A recent newspaper article states that “US stocks have now underperformed bonds not just in the short term but in the past 30 years, which is something they haven’t done in any other 30-year period since the start of the American Civil War.” Therefore, investors were cautioned to consider that investing in shares for retirement may not be the best idea. Perhaps think about bonds and fixed interest.
It is somewhat convenient that 30 years ago, bond yields were on historic highs in the wake of runaway inflation. It is doubly convenient to compare the “performance” of the sharemarket at its lows this current time, especially at the same time when bond yields are now close to zero. The article does not reveal the source of its authoritative statement, so readers will never know exactly what was measured to gauge relative performance. In my experience, sharemarket performance measurements seldom include the effect of dividends, which contributes close to 50% of expected returns for shares in the long term.
1% real return plus dividends?
A recent market commentator stated that over the last 10 years, share market generated returns of 5.74% per annum, which after considering the effects of inflation, only leaves a real return of 1% per annum, plus any dividends received. Therefore, buy and hold is no longer a valid strategy, and investors are urged to time the market, and to stay in cash in the current market environment. Let’s face it, he says, you are not Warren Buffett, and you will never be one.
The commentator above has merely just restated long term average returns of shares, being 9% per annum compounding, with 4.5% returns from dividends and 4.5% returns from capital gains. Taking into account inflation of 3% per annum, you get 1.5% per annum plus dividends. A clever twist of phrase and differences in emphasis gave birth to a bear story out of a bull story.
This time it is different
So we are not surprised that despite our numerous articles, many investors are sitting on the sidelines, listening to the siren calls of doomsayers and awaiting financial Armageddon. Cash deposits are building up at our major banks. Transaction volumes are trending down.
You see, this time, it is different. The European crisis has worldwide implications, markets are all correlated, and you never know what is going to happen next. Some weeks ago, we at The Motley Fool were accused by readers of “spruiking” shares, apparently ignorant of the dreadful implications if Greece went under. It is of course doubly irresponsible for us to continue “spruiking” shares if something were to happen to Italy now (and irresponsible to the third degree if we consider Portugal, Spain and China down the line.)
Just like the advice of the late Peter Cundill that “there is always something to do”, my take on this is that “there is always something to worry about.” The “secrets” of investing were released decades ago. It was never much of a secret. However, history will yet show again that the enemy of investors is often themselves.
Yawn, Business as Usual
Whilst all of the above are playing out in the headlines, CSL Limited (ASX: CSL) has quietly gained 26% of the blood albumin market in China. Computershare Limited (ASX: CPU) obtained regulatory clearance to proceed with its major purchase of BNY Mellon Shareholder Services, taking Computershare one step closer towards global domination of the registry market. A director of IMF Australia Limited (ASX: IMF) spent over $2m buying up IMF convertible notes (ASX: IMFG). The CEO of BSA Limited (ASX: BSA) reaffirmed guidance of a 20% increase in revenue this financial year.
We are now aware that a smart old man shot down a big blue dancing elephant with his capital shotgun, yet shares in Oakton Computing Limited (ASX: OKN), Data3 Limited (ASX: DTL) and DWS Advanced Business Solutions Limited (ASX: DWS) slipped by unnoticed and unloved.
The market collectively gave a big yawn. You get a rough idea of investor sentiment when bullish news are treated indifferently. This is further reaffirmed by the CEO of Platinum Asset Management Limited (ASX: PTM) who pointed to the outflow of funds under management and investor redemptions, remarking that “the cult of equity is at risk.”
Climax of the Bear
A bear market ends when the last bull throws in the towel and sells shares at rock bottom prices. I suspect readers will be waiting for a very long time before any one of us Fools do that.
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Fool contributor Peter Phan owns shares in IMF and BSA. The Motley Fool’s disclosure policy is to be greedy right here, right now. This article has been authorised by Bruce Jackson.