Stocks for the long run - along unpredictable events.
Back in 1987 when large neckties, vests and shoulder pads were the trend, the book “The great depression of 1990” was highly acclaimed. Its author, Dr. Ravi Batra wrote, among other claims:
“I am an economist, trained in scientific analysis, not a sensationalist or a Jermiah. Yet all the evidence indicates that another great depression is now in the making, and unless we take immediate action the price we will have to pay in the 1990’s is catastrophic”
Hence, this Dr. Batra hit the jackpot in being sooo wrong! In spite of that, his book sold hundreds of thousands of copies!
But, in fact, we were lucky that his prediction proved to be dead wrong. During the next decade the Dow rose from around 2,500 to over 11,300. And 10,000 US$ invested in the early 1990’s would have increased to $41,200 by the end of 1999. During this same time period the UK’s FTSE 100 stock index tripled in value.
A decade later, with euphoria blowing at their backs, books of clearly different philosophies were released: Dow 36,000, Dow 40,000, etc. One such acclaimed guru even called for Dow 100,000. I will spare you the long list here, but most of you remember the relentlessly bullish publications in those days. Those were the days when the US troubles finally started to hit home in our own back yards. The Enron and WorldCom bankruptcies, the dotcom crash and the far more serious Telecom and NASDAQ IT collapse. Then the unthinkable: the Sub-Prime horror that will now take years to recover. Not to mention US home prices, whose average values will be shockingly depressed for perhaps a decade! Who knows? I surely – and hopefully you – did not opt for an inflated-value homein America.
But this is the whole point: who knows? We want to have the feeling of control. But without true clairvoyance it is impossible. We humans all have some flaws. One is that we want to see patterns, even when there are none. Another, we believe in good luck: as though we have a “sixth sense”…Or premonitions to guide us into the Future. Occasionally, we are right. Then we believe we have “a gift”. In fact, it was just…“The way the cookie crumbled”.
My belief, same as many others, is things most often happen by chance. You can call it good or bad luck if you want. But the Truth is, it is a random event which we cannot predict most of the time.
18 month or so ago many pundits forecast the demise of the US$. But it rallied due to the US induced Sub-Prime Crisis. Now most people are calling for a renewed weakening: yes me included!….But I am not willing to “bet the ranch” on Currency Speculation. Meanwhile, gold is barely keeping up with stocks: perhaps because the price we most hear quoted is in US$.
Once you give up the illusion of control and the ability to make major predictions, you are actually liberated…by understanding how to deal with not being in control. “To Not Know Is To Know” could be a wise old Greek saying.
"Those who have knowledge don't predict
Those who predict don't have knowledge."
Lao Tzu
However, we do know some things amidst all the unpredictability. To site just two:
1) Bad news sells far better then good news. So beware of media, web sites and/or books that persistently proclaim how bad things are…or are going to get.
2) Investments, over the long term, have inevitably proven how the various asset vehicles perform. Stocks are the clear long term winners.
Performance of a properly-diversified stock portfolio – although, it may fluctuate over the short term – over time, always prevails over every other asset class: especially when compared to gold. Certainly there have been periods – sometimes years – when other asset types have outperformed stocks. But, with time, the evidence is indisputable: investment in stocks simply cannot be beat.
Following here is corroboration of the above, which I posted on our Members only Lounge {here} within the past few months. This, per data published on page 60 of the excellent new book called "Dance With Chance. Making Good Luck Work For You".(2009), written by three prominent professors from top Universities around the world.
If you had invested US$10,000 in 1802 (the beginning of USA, as we know it) until 2006, (latest data available), a variety of investments would have performed as follows for you. Over those 204 years, you would now have:
1) 8.4 Billion US$ if you had invested in US equities. (Yes, that is Billions).
2) 10.8 Million US$ if you had invested in US government bonds.
3) 3.6 Million US$ if you had invested in US government short term bonds.
4) 27,800 US$ if you had in invested in gold.
The above is for the extremely long term. There are numerous shorter-term studies to prove the same. Dance With Chance concludes with more pertinent information to corroborate that, over the long run, gold is the least desirable long term investment when compared to legitimate alternatives. (Of course it rightly points out there have been huge fluctuations in between.)
As you know, the current fashion is to be short on the US$ while long on Gold. You are told inflation is right around the corner, and gold is the best hedge against Inflation, as there is “too much money in circulation.” So, what else is new? Weren’t you being told the same about Inflation 2 or 3 years ago, back when most commodity prices were soaring? But, alas that Inflation never occurred. Next, as you know; the Sub-Prime Crisis caused a worldwide Recession. And so, again, Inflation was put off until later. Now…yet again…supposedly…Inflation is just around the corner.
But is it?
In 2007 I wrote a couple of articles here explaining that Marc Faber and his likes’ would be proven wrong on the imminent Inflation threat, because other macro factors were hard at work. The fact is, most things you have bought or used over the past couple of years have actually become cheaper, not more expensive. To mention a few from the endless list, please just consider computers, mobile phones, Internet connections, running shoes, clothes, airline tickets, etc. Talk of Inflation is the same as it has been for so many years: fashionable to use the word, but don’t talk about the numbers. Long-term graphs show most prices declining, while wages (at least in developing countries) are increasing – after adjusted for Inflation. For example, please see page 120 of Dance With Chance).
Insulating myself from the clamor, the trendy best sellers and the gold bugs, I remain convinced that a properly-diversified portfolio of growth stocks (preferably, Thai high-yield stocks) continue to be the undefeated strategy for long-term investors. With this strategy, you must assume some changes from time to time, and the occasional setback. But not a trading mentality. Unless it is highly disciplined, confined to bull markets and with proper stop-loss orders in place (but this is a different issue).
The foretold strategy assumes having cash on hand. But mostly being fully invested…It assumes patience, perseverance and not buying shares on margin. While a few loser picks may be inevitable, it assumes some fundamental analyses, which I am happy to share with you here: in order to save you from just throwing darts. It was wrong if you did not get out a year ago. It was even worse if you did not get back in, fully invested by April 2009. Most of you who got out last year probably still have not become invested again. That is the classic “Bear Trap”: staying bearish too long…and missing the boat.
Over the years, I made only a few excepting on this core theme. I really only remember one. In 2004, I was very bullish on Ticon. My recommendation was to over-emphasize. This went against my advice given here. However, it was the right call at the time: Ticon tripled within the next 2 years. Seasoned Members and users of ThaiStocks.com might have observed a few wrong calls. Yet, in spite of a few misses, properly-diversified stocks have still proven the superior investment for long-term returns.
Although the Thai and Global economies now appear to be recovering, you still have no idea how strong the recovery will be, or when a price correction or other set back will hit you. Hence, there is no reason to change this investment strategy. It has been proven to create wealth over time, while especially acknowledging the “who knows?” factor. It cannot be denied: a well-diversified stock portfolio, averaged over time – according to my experience and expertise in stock selection – performs well above the norm.
Best Regards,
Paul A. Renaud.
