read this.. it had me doubled over laughing.... HO HO HO, ROFLMAO!
if I am right about what begins this week... it will be TRULY IRONIC!
Investors Saying Bosh to the Bears
By James K. Glassman
Sunday, March 28, 1999; Page H01, Washington Post
With the Dow Jones industrials on the brink of 10,000, you might think this would be a period of celebration and congratulation. But no. The gloomy financial pundit class is issuing more ultimatums than NATO and heaping scorn on those poor saps who have sextupled their money in America Online Inc.
The truth is, small investors have been right for the past five years. When stocks fell sharply in October 1997 and again during the summer of 1998, many pros panicked, but the little guys held their ground.
Still, the theme emerging in the press on the eve of quintuple digits is that dimwitted investors have forgotten the past. "After several years in which stocks do better than their long-term average--as they have in the 1990s--there is a better-than-even chance that they'll underperform over the subsequent several years," wrote Mark Hulbert last week in the New York Times.
Hulbert quoted two economics professors, John Campbell of Harvard and Robert Shiller of Yale, as saying that stocks will drop by one-third--or worse.
But don't panic just yet. Campbell and Shiller have been bearish for a long time. It was Shiller who issued the influential dire warning at a Federal Reserve Board meeting in 1996 just before Chairman Alan Greenspan's "irrational exuberance" speech--with the Dow at 6437.
But even if stocks do "regress to the mean"--or go down after they have gone up--how do investors know when this dreaded event will happen? Should they have bailed out in March 1994, after a 12-year bull market, with the Dow at 3636? Or in March 1996, with the Dow at 5587? Or in March 1998, when it was at 8800? Just wondering.
Since no one can predict the short-term movements of stocks--it is, as Burton Malkiel wrote, "a random walk"--selling a fine company because of fears about the market tends to be a foolish act. Smart investors buy shares of good businesses and hold them for a long time and ride out the bad periods--or use them to buy more.
In fact, recent research shows that this is precisely what investors are doing. While an editor of Money testifies in Congress that her readers can't answer certain test questions about stocks and bonds, they were, nevertheless, wise enough to ignore the magazine's August 1997 cover story (with the Dow at 7672), exhorting them, "Sell Stocks Now!" They know what they need to know.
The latest critic of small investors, surprisingly, is Jane Bryant Quinn, the Newsweek and Washington Post columnist, whom I have long admired. Last week, she mocked the "Dow Generation" of young investors, who know, "as scripture, that stock markets exist to deliver 20 percent returns."
Caution is a virtue, but scaring Americans away from the stock market is a disservice. Investing in the stock market for the long term is good for the economy and good for investors and their families. It's a practice that should be encouraged and respected, not ridiculed and threatened.
Quoting a money manager from St. Louis, Quinn admonishes readers that, from 1966 to 1983, "big-growth stocks did worse than bank certificates of deposit."
Well, maybe, but that was a period of terrible and anomalous inflation. What's remarkable is how well stocks did do. Using data from Ibbotson Associates Inc., I calculated that the large-cap stocks of the Standard & Poor's 500 index returned 275 percent over that period--not really too shabby, except that inflation totaled 217 percent and Treasury bills returned 246 percent. Still, large-cap stocks did better.
And small-cap stocks did much, much better: They returned an incredible 1,362 percent. Adjusted for inflation, small-caps more than quadrupled. No wonder Quinn limits her comparison to "big-growth stocks."
She also claims, "Between 1966 and 1983, there was no, repeat no, net rise in the Dow." She's wrong. At the start of 1966, the Dow stood at 970. At the end of 1983, it was at 1259.
No matter. Perhaps she meant the end of 1981, when the Dow was at 875. But, at any rate, the increase in the price level of an index is only part of its return; the other part is dividends, which were hefty during this period.
Let's focus on the period that make Quinn's point best: 1966 to 1981. While the Dow itself fell by nearly 100 points, or 10 percent, large-cap stocks returned a total of 153 percent, according to the Ibbotson statistics. No wonder: Annual dividend yields averaged 5 percent.
But let's concede Quinn's point about stocks vs. CDs during this 1966-83 period. So what? Finding such a forlorn stretch over the history of equities means nothing. Why concentrate on anecdotes and outliers when Ibbotson provides us with 73 years of detailed history, and Jeremy Siegel of the University of Pennsylvania's Wharton School gives us more than 196 years of data in his bullish book "Stocks for the Long Run."
When we examine every five-year interval from 1926 through 1998 (i.e., 1926-30, 1927-31, etc.), we find that stocks beat corporate and Treasury bonds, T-bills, and inflation 58 times out of the 69 periods. Over 15-year periods, stocks were the best asset 55 times out of 59. And, over 20-year intervals, stocks had a perfect score: 54 out of 54.
And this, after all, is the point. Stocks are always the best place for long-term investors to put their money. The problem in the past was that they did not understand this fact and put too much into bonds, bills and CDs. Now, they are getting more rational.
A recent study by the Investment Company Institute (ICI) found that employees in their thirties held 68 percent of their 401(k) retirement assets in stocks, 9 percent in bonds, 10 percent in money-market funds and 12 percent in funds balanced between stocks and bonds. That's an impressively sensible allocation.
Despite what you read about the starry-eyed Dow Generation, a Roper Starch survey discovered that the typical mutual fund shareholder has modest expectations from stocks. In fact, writes David Oliveri of MFS Investment Management in Boston, such an investor is "more likely to underestimate the average return."
The study found that one-third believe that stock funds return between 5 percent and 10 percent, and four-fifths believe returns are less than 16 percent--which is, in fact, the annual average return of a stock fund over the past 10 years, according to Lipper Inc. Since 1926, the S&P has returned an average of 11 percent.
"Investors are getting more sophisticated and getting better-educated," Robert P. Goss, president of Certified Financial Planner Board of Standards in Denver, told me last week.
More of them than you might think are getting good professional help. Fully 60 percent of stock and bond funds are sold through a third party--a broker or financial adviser. An additional 17 percent are sold through other intermediaries, such as 401(k) plans. And only 23 percent are bought directly by individual investors.
While I admire anyone who can establish a financial plan, buy good stocks and bonds, and stick to the regime, I am skeptical that most do-it-yourselfers will do as well as they should.
Dalbar Inc., the Boston research firm, has been conducting a long-term study, using a computer model, of how real-life investors fare with their mutual funds. From Jan. 1, 1984, to Dec. 31, 1997, the S&P returned 820 percent. But the average investor achieved returns of only 148 percent.
Why? "The gap," concluded the research, "is explained by the behavior of equity fund investors. In their attempt to cash in on the impressive stock market gains, investors jump on the bandwagon too late, and switch in and out of funds trying to time the market. By not remaining invested for the entire period, they do not benefit from the majority of the equity market appreciation." That's one reason they need help--though not from unscrupulous advisers who make commissions off churning their customers' portfolios.
Still, most investors--helped or not--are getting better. The ICI recently looked at the reaction of investors to the 19.3 percent decline in the S&P over just six weeks last year, from mid-July to the end of August. "Domestic stock funds experienced a net outflow of $6.6 billion, or just 0.3 percent of assets in August," the ICI report, concluding that the response was "muted." In fact, for all of 1998, the most volatile year ever for the market, according to some indicators, investors added $151 billion to their stock-fund holdings--in addition to the gains from shares appreciating in price.
Where should that money be going? Right now, safety-conscious investors might want to look at a list compiled by Geraldine Weiss, editor of Investment Quality Trends (619-459-3818), a newsletter that follows 350 blue chips. Weiss cites 21 companies with squeaky-clean balance sheets: no debt at all.
Among the best, with long-term earnings growth rates, according to Bloomberg, of at least 10 percent annually: Arnold Industries Inc. (AIND), trucking and warehousing; Crawford & Co. (CRD/A), services for insurance companies; Dollar General Corp. (DG), retailer appealing to low-income shoppers; Hasbro Inc. (HAS), toymaker; Kaydon Corp. (KDN), custom-engineered parts for industry and military; Liz Claiborne Inc. (LIZ), apparel; Sigma-Aldrich Corp. (SIAL), biochemicals; Stride Rite Corp. (SRR), children's shoes; Walgreen Co. (WAG), drugstores; and Wm. Wrigley Jr. Co. (WWY), chewing gum.
Glassman's e-mail address is jkglassman@aol.com; he welcomes comments but cannot answer all queries.
Undeterred by the Ups and Downs
Although 1998 was a volatile market year, many nonetheless emerged confident about investing, according to a consumer survey from Dalbar*:
The financial markets of 1998 offered rare buying opportunities:
Agree 59%
Disagree 41%
The financial markets of 1998 convinced me to stay away from the stock market:
Agree 21%
Disagree 79%
Did the financial markets of 1998 result in your:
Making money 47%
Neither making nor losing money 25%
Losing money 21%
Don't know 8%
*Data was based on a survey of 1,100 households with incomes of $50,000 or more. Survey was conducted in December 1998. The margin or error is less than 4 percent, figures rounded.
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