‘The cult of equity is dying’

6th August 2012

Any big pronouncement can be wrong, but this is particularly the case with the market – at present you might as well stare into a crystal ball to predict where it's heading; it's anyone's guess with the current uncertainty.

However, it is partly driven by waves of sentiment which media reports pick up on.

And last week, it was widely reported that Bill Gross, bond investor and co-founder of Pimco, had made a stark prophecy: He said both equity and bonds will be dud investments in the future.

"The cult of equity is dying," he says in his August investment outlook.

However, fundamentally, understanding that markets are driven by stories, sentiments, and social interactions is perhaps a more worthwhile consideration than any proclamations from ‘experts' to discover market momentum.

Gross, in particular, says that the higher returns on equity over the last 100 years at 6.6 per cent real returns over 1912-201, are a "historical freak".

Perhaps it's true that people are far more adverse to stock market investing than they were before the financial crisis began, but this could mean it's a decent time to buy them, argues Huffington Post.

It's common sense, after all, that you're going to get some pretty good bargains in stocks when you've got so little competition for them.

And for long-term investors, betting against headlines and statements such as these is often a good idea.

Having declared the death of the cult of the equity, have we not really declared that the time is right to start a new one, asks the Financial Times (paywall)?

As Psyfi blog says: "…a contrarian investor should be looking to bet against the noise traders…so it's of significant interest to figure out what the current sentiment of day traders is."

After all, it is the same Bill Gross that predicted interest rates would soar last year – but they didn't, and as a result took a big hit to his fund's performance and his reputation. So do you think we should believe him?

Gross's statement is also reminiscent of the BusinessWeek magazine cover in 1979 which shouted about "The Death Of Equities" – and a few years later came the start of a 16-year bull market.

Also, remember the book called Dow 36,000, featured by Atlantic Monthly at the top of 2000 tech boom? That predicted the Dow Jones Industrial Average, would hit 36,000 – a wish which failed to come true.

And as Henry Blodget pointed out on Business Insider Gross made an elementary mistake. Stocks did not appreciate nearly 7 per cent a year over the last hundred or so years – they returned  7 per cent. The difference being that "appreciate" refers only to price, while return includes dividends. And looking  only at price, stocks appreciate only about 2 per cent a year over long periods.

"Even brilliant people occasionally make boneheaded mistakes, and one of the world's most prominent investors appears to have made a big one."

However, he agrees with Gross's point that stocks are going to put up some unappealing numbers for a while for some reasons. "Bill Gross also makes another very important point about how corporations and shareholders have become greedy in recent years and now pay an all-time-low percent of GDP as wages. This is a big problem…As companies pay employees more, margins will drop, which will hurt stock performance."

But remember that emotions at market tops and bottom can be truly extreme. Timing the best entry point, with press headlines or anything else, is impossible. But you can bet that we are not seeing the end of equities.

After all, anyone stating with such certainty that equities are dead should be questioned.

As Psyfi blog comments on Mindful Money here: "The best analysts tend to be self-effacing, are often cautious in the face of uncertainty and usually hedge their bets a lot of the time. Lacking brazen overconfidence they're less popular, but they're the safest hands in the business."

Given rock-bottom interest rates, if you want to do something with your money beside stick it in a mattress, equities will remain a viable option and by picking the right stocks, there is potential for profit.

Edward Hocknell former partner at Baillie Gifford comments on a Mindful Money blog: "Unfortunately, we have to take risks. We have no choice, because the cost of not doing so has become immense. The entry fee to safe havens is prohibitive. Bond markets are behaving like an insurance salesman who wants to charge you more to insure your house than it would cost to rebuild. Safety guarantees loss.

"If we want a reasonable prospect of real long-term returns, we usually have to invest in equities- and that means having to cope with uncertainty. Indeed, the great economist John Maynard Keynes suggested in the 1930s that the holder of quoted equities requires "much more nerve, patience and fortitude than… the holder of wealth in other forms".


More on Mindful Money:

Investment Strategy: Why PMI's are more important than GDP figures

What investors need to know ab
out market correlation

The shocking truth about growth investors

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