Friday, December 30, 2005

US stocks very unpopular


For those of drinking the S&P 500 Kool Aid for the last several years, the recent articles from gurus of small investors (like Jonathan Clements in the Wall Street Journal) amount to a kick in the rear. These 'experts' now tell us that we were stupid to invest in S&P 500. Their reasons: (a) S&P 500 does not represent the US stock market as a whole, and (b) the US is going to grow very slowly in the future.

Now (a) is a weak argument. In the 90s, these gurus convinced us to refrain from picking individual stocks, and to go for index funds like the S&P 500 funds, since "5, 10 or even 50 individual stocks in your portfolio can't mirror the variety in the stock market adequately."

I am not so sure anymore. When these same gurus talk about market performance, they quote you the Dow numbers - and the Dow average is made up of just 30 stocks. So if an index of 30 stocks is enough to tell you whether it was an 'up' year or a 'down' year for the economy, it should be good enough for my portfolio too, assuming I want a portfolio that moves in lock-step with the American industry.

(b) above is equally troubling. We heard throughout the 90s that the stock market will give us 8-10% returns year after year. But now that we all have figured that out, they say it won't be possible to get those returns anymore.

All this backtracking is based on some strange assumptions: since there is more money available (pension funds et), they say, the returns will go down. That's almost anti-capitalist: one should be able to get better results with more money, no? And why is there so much more money available for investment when the American saving rate is so abysmal? Isn't it just foreign investment? So if foreigners are investing in America, why do these investment gurus recommend increasing the foreign component of our portfolios? I think these guys are just running scared since the last couple of years have not been very good for the US stock indices.


Comments:
Well, the part about more money available for investment is not about individual savings (rate or net.) It's about enormous hedge-funds and private equity. It's true, there's a lot of money in those funds which is just sittin' around, waiting to be invested. These guys have on average, about 7 years to make some sort of return on their money. Since 2001, they put a choke on the pipeline, figuring they'll see better times ahead to start investing again. Well, they've opened the pipelines, but not the floodgates. So here is lots of money looking for big returns. Well, those big returns are elusive. In the go-go days, it was easier, but as competition grows, margins decrease, and you ain't gonna see whopping big returns. (Plus, the fact that there are too many middle-tier and bottom-tier funds that help bring the average return down.) So where do you look for bigger returns? International -- where there is lots of room to grow, with relatively less competition... Cheers.
 
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