Friday, September 03, 2010

Another nomination for "death of equities" headline

This article from USA Todayhas been picked up by a few bloggers.

While the article itself is not completely unbalanced (the quotes from Jim Paulsen give one view on what it would take to set off the next bull market), the most interesting (and depressing) reading was in the comments. The degree of negativity was enormous: repeated allegations of the market being rigged by the "big guys", allegations that the regulators do nothing to "protect the little guy" etc etc etc. The sentiment was either that people would never invest in stocks again or would only invest when things were better - overwhelmingly so. I really struggle to understand why people would prefer to invest "when things are better" - that amounts to a statement that people would rather pay higher prices than lower prices which defies all common sense.

While it will always be true that prices can go lower and it is very true that the American economy has some very serious issues (government debt, deficits, consumer debt, regulation that is strangling the small businesses that drive job creation, a misplaced entitlement mentality and a lack of political will to do anything to resolve these and other problems), it is also true that America has a great record of dealing with economic adversity.

Looking at a few facts - on both a trailing and a forward looking basis, American stocks are trading at below their long run averages, there are many world class companies with very strong balance sheets that are selling at prices which (IMHO) are attractive on a valuation basis and Americans also have the ability to invest in the world's lowest cost index tracking funds. I wish Vanguard would let me invest with them.

Looking at the alternatives, bonds are selling at very low yields. You have to get a fair distance out along the yield curve to match inflation and even further if you have to pay tax on the interest income. Bonds have done well but yields are now well below equity earnings yields. Real estate would have to be attractive given the number of forced sales going on (but clearly involves a lot of homework and more work generally than other investments). Bullion has also done very well but is more speculative given that the price largely depends on sentiment and there is an absence of valuation parameters which can be applied.

Historically, going against the crowd and investing in the most unwanted asset class has often turned out to be a sound move.

None of this is to say that equity prices cannot go lower. They can. But given current sentiment and current valuations and a willingness to ride out the volatility that is inherent in the equity markets (for years if necessary), equities look a pretty good bet at the moment.

Of course, since I am heavily invested in equities perhaps my perception is less than fully objective.

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