I used to subscribe to these investment talking points and believed in the US equity market. I adopted these attitudes from reading Warren Buffett, index fund, financial advice. These are sound principles. I occasionally revisit value investing, dollar-cost averaging.
But times are changing. The US equity market will unlikely to deliver exceptional returns. Buffett may have a strong bias since he started his investing career post WW2. Buffett may experience only the correlation between the US equity market growth and global growth. Investment return is likely non-ergodic. We're entering new terrority where exceptional returns may come from other assets.
> The US equity market will unlikely to deliver exceptional returns.
With each passing day in this crisis, I think you can make the opposite case. Long-term risk in equities is going down, not up, as the market falls and stocks move toward relatively underpriced from relatively overpriced. Or am I missing something?
The expected long-term return from investing $1 in the stock market now vs beginning of Feb is higher, is it not?
The expected long-term return may still be lower than the historic average. However stocks are now significantly cheaper than now than they were in the beginning of Feb so it follows that yes, the expected long-term return from investing $1 is higher than it was in Feb.
Lots of bold, unsubstantiated claims. I think every time there is a big peak, or a big valley, some percentage of people are always peddling "but this is different"
> I think every time there is a big peak, or a big valley, some percentage of people are always peddling "but this is different"
When stocks crashed in 1929, it was different. In the US we got the New Deal, which still exists in some form. In Germany we got fascism and then a divided Germany for decades. The 1929 crash had effects felt to this day. The DJIA did not recover its 1929 level (not inflation adjusted) until 1954.
The kings and queens of Europe could point to how things never changed over the past millennia, and moved forward as they always had, until Charles I had his head lopped off in 1649. Then things began changing.
It's useful to read the history of the stock market prior to WW2. It was a casino back then. Our experience post WW2 probably creates a bias. We're used to the stock market stability. But it has some serious structural problem now (e.g. low/0 interest rate). I would not be surprised if it is heading back into casino mode.
Sure game-changing big changes exist. But when someone says "this is different", it's almost certainly not different. Both of those statements are true and I see no reason to think we're not in the latter case right now.
Over the long term. Let's go back 150 years and invest in a random stock market wherever you happened to live.
If you lived in the USA or England, this was a great idea and worked out brilliantly.
If you lived in countries like Italy, Germany and Russia, you lost everything when those stock markets were closed down in the first half of the 20th century.
You can't say "historically over the long term" then project forward for the next 50 years based only by the results of the last 50 years in the market where things have worked out best.
Over our lifetime, equities are indeed the best bet. But not a guaranteed safe one.
If you lived in countries like Italy, Germany and Russia, you lost everything when those stock markets were closed down in the first half of the 20th century.
This may be true, but then we're talking about such large changes that investment advice sort of becomes pointless. I mean no doubt that life would have sucked in those situations, but there's no investment choice that would have saved you either.
Like, if we were sitting today contemplating WW3 breaking out in 1960, annihilating the civilized world, the market going down would have been the least of your problems.
I mean no doubt that life would have sucked in those situations, but there's no investment choice that would have saved you either.
Guaranteed saving, no. But keeping an emergency supply of highly portable wealth in the form of gold worked surprisingly well for most of those historical examples. (The ironic exception being the USA where we confiscated people's gold under Roosevelt.)
I think the dynamic of the US equity market has changed. In the old days, you can balance your portfolio between stock and bond. This is portfolio advice from Benjamin Graham's The Intelligent Investor. We can no longer do this because interest rates are heading to 0. Bond investors don't make money from interest rates. Bond traders benefit from rate drop. Bond was an investment. It's now destroyed. We end up with cash and equity.
There's a lot of money pumping into the market by central banks. Markets are no longer free. Central banks manipulate their markets. With these kinds of manipulations, we get diminishing returns. Let's say the economy gets back on its feet. Where does it get the leverage to invest? We're overloaded with debt. The interest rate is probably 0 or negative at that point.
The counter-argument to this is that even with the money being pumped into the market by the central banks, we are not seeing significant inflation in consumer goods.
This implies that the money is being put to work efficiently and resulting in productivity and QoL improvements for society as a whole.
We have not seen inflation. But we're seeing slow growth and negative interest rate. These are signs of diminishing returns. The market has lost its check-and-balance. Bond and lending were supposed to carry risk and skin in the game. Right now, overall growth is delivered through the Fed pumping money. There is no check-and-balance.
With this crisis, governments will likely pump more money. That'll distort the market further.
What we've seen throughout history is that economies are typically ruined by two things:
1) Governments or central banks printing or issuing (often not physically) too much money, resulting in inflation that spirals out of control.
2) Governments, central banks, individuals, businesses hoarding money due to fear or other reasons, resulting in deflation that spirals out of control.
Those two are a form of check & balance. The thesis that most central banks now use is that if we can keep inflation steady, then we will have relative economic stability. The interest/lending rates are simply tools through which inflation can be moderated.
The question is whether they'll go up as much as they used to - with global population growth slowing down, there is a case to be made that the 7% long term growth that many people treat as a fact of nature is not in fact a long-term thing.
But times are changing. The US equity market will unlikely to deliver exceptional returns. Buffett may have a strong bias since he started his investing career post WW2. Buffett may experience only the correlation between the US equity market growth and global growth. Investment return is likely non-ergodic. We're entering new terrority where exceptional returns may come from other assets.