quarta-feira, 10 de dezembro de 2008

The Angry Investor

Fellow Investor,

Scan the financial media today, and it's hard not to get dizzy from digesting the remarkable array of contradictory predictions about the future of global financial markets. On the one hand, market Cassandras such as New York University's Nouriel Roubini say that the worst is yet to come, and Yale's Robert Shiller argues that the U.S. stock market is still overvalued. On the other hand, Warren Buffett and high profile mutual fund managers like Bill Miller (Legg Mason Value Trust) and Ken Heebner (CGM Focus Fund) have called a bottom to the stock market. After a couple of days of upward momentum, Swiss investment bank UBS predicted last week that the S&P 500 will end 2009 at 1,300, up 43% from its close after yesterday's strong rally.

Here's a reality check: 99% of the predictions you read about financial markets will be wrong, particularly with respect to timing. Want proof? A few months ago, Goldman Sachs was predicting $200 a barrel oil prices. And none of the Cassandras nor Buffett, Miller or Heebner has made any money this year -- whether their analysis was accurate or not. In fact, for all the virtual ink spilt over analyzing the markets this year, less than 1% of money managers have made money in 2008. And even among that elite group, most were luckier than they were smart.

The Angry Investor: The "Lost Decade"

Read the comments to virtually any article that discusses the state of the markets, and one thing will hit you: Investors are angry. And you can see why. The statistics are sobering. The average diversified U.S. stock mutual fund is down 41% in 2008. In late November, the S&P 500 index dipped to its lowest level in 11 years. The U.S. stock market's decline this year has erased all the gains made during the rally from 2003 to 2007. Roughly $30 trillion of wealth -- that's more than twice the size of the U.S. economy -- has evaporated in global stock markets this year. That amount dwarfs even Roubini's estimated $2 trillion in losses recorded in credit-related securities.

More worryingly, the current bust in financial markets is more than just a short-term funk. For the average U.S investor, the last decade has been a complete write-off. After enduring two booms and two busts since 1998, Morningstar estimates that a U.S. investor who put $100 a month for the past ten years into the average U.S. stock fund would have accumulated just $10,932 -- $1,068 less than he invested. Even a balanced fund -- one that mixes government bonds and equities -- would have lost money. With the Dow today struggling to hit 9,000, books like "Dow, 30,000 by 2008" Why It's Different This Time are barely even funny.

Nor has the bad news been confined to the stock market. In 2008, the value of all investments -- whether corporate bonds, commodities or hedge funds -- has plummeted. The "free lunch" of diversification -- the theory that investing into "alternative assets" could prevent investors losing money in bear markets -- has collapsed under the weight of soaring risk aversion across all assets classes. Even the Harvard endowment, one of the most sophisticated and diversified investment vehicles on the planet, fell by 22% over the past five months.

The Angry Investor: Some Tough Love

Angry investors are prone to blame their financial woes on George Bush, the government, Wall Street corruption, the housing bubble, or even financial newsletter editors. In short, they blame everyone but themselves.

But perhaps it's time for some tough love. First, it's hard to argue that all active participants in the stock market are blameless. After all, those who stuck to the discipline of stop losses were able to lock in much of the gains of the last few years. I have a dozen or so friends and close associates who made terrific gains on my investment recommendations over the past couple of years. Yet when these same stocks collapsed, none of my goading them to sell their stocks at pre-determined stops did any good. Today, some are sitting on losses as high as 95%. "You take a horse to water. But you can't make it drink."

Second, investors don't act rationally -- no matter who is sitting in the Oval Office. If they did, they would treat prices in the stock market as they do a car or a pair of shoes. They would buy them when they are on sale, and sell them when they are expensive. Investors, of course, do the opposite. Goaded by the prospect of quick riches during the Internet boom, they piled into the market in 1999-2000, and are exiting it now. Looking at the price of stocks, that makes little sense. In 2000, the global price-earnings ratio was 35. Today, that ratio is flirting with single digits. Société Générale, a French bank, calculates that when U.S. shares have traded on a low cyclically adjusted price-earnings ratio, returns over the next decade have averaged 8% a year in real terms. When they are priced high, they return 3%.

Here's the irony: investors were happy to buy shares nine years ago, when the ratio of share prices to profits was three times what it is today. Compared to 2000, stocks are on a 70% off sale. Yet, equity mutual funds saw net outflows of $195 billion in the first 10 months of this year. Today, cash, money-market funds and U.S. bonds are king, while stocks are selling like platform shoes and mood rings. Meanwhile, thanks to falling interest rates, the returns on money market funds and bonds are so low as to be close to microscopic.

The Angry Investor: Spring Will Follow the Winter

Although I am not a big believer in predictions, I will venture this one: "This too shall pass." To put it in the language of (much reviled) modern finance, financial markets tend to revert to the mean. With many global stock markets in the United States and Europe now offering a dividend yield that is higher than the yield on government bonds -- something that has happened only rarely in the past 50 years -- the next Warren Buffett is already out there, sowing the seeds of a world-beating fortune. If you know who you are, let me know.

Nicholas A. Vardy 
Editor, The Global Guru

Nenhum comentário:

Minha lista de blogs