Kurt’s post yesterday  made some good points, and I suspect he was hoping for a worthy counter. So, never one to disappoint his fellow blogger, I offered Jim a counterpoint and he said that sounds like fun, so here goes…
Years ago in grad school I met Branco, a visiting professor from Yugoslavia, and a dyed in the wool communist (yep, that long ago). He hated America with a passion. Many mornings our walk to class became long protracted debates. Branco couldn’t talk and walk at the same time, so many students passed us, staring at the spit flying and arm waving on the sidewalk. I can regale you on the fun stories, but let’s cut to the chase.
“Branco, if you hate this place so much, what the dickens are you doing here? Who at the Politburo did you tick off?”
Branco may have been misguided, but he was not stupid.
“Listen,” he said, “The American education system is the worst in the world; we all know that. But… how come it produces more Nobel prizes than the rest of the world put together?”
What you see depends on what you look at and how you look at it.
Let’s say your debts are paid off and you have money to invest. What you gonna buy? You pretty much only have the following options (in rough order of riskiness):
- The mattress (don’t laugh, I have a friend that does this)
- Savings accounts and their sisters, CDs and money market funds
- Mutual Funds and ETFs (hedge funds if you’re rich)
- Rental properties (residential or commercial)
- Bonds (taxable and tax free)
- Precious metals
- Collectibles (art, classic cars, jewelry, etc.)
- Own business (I’m only adding this because Kurt listed it)
“Nothing beats stocks” is a crazy statement. Any one of those investments can beat stocks. But, any one of them can also be beaten by stocks. There are simply too many variables to make any categorical statement one way or the other.
Is $10,000 invested in 3M more risky than $10,000 invested in a restaurant? You have to decide: 80% of all small business vanish from the face of the earth in 5 years. Either can make more money than the other — it all depends on the individual cases, but I think the odds of 3M going under are small. Not zero, but small.
What should you invest in? That depends on you more than anything else. Some people are geeks and prefer staring at a computer screen (hand raised). These people don’t mind digging up information on stocks and mutual funds.
Others (like my neighbor Mario) are good with people and their hands, so he invests in rental properties. If something breaks, he simply speed dials his electrician. Problem solved. He can stay on people who are late with their rent. I couldn’t, their sob stories would tug at my heartstrings and I’d end up broke.
Rentals work for Mario because of who he is and stocks work for me because of who I am.
It’s human nature that we do well in that which interests us. And that’s probably the most important point in choosing what you invest in. What captures your interest?
1. You need to invest. Sorry if that’s a bummer. Not investing is pretty much not an option. Even stuffing it under the mattress is an investment decision.
2. Every investment will take something from you. Time mainly, but also decisions, trade-offs, research, effort. Sorry. Also sacrifice: that $10,000 you put away for your IRA contributions this year? There went that Caribbean cruise.
3. Each and every investment carries risk. There is no such a thing as a risk free investment. Even a savings account carries the risk that in a time of inflation it will lose real value. You may as well just come to terms with it, and then pick what risk you’re most comfortable with. Sorry (again).
4. The good news is you’re never locked in. You always have an exit option. Some exits are more costly (real estate) than others (savings account) but you can always change course. If you think the stock market is going to tank, simply sell. When it’s brimming with bargains after a crash, simply buy. Nobody is handcuffing you to a choice you made ten years ago.
5. The other good news is almost all investments make money some of the time.
6. Someone selling investments, like a broker or realtor, is almost never the source to listen to. They have a vested interest in getting you to buy something. You are your own best analyst; it’s your money. The good news is figuring out investments is not rocket science, but the bad news is it does take time. Nothing for nothing and no gain with no pain.
That said, let’s get back to the question: should you be wary of stocks?
I say no, absolutely not. Forgive me when I just shake my head when people tell me I made a dreadful mistake by investing in stocks. Since 2009, my stock portfolio has multiplied fivefold. Many others have reaped returns similar to that. I can’t think of any other investment with that kind of return. I’ve never been accused of being the brightest light on the Christmas tree, so if I can do it…
The Elephant In The Room
There is one factor to keep in mind with any of your investments, and it dwarfs all others. It’s this: our economy moves in cycles. That means prices of all investments, other than the first two on the list, go up and down. These cycles last 7-10 years, bottom to bottom, as you can see from this chart:
In the up phase of the cycle pretty much any investment works and in down times pretty much any investment doesn’t work. But it will turn (up or down) every 5 years or so. So don’t get too excited when things look great and don’t get too depressed when things go down again. If you need to liquidate your investments, keep the cycle in mind.
Don’t let anybody fool you. Those fellas Kurt quotes (Bodie and Taqqu) say: “…the better your chances of getting blindsided by a downturn.” Factually true, but not the whole truth.
The whole truth is you have an equal chance of getting blindsided by an upturn. Think this through: for every upturn there’s a downturn and for every downturn there’s an upturn. Look at the chart – upturns generally last longer than downturns.
Here’s the point: in ANY investment, you have to keep the economic cycle in mind. House prices tanked as badly as stocks a few years ago. And small businesses fared worst of all. Bonds went up, because the government wants to flood the economy with cash. That will change at some point. It always does.
You of course can choose to ignore the economic cycle. But if you do, prepare to suffer. Both the stocks I bought and my neighbor’s real estate he bought in 2007 turned out pretty bad. Does it matter which one did worse?
Again, the choice of investment vehicle is far less important than the timing. That’s the elephant in the room nobody talks about.
There isn’t a single investment that will at all times outperform any other. If there was, everybody would be on it.
All investments will make you money if you buy right. And all will kill you if you buy wrong.
Nobody in their right mind believes that stocks will always outperform any other investment. So, no argument there.
I know Kurt’s not saying all stock investment is bad, so that’s not the contention. However, there does seem to be a bit of an inference that stocks are an unreliable investment, if not totally bad outright. For that, he leans strongly on his distrust of the stock market as a mechanism (casino, high frequency trading, etc.). I have no beef with that… other than its irrelevance.
I buy stocks, I don’t invest in the stock market. Subtle difference, perhaps, but non-trivial.
Let’s say I buy a Sony HDTV at Walmart. Three or five years from now, as I cheer for the Broncos in the Superbowl on my HDTV screen, I’m going to be happy with the product I bought. I’m not going to remember where I bought it. What does it matter to my HDTV what Walmart does when I’m not there?
In other words, when I buy a stock, I’m not paying attention to “Wall Street.” If I buy stock in Caterpillar, I’m buying faith in a management team and a brand, and the hope that in the years to come they will continue to do what they’ve proven they can do: find opportunities to grow profitably. The same applies if I buy stock in Royal Caribbean Cruise Lines or Amazon. “Wall Street” is nothing more than the portal I use. If others use high frequency trading, I don’t care. I still place my orders by hand and they get executed or not.
At the end of the day, the bulk of stocks are owned by institutional investors like mutual funds. They have to own stocks, it’s in their charter. That brings an inherent stability in the market many people overlook, because it’s so basic and has been around so long. Exxon and Coca-Cola have been around for a long time and the stuff the critics fuss about have done nothing to their intrinsic value. So that’s what Warren Buffett and I invest in. (Sounds great that way, no?)
No investment is always superior (or inferior) to any other.
The economic cycle will have a bigger impact on the performance of your investments than the particular investment vehicle you select.
You’re likely to do better with an investment vehicle that suits your personality.
But you’ve got to do it.
As for me, stocks have done better than anything else I can think of. But I did most of my buying when prices were low because of the economic cycle.
William Cowie came out of the past recession in the best financial shape of his life. He shares his secrets in a free course on the four seasons of the economic cycle at www.dropdeadmoney.com . (And, as you can tell, he loves stocks as an investment vehicle.)