The Market
It has been 6 months in which “the market” has behaved poorly and shown the conventional wisdom at its worst. The conventional wisdom is encapsulated in modern portfolio theory, that a balanced portfolio of domestic and international equities, bonds and cash will perform with some consistency, flattening out the highs and lows of speculation. The usual expression is that in any 10 year period stocks will outperform bonds. Think again.
In the last 10 years U.S. equities have underperformed all models. Fidelity’s flagship Magellan Fund of large and growth companies has a 10 year average return of -4.77%. Their fund which most closely reflects a portfolio theory in a single fund is the Asset Manager which has an average 10 year return of 1.02%, only positive because of its bond component.
I and almost everyone else took a beating in the market in 2008. On the whole the geniuses were the most aggressive and took the biggest beatings. I am among the fortunate for whom the beating means only rethinking and re-orienting. Others are not so lucky, but will still get by. I think of retirees I know who thought they were comfortable with $2 million and now have $1.5 million. Or people who thought they were rich with $5 million and now have $3 million. No one will feel very sorry for them, they will be OK in the scope of things, but their lives are a little different now and not what they planned.
I would feel better if there were any lesson to be learned, and I have two thoughts. First, it seems that the stock market is not an investment at all. It is pure gambling. What normal or even sophisticated person could understand the financial condition of Citibank? Large companies are opaque, an investor cannot understand either the business model or even the financial condition of the market leaders, so there is no rational basis for investing. Citibank stockholders have lost 90% of their investments over a couple of years. Small companies on the other hand are fed and limited by big companies and took the biggest beatings in 2008. Even if an investor can understand the finances and business of a small company its public stock price is at the mercy of larger forces.
My second thought is that our current financial system does not primarily reward stockholders. The staff and players in the market eat enough of the profits to increase the stockholders’ risk significantly. The investment bankers get a percentage of the gross off the top, mutual funds get a percentage for winning or losing, and the hedge fund managers usually get 20% of the gains. The management of most public companies controls the passive Boards of Directors, and an unkind commentator could believe that General Motors and Citibank have simply been looted by management. The amount of profit which has to be earned by a public company to pay the overhead, the financing institutions and management guarantees in many cases that the stockholders are unlikely to see any increase in value of most companies, and any gains which are made are significantly diluted by management stock options.
In 10 years the Dow Jones Industrial Average has gone from 9000 to 8000. I do not know if it will go up or down or nowhere in the next 10 years. What I think is that whatever it does will not be because of anything that is or can be known to me or anyone and it will not be reflective of value to shareholders. It is only gambling on the psychology of other people. Good luck to all of us.
In the last 10 years U.S. equities have underperformed all models. Fidelity’s flagship Magellan Fund of large and growth companies has a 10 year average return of -4.77%. Their fund which most closely reflects a portfolio theory in a single fund is the Asset Manager which has an average 10 year return of 1.02%, only positive because of its bond component.
I and almost everyone else took a beating in the market in 2008. On the whole the geniuses were the most aggressive and took the biggest beatings. I am among the fortunate for whom the beating means only rethinking and re-orienting. Others are not so lucky, but will still get by. I think of retirees I know who thought they were comfortable with $2 million and now have $1.5 million. Or people who thought they were rich with $5 million and now have $3 million. No one will feel very sorry for them, they will be OK in the scope of things, but their lives are a little different now and not what they planned.
I would feel better if there were any lesson to be learned, and I have two thoughts. First, it seems that the stock market is not an investment at all. It is pure gambling. What normal or even sophisticated person could understand the financial condition of Citibank? Large companies are opaque, an investor cannot understand either the business model or even the financial condition of the market leaders, so there is no rational basis for investing. Citibank stockholders have lost 90% of their investments over a couple of years. Small companies on the other hand are fed and limited by big companies and took the biggest beatings in 2008. Even if an investor can understand the finances and business of a small company its public stock price is at the mercy of larger forces.
My second thought is that our current financial system does not primarily reward stockholders. The staff and players in the market eat enough of the profits to increase the stockholders’ risk significantly. The investment bankers get a percentage of the gross off the top, mutual funds get a percentage for winning or losing, and the hedge fund managers usually get 20% of the gains. The management of most public companies controls the passive Boards of Directors, and an unkind commentator could believe that General Motors and Citibank have simply been looted by management. The amount of profit which has to be earned by a public company to pay the overhead, the financing institutions and management guarantees in many cases that the stockholders are unlikely to see any increase in value of most companies, and any gains which are made are significantly diluted by management stock options.
In 10 years the Dow Jones Industrial Average has gone from 9000 to 8000. I do not know if it will go up or down or nowhere in the next 10 years. What I think is that whatever it does will not be because of anything that is or can be known to me or anyone and it will not be reflective of value to shareholders. It is only gambling on the psychology of other people. Good luck to all of us.
posted by Contraria | 4:32 PM
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