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Young Americans: The Death of Equities May Be Exaggerated
My opinion is that many instabilities built up in the financial system and the Great Recession occurred when some input caused the instabilities to avalanche. The change to the system didn't have to be large, just large enough to be the "straw that broke the camel's back". For reasons stated in both articles, many instabilities still exist and a large aftershock may still occur. For most people, reading the news is enough of a turnoff. Given time and a change from a secular bear market to a bull market, equities will come back in favor. Currently equities may be dead, but that is only temporary. (I remember someone said "permanent is greater than one day, temporary is less than a lifetime".)
Also, Mark Twain said that "History doesn't repeat itself, but it does rhyme".
What a stunner that the financial media continues to ride to the defense of the comment from Gross! "OMG, equities are still great, no one listen to him, especially the three people still watching CNBC!" At least Morningstar quoted him right that he said the "cult of equity". It's not that equity investing is going to go away, the Gross comment was simply calling for people's expectations to come down (see below)
People continually note that retail chases markets (which results in completely unhelpful articles trying to guilt and shame people into chasing saying "YOU MISSED IT!"). At what point are they going to chase this one? Or, better yet, at what point does it become apparent they just won't? Money is still flowing out of actively managed mutual equity funds at what I would consider a pretty remarkable pace. Some of that money has gone into ETFs, but I'd be immensely curious as to the reasoning. Yes, ETFs often have cheaper expenses, but I can't imagine that's a primary reason among a large majority of retail investors. I don't see how moving to ETFs will help aside from making it easier for many to quickly puke up shares if things turn sour (and the lesser expenses.)
The majority of the money - as shown on the graph in the article - has gone into bonds. The retail crowd was likely underinvested in fixed income, but a large amount of investors have likely moved to fixed income out of risk concern and I don't think a large amount of that money is coming back to equities.
Everything is presented so black and white these days. Equities are over or not, people ran out of equities into fixed income when if they had some fixed income allocation in the first place (if they did not) they could have likely had a somewhat smoother ride over the last several years. At the same time, the creation of one easy money "bubble" after another by our Government isn't helping matters, either. Markets don't climb a wall of worry, they climb a ladder of easy monetary policy.
I'm not saying that people should be out of equities. In fact, I actually like a number of themes (things from mobile to agriculture to infrastructure to even something like probiotics) and can sleep at night in things like Brookfield Infrastructure or foreign telecoms yielding 5%. Flexible funds like Marketfield have a great degree of freedom to capitalize on ideas long/short (globally, in the case of Marketfield.) I do admit I move around a fair amount, but at the core, if I have a long-term view on a theme, I remain there. Dividends help, like in the example I gave the other day of Graincorp (http://www.fool.com.au/2012/08/investing/graincorp-basically-bread-and-beer/), which has a policy of: “Across the cycle our dividend policy is to pay between 40-60% of NPAT. In strong performance years we are able to ‘flex up’ and return some additional capital to our shareholders through a special dividend." Obviously, things can change, but a strong dividend policy by intent. Not a recommendation - it's somewhat volatile - but more giving an example of a strong dividend that makes it more comfortable for a longer hold, versus something that pays 1%.
I said yesterday that an older generation who is in or near retirement is not going to (to a large degree) want to take the same risks and younger generations are not going to be there to make up for the outflow of older generations. This country HAS TO increase financial education at an earlier age in schools, and I think you're going to create a new generation that is going to be more skilled at investing and I think people who are more educated about their investments are going to have a stronger attachment to them. People just don't do the research and they don't want to or don't have time to do the homework, but they have to - and I think a more educated retail investor is going to be beneficial to them and the market as a whole.
Human nature is human nature and there's an enormous amount of variables for everyone's individual situation, but I really think if people were better educated about their investments people would have an easier time holding them for the long run. Of course, if people were actually educated about things like P/E's, there would likely be a harder time selling things like the Facebook IPO to the retail public - but that's in many ways a good thing. The Facebook situation to me was a significant example of retail investors knowing something about a product but maybe not being able to evaluate the metrics of it as an investment or aware of how to really evaluate it as an investment beyond "I like the product."
Long story short, I think a large part of the retired or near retired crowd is out - they're in fixed income and ZIRP has not pushed them to take the kind of risk that ZIRP was intended to do. They are looking for preservation of capital. Nothing's going to change human nature, but educating people at a younger age will - I think - go a long way towards creating stronger investors and maybe even smoother markets over time/over the long term in a best case scenario.
The Gross response to all of the ridiculous irritation over his comment - GROSS: Stop you Nattering Nabobs of Optimism! The fading cult of equity only says: don't count on 10%+ returns on stocks/bonds to pay bills.
Comments
My opinion is that many instabilities built up in the financial system and the Great Recession occurred when some input caused the instabilities to avalanche. The change to the system didn't have to be large, just large enough to be the "straw that broke the camel's back". For reasons stated in both articles, many instabilities still exist and a large aftershock may still occur. For most people, reading the news is enough of a turnoff. Given time and a change from a secular bear market to a bull market, equities will come back in favor. Currently equities may be dead, but that is only temporary. (I remember someone said "permanent is greater than one day, temporary is less than a lifetime".)
Also, Mark Twain said that "History doesn't repeat itself, but it does rhyme".
People continually note that retail chases markets (which results in completely unhelpful articles trying to guilt and shame people into chasing saying "YOU MISSED IT!"). At what point are they going to chase this one? Or, better yet, at what point does it become apparent they just won't? Money is still flowing out of actively managed mutual equity funds at what I would consider a pretty remarkable pace. Some of that money has gone into ETFs, but I'd be immensely curious as to the reasoning. Yes, ETFs often have cheaper expenses, but I can't imagine that's a primary reason among a large majority of retail investors. I don't see how moving to ETFs will help aside from making it easier for many to quickly puke up shares if things turn sour (and the lesser expenses.)
The majority of the money - as shown on the graph in the article - has gone into bonds. The retail crowd was likely underinvested in fixed income, but a large amount of investors have likely moved to fixed income out of risk concern and I don't think a large amount of that money is coming back to equities.
Everything is presented so black and white these days. Equities are over or not, people ran out of equities into fixed income when if they had some fixed income allocation in the first place (if they did not) they could have likely had a somewhat smoother ride over the last several years. At the same time, the creation of one easy money "bubble" after another by our Government isn't helping matters, either. Markets don't climb a wall of worry, they climb a ladder of easy monetary policy.
I'm not saying that people should be out of equities. In fact, I actually like a number of themes (things from mobile to agriculture to infrastructure to even something like probiotics) and can sleep at night in things like Brookfield Infrastructure or foreign telecoms yielding 5%. Flexible funds like Marketfield have a great degree of freedom to capitalize on ideas long/short (globally, in the case of Marketfield.) I do admit I move around a fair amount, but at the core, if I have a long-term view on a theme, I remain there. Dividends help, like in the example I gave the other day of Graincorp (http://www.fool.com.au/2012/08/investing/graincorp-basically-bread-and-beer/), which has a policy of: “Across the cycle our dividend policy is to pay between 40-60% of NPAT. In strong performance years we are able to ‘flex up’ and return some additional capital to our shareholders through a special dividend." Obviously, things can change, but a strong dividend policy by intent. Not a recommendation - it's somewhat volatile - but more giving an example of a strong dividend that makes it more comfortable for a longer hold, versus something that pays 1%.
I said yesterday that an older generation who is in or near retirement is not going to (to a large degree) want to take the same risks and younger generations are not going to be there to make up for the outflow of older generations. This country HAS TO increase financial education at an earlier age in schools, and I think you're going to create a new generation that is going to be more skilled at investing and I think people who are more educated about their investments are going to have a stronger attachment to them. People just don't do the research and they don't want to or don't have time to do the homework, but they have to - and I think a more educated retail investor is going to be beneficial to them and the market as a whole.
Human nature is human nature and there's an enormous amount of variables for everyone's individual situation, but I really think if people were better educated about their investments people would have an easier time holding them for the long run. Of course, if people were actually educated about things like P/E's, there would likely be a harder time selling things like the Facebook IPO to the retail public - but that's in many ways a good thing. The Facebook situation to me was a significant example of retail investors knowing something about a product but maybe not being able to evaluate the metrics of it as an investment or aware of how to really evaluate it as an investment beyond "I like the product."
Long story short, I think a large part of the retired or near retired crowd is out - they're in fixed income and ZIRP has not pushed them to take the kind of risk that ZIRP was intended to do. They are looking for preservation of capital. Nothing's going to change human nature, but educating people at a younger age will - I think - go a long way towards creating stronger investors and maybe even smoother markets over time/over the long term in a best case scenario.
The Gross response to all of the ridiculous irritation over his comment - GROSS: Stop you Nattering Nabobs of Optimism! The fading cult of equity only says: don't count on 10%+ returns on stocks/bonds to pay bills.