Investors have been told over and over again that the best strategy is to buy equities and hold them for the long term. This mantra-like advice was repeated throughout the 1990s when the stock market craze was at its peak. However, that was the wrong message, delivered at precisely the wrong time.
Over the past ten years, equities have been poor or disastrous performers, depending at what time interval was selected. In the world's major markets, stocks have declined by just under 80 per cent while treasury bonds provided a return of nearly 95 per cent over the same time frame.
This seems illogical as bondholders have first claim on the corporate sector's cash flow and shareholders are entitled to the rest, assuming, of course, that profits keep growing.
Investors/speculators jumped into the stock market seeking high returns, and that pushed equity prices to sky-high peaks. The ratio of prices to earnings rose in the United States by one-third, above the absurd levels of the 1929 peak. This pattern was duplicated in the U.S. housing market where many luminaries said that house prices would never fall, but at worst would level off for a few years.
Now some forecasters are claiming that because the stock market has performed so badly over the past decade, they are certain to do well over the next few years, perhaps even cornpensating for the lost ten years. The same argument was applied to Japan, but there the weak stock market is in its third decade of a bear market.
The U. S. stock market never reached the incredible levels prevailing in Japan, but still it is selling at nearly 20 times current earnings, far above the historical average of 15 times earnings.
The implication of this high valuation is that speculators infer that boom conditions are in the offing, while far more likely, is desultory growth or even another recession. Too many are assuming a strong recovery in the economy and corporate profits. Yet, as the effects of various government stimulus packages wear off the outlook is far from positive. Government efforts to keep interest rates low reveal central banks' uncertainty about the economy. That in turn is pushing investors-speculators into a search for better returns, fueling again over-valuation in share prices.
Like a cat chasing its tail, all this confirms that holding equities over the long term is not a reliable guide to good results. Too many have absorbed the wrong message to their own investment peril.
