Thursday, March 12, 2009

Equities: Dead, or Just Resting?

Equities: Dead, or Just Resting?


These are truly scary times. The stock market has lost some $11 trillion in value since its October 2007 peak. Blue-chip companies like AIG (AIG) and Citigroup (C) are now penny stocks, while General Motors (GM) and Las Vegas Sands (LVS) trade at less than 2 a share.

It seems that everybody is scouring through the numbers, trying to figure out how far down is down—and how long this bear market will last.

And if the stock market train wreck isn't enough, investing icon Warren Buffett has come along with a new warning. "A few years ago, it would have seemed unthinkable that yields like today's could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms," he writes in his latest annual letter to Berkshire Hathaway (BRKA) shareholders. "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary." Great.

No Longer a Cornerstone

What is the average saver in a 401(k)-type plan supposed to do? Abandon equities? Flee bonds? (Sales of home safes are up, but that's not recommended.) Two simple market stories reinforce a time-honored lesson for all investing seasons. You don't have a clue what investment will do well going forward, and neither do the experts.

The first story: The old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared. Younger investors, in particular, are avoiding stocks. In fact, the only reason the mutual fund industry has been able to survive the death of equities is the dramatic success of such funds which invest in T-bills, bank CDs, and other short-term paper. Says Alan B. Coleman, dean of Southern Methodist University's business school: "We have entered a new financial era. The old rules no longer apply."

Those thoroughly modern-sounding lines were plucked from one of the most famous cover stories in business journalism, BusinessWeek's August 1979 piece "The Death of Equities." Needless to say, BW's bold pronouncement became the favorite example of contrarians. (Type "The Death of Equities" into your search engine and you'll see what I mean.) Case in point: "By the end of the 1970s, things were so bleak on Wall Street that a pessimistic BusinessWeek cover proclaimed "The Death of Equities," Money magazine wrote last year. "That, of course, turned out to be one of the great buy signals of all time."

Really? The contrarian story doesn't stand scrutiny. Rereading it today, it's a well-reported, well-written article that thoughtfully looked at why individual investors were abandoning stocks nearly seven years after the Dow's peak and suffering through years of raging inflation. Here's the rub: The stock market didn't bottom out until August 1982—three years later. That's one long lasting contrarian indicator. Hopefully anyone who invested on the theory that magazine covers are useful contrarian indicators had very deep pockets and a long time horizon.



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