a seller to this point. Essentially, she’d have been buying (some) while stocks were falling and selling (some) when they were rising. While I don’t have a dazzling chart to illustrate that hypothetical, suffice it say that by continuing to buy after the 1999 peak, the seller’s winning threshold would have been breached noticeably sooner than 2005.

My point? If we want to look at the transacting of a share of stock in an index fund as a battle of wits (which, by the way, we shouldn’t)—given that the market today is higher than it’s been at any point in history—as it was this time last year, and in 2007, and in 1999, and at some point in virtually every year during the nineties, and… well, take a look at the chart below—history strongly favors the patient long-term investor.

Yeah, I know, the continuing to invest and the rebalancing examples really don’t apply to the original battle of wits: the seller of those original shares around the ’99 peak was indeed the winner for an unusual (given modern market history) number of years, even considering dividends. That said, history strongly favors the patient long-term investor who continues to invest through thick and thin and/or who periodically rebalances to a target mix. In fact, historically-speaking—when we’re talking a broad basket of stocks—the patient long-term investor, if he/she lived long enough, always won…