Good reads from around the Web.
This week saw the well-respected bond titan Bill Gross predict the death of equities:
The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well.
The key thrust of Gross’ argument is that:
[Equities’] 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year.
Unfortunately, Gross appears to have made a (wait for it) gross error. As the likes of Jeremy Siegel and Henry Blodget have pointed out, he has forgotten that a large part of that 6.6% real return consists of dividend payouts:
Stocks have not, in fact, “appreciated” at ~7% per year for the past couple hundred years. Stocks have only “appreciated” about 2% per year.
That is to say, the prices of stocks, after adjusting for inflation, have only risen about 2% per year for the past couple of centuries.
So where has the rest of the return come from?
Over the past century, about 4 points of the ~7% annual return of stocks has come from dividends.
This would seem to be an inordinately huge error, but Gross has yet to address it. Instead he and Siegel have traded insults across the financial media:
“I like Bill Gross a lot, but he’s got the economics wrong,” Siegel said on Bloomberg Television’s “In the Loop” with Betty Liu. Siegel is “obviously pushing at windmills,” Gross said today in an interview with Liu. “He belongs back in his ivory tower,” Gross said.
A load of crystal balls
Other critics have noted that plenty of US companies get much of their earnings from overseas. Thus their business value would be geared to global GDP, not to US GDP alone.
But the main thing I takeaway from this spat is that fun as it is to read the word of gurus and pundits, an investor shouldn’t regard any of it too seriously. (That includes any forecasts that stray onto Monevator, for that matter).
If a multi-millionaire bond king with billions under management like Bill Gross can make such a simple slip, do you really think an economist has a clue when he says Russian GDP will pick up in 2014, or that the FTSE will fall below 4,000 before rebounding to 10,000, or any other comically precise forecasts?
In the real world, central banks can’t get next quarter’s inflation figures right, and analysts who devote their working lives to tracking one company can be raving bulls just before profits crater.
Gross may or may not be right about equities (he’s been plenty wrong before) although his critics should note that he also thinks bonds face a tough future – so he’s not just talking about his book here.
I suspect too, that those who see his bearishness as a buy signal akin to the famous ‘Death of Equities’ Newsweek cover of 1979 may well be vindicated, though it’s worth noting that cover wasn’t as terribly timed as is popularly thought.
But even had his maths not been fundamentally wrong, the idea of reliable market forecasting is still wrong-headed.
From the investing blogs
- UK house price affordability – Retirement Investing Today
- Why does it take so long to move an ISA? – Simple Living in Suffolk
- UK disposable income at a 9-year low – Totally Money
- Fictional profits, false accounting, and financialisation – The Psy-fi blog
- A simple graphical model of financial success – Objective Wealth
- The greatest economic indicator goes positive 😉 – The Reformed Broker
- All about managed payout funds [US] – Mr Money Mustache
- Richard Beddard explores ‘The Essential PE’ [See below] – iii blog
Book of the week: A whole book dedicated to the price-to-earnings ratio might suggest writer’s block. But The Essential P/E, a new work by a British author, is right to challenge our reliance on this slippery ratio.
Mainstream media money
- Triodos targets 9-10% return with new wind turbine fund – Guardian
- How a trading bot cost its owner $440 million this week – Channel 4
- Such large scale algorithms break in strange ways – Reuters
- Its shares have tanked, but how is Facebook itself faring? – Economist
- Facebook reminds us why most should be in trackers – DealBook/NYT
- Unpacking the also-dubious Manchester United IPO – DealBreaker
- Swedroe: When do the risks of value stocks appear? – CBS/Moneywatch
- Nearly 50% of Japanese firms have more cash than debt – Bloomberg
- Threat to cheap ETFs if stock lending rules are changed – FT
- Alternatives: The price of antique atlases is soaring – FT
- The case for private equity investment trusts – Telegraph
- How to claim compensation from the RBS/Natwest glitch – Telegraph
- The ins and outs of flexible working – Independent
Product of the week: Not a link to a specific product this time, but the first details on Tesco’s eagerly awaited mortgage range. And the news is that Tesco isn’t particularly cheap, as the FT points out.
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