Passing time can hide true magnitude of a stock loss

Using a spreadsheet to track my investments has made me aware of what I see as an interesting blip in the math used to calculate a bear market. A stock enters bear market territory when it is off its recent high by 20% or more. The important word in that definition is "recent".

Take Bank of Montreal (BMO) stock. Today it is selling for $118.87 (mid-day) and is off its high of the past year by 13.6%. BMO is in correction territory. It is not now in bear market territory but it was and not all that long ago. Passing time and not a big pop in price pulled BMO stock out of the bear's grasp.

On March 22 of 2022 BMO hit a high of $154.47. Today BMO is trading at $118.87. It is off that historic high by $35.60 or 23.0%. But that high was about 17 month ago. It dropped off the financial radar when it passed the 12 month mark as it is the high of the past past year, $137.64, that is used to calculate corrections and bear market prices. Today BMO is only down 13.6% when calculated using its high of the past year. BMO is said to be barely in correction territory.

Investors who bought a hundred shares of BMO some17 months ago have lost $3560. The present target price of BMO shares is around $135. This means that even at its target price for the coming year, an investor who bought the stock at its historic high would still be down about $1947. It could be two or three years before such an investor is in the black on this investment.

What can we learn from this story of investor loss? My big take away it that investors must pay attention to not only the loss calculated using the high of the past year but must look back even further to the highs of recent years.

My spreadsheet indicates that the recent market losses may be worse than folks realize. For instance, BMO was off a recent high by about 27.5% at one point. It can easily take more than two years to recover from such a large drop. The fact that BMO stock has not yet fully is not surprising.

It also seems clear to me that the above is a clear argument for averaging down. An investor who bought 100 shares of BMO at its historic high invested $1,548. When the stock was clearly in bear territory, say selling for 22% less, it would have been understandable if the the investor averaged down at that point and bought another 100 shares at $120.49. 

With BMO shares trading today at only $118.87, BMO is a clear buy for our investor who got badly burned buying at the historic high. Averaging down today would drop his average price for BMO to $136.67 and give him a nice dividend to enjoy while waiting for the BMO price recovery.

If BMO shares should take another dip, I believe I might well be a buyer. (Note: BMO hit $17.60 on the next trading day. I bought 100 shares yielding 5%.)

For a good article on bear market recoveries, read: Bear Market Fears: Here's When Stocks Usually Bounce Back After a Downturn.