August 31, 2010
During the ‘nifty 50’s,’ with post-war peace and re-construction combined with a population explosion, the well-oiled war-time economy transformed into a world-class production system. During this period, there were two years in which the stock market returned more than 45% and three additional years in which it returned more than 20%. There was only one year with a decline: 1957, which yielded a 10.05% loss. Treasury yields went from 2.14% to 4.11% during the 50’s. The worst one-year decline based on total return was 3.77%.
Finally, during the period from 1960 to 1993, the highest recorded period of inflation in US history, there were only two years when the index lost money: 1967, down 3.05% (stocks were up 28% that year), and 1969, down 2.4% (stocks were down 10.9%). In the two years following, Treasury bonds rose 15% and 11%. In fact, there were six years during this period when this blend of Treasury bonds produced more than a 15% annual return.
So why would such esteemed men ignore history in their forecasts? Giving them the benefit of the doubt, one might argue that they don’t think history has any relevance in this ‘new normal.’ But isn’t that similar to the mantra of the late 90’s that ‘earnings don’t matter because the Internet changes everything?’ It was Wall Street analysts who told us to keep buying tech stocks even at 100 times earnings, because that was what they had to sell. Dot-coms were coming to market faster than the ideas behind them (if there were any) could be explained. Ideas of diversification and allocation were thrown out the window. Even Fortune magazine had on its cover a picture of Mr. Buffett (who famously sat out the tech rally), accompanied by a caption asking whether the ‘oracle’ had lost his way.
Just as it is in Wall Street’s interest to sell what they can to make themselves money, it may be possible that these ‘bubble’ prognosticators have some amount of self-interest at stake. Buffett’s comments come from his annual letter to stockholders, which means his comments have to be taken in light of Berkshire Hathaway’s interests. Berkshire Hathaway is not being managed to confidently meet the needs of any one individual. Indeed, the volatility of shares of Berkshire has been considerably higher than the volatility of the stock market as a whole. Siegel is an advisor to, and has a financial interest in, Wisdom Tree equity funds. He makes money selling stock funds, not Treasury bonds.
There is no way to know what tomorrow will bring. Placing outsized bets, particularly with one’s lifetime savings, based on prophecies from even the most renowned soothsayers is not a sound strategy. Prophecies rarely unfold as predicted, and even more rarely do they do so completely. Recall poor Macbeth. Yes, he became king, but in the end he lost his head.
Sam Bass is the founder and CEO of Beacon Investment Management, a Raleigh, NC-based fee-only advisory firm. He uses Wealthcare in lieu of traditional financial planning.
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