Update--Second Quarter 2001
A Modern Fable Of The Tortoise And Hare
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"We got pretty greedy didn't we? Unlike the bull market of the 1950s, which the middle class foolishly ignored, we got so caught up in this bull market that we lost our heads. In the 1980s, as the bull market was gaining steam and baby boomers were learning to become investors, there was still a sense that there was a lot more to life than the stock market. But by the mid-1990s, way too many people had become fixated on the market to an unhealthy degree, as if the act of making money with their money was the highest good they could perform as human beings." Money Magazine--May 2001 |
With rolling brown-outs hitting California and the price of gasoline hitting two dollars per gallon in many parts of the U.S., a Merrill Lynch analyst told CNBC viewers last week that if you add up the stock market value of America's four largest oil and gas refiners it wouldn't equal the stock market value of Yahoo! He went on to say that in recent years, American investors have wasted enormous amounts of capital betting on the paper of technology companies rather than prudently investing in a rapidly deteriorating electrical grid and additional sources of energy.
My first thought was the irony that Merrill's analyst was possibly the country's leading cheerleader for internet companies during that time. My second--and more gracious--thought was the Dalai Lama's sentiment that "If we do not manage our affairs in an ethical and responsible way, we will inevitably come to regret it later." And my third thought was how the ancient fable of the tortoise and hare remains so very relevant. Not simply on a social level, but on an individual level for investors as well. Consider these statistics which might surprise the 61% of investors who the April 30th Wall Street Journal said still expect more than 10% annual returns from U.S. stocks during the coming decade.
*Many still tell me that despite the drubbing technology stocks have taken during the past year, the best way for an investor to have made money over recent years was to bet on large growth stocks such as Microsoft and Cisco and/or the tech-heavy index funds. Yet the May 1st issue of the Journal reported: "As of March 31, the Wilshire 5000 index of most regularly traded U.S. stocks had a trailing three-year average annual return of 1.7%, a five-year return of 12.4% and a 10-year return of 13.7%. Moreover, growth stocks have been hit so hard that their three, five and 10-year returns are now below those for value stocks." Notice two points. First, while many clients have thought I've been too cautious about stocks during recent years, you could have made three times as much money in a traditional 5% savings account as in a total market index fund during the past three years. Second, the risky hare-like growth stocks that have captivated the news and therefore investors' attentions actually haven't been as rewarding as prudently buying the tortoise-like value stocks. And there's been far less indigestion with the tortoises.
*Yet it's been slower going than normal for even the tortoises during the past three years. The May 8th Journal reported that the average annual return of the ten largest large-cap value mutual funds, or the most popular funds that invest in the inexpensive blue-chip stocks that most true investors favor, over the past three years has been 4.2%.
*Many think the recent rally in tech stocks has erased the pain of the past year. Yet in a testimony to the relative merits of tortoise-like investing, today's Journal said: "It's not easy climbing back when your investments have fallen off a cliff. Take the 70.1% decline suffered by the average tech fund in the almost 13 months between March 10, 2000, and April 4. A 70.1% rebound doesn't nearly get the investor back to break-even; indeed, a fund or any other investment down that much has to soar 234%--that is, more than triple--to get back to its initial value. That means the average tech fund's 38.5% gain from April 4 through Wednesday has helped far less than some investors may think. Even after that recent gain, the tech funds are still down an average 59.7%."
*Many investors have told me in recent weeks that tech stocks are now cheap. Yet before much of the current rally, the April 22nd New York Times reported, "the Merrill Lynch technology index is trading at 166 times trailing earnings for the 100 companies in it. By contrast, the S&P 500-stock index trades at 27 times earnings." And the historic norm for stocks is 14 times earnings.
*The May 17th Journal reported that after one of the largest one day advances of the year, the Dow Jones Industrial Average was still exactly where it was two years ago, at slightly above the 11,000 mark. It added this about the broader market: "The market value of U.S. stocks now has gained back $2 trillion since hitting a low of $11.58 trillion on April 4. The market's value stood yesterday at about $13.61 trillion. The market's overall value still is down $3.35 trillion from its high of $16.96 trillion on March 24, 2000."
*Most investors I speak with think that Chairman Greenspan has been lowering interest rates. Yet a chart in today's Journal indicates that's not necessarily true. While the yield on the 2-year Treasury bill has indeed fallen from 5.0% at the beginning of the year to 4.75% today, the yield on the far more important benchmark 10-year Treasury note has actually risen from 5.0% to 5.5%. That puts the 10-year rate at precisely where it was three years ago. More importantly, it's why your bonds haven't been going up in value as you might expect. Even more importantly, the 10-year Treasury may be saying that the lower short-term interest rates the chairman is giving us will produce more inflation down the road and that won't be good for U.S. bonds.
*While most Americans continue to invest in large-cap domestic funds, the June issue of Mutual Funds magazine reported that, "Over the past three years, the average small-cap foreign fund has returned a total of 20%, thrashing its large-company rivals and more than doubling the gain of the S&P 500 Index. Plus, small-cap funds have provided serious diversification, moving in tandem with the S&P on average just 29% of the time."
In short, despite Americans' fascination with U.S. stocks during recent years, almost nothing has occurred for the true investor. I continue to believe the odds favor our stock market moving sideways for up to a decade, as it did from 1968 to 1978, while earnings catch up with valuations. That's one reason we'll only do Updates when needed in the future, rather than quarterly as we have in the past. We hope you'll spend the extra time with reading that will enrich you spiritually! As for investing, let's simply stay with our strategy of seeking dependable income from intermediate-term bonds, both foreign and domestic; seeking inflation-sensitive income and growth from conservative real estate investment trusts; and seeking capital gains from inexpensive value stocks, both foreign and domestic, as well as hedge funds that might profit from stock market declines as well as advances. Above all, let's avoid imitating those entertaining dogs at the track...the ones that frantically chase the hare only to end up back where they began.
