A New, and More Uncertain, Investment Environment

Often in our investment lives, new developments creep up on us unexpectedly. Many take a long time to emerge, and others come more quickly – as has happened since the recent financial crash.

Today we can see some very important new factors in the equation which make it clear that we are in a changed investment world. This world appears likely to be more difficult and uncertain than the generally comfortable environment that prevailed during the last two decades of the 20th century – before the bursting of the technology bubble in 2000-2002 and then the big financial crash in 2008-2009.

In what now looks like a nostalgic view, the Princeton economics professor, Ben Bernanke, labeled the late 1900s’ placid period “The Great Moderation” – shortly before he became Chairman of the Federal Reserve Bank in 2006. Unfortunately, though, no “moderation” prevailed during his eight years in that position.

Many changes have caused this shift in the environment, all of them negative to some degree. I don’t want to over-dramatize this situation, but it deserves careful consideration. So let’s examine realistically these notable changes and see what they portend for the future. Successful investors are always sweeping their eyes across the entire world, looking through binoculars to find important information – while most others merely focus on a few current short-term events, usually local ones, peering through microscopes. Here, we’ll take a broad view.

How Should We Look At The Stock Market?

I have found that many individuals who own stocks devote a majority of their investment thinking to looking at the stock market and trying to figure out where it’s going in the near future. But that’s really very unproductive. So I want to talk to you about how you should look at the market, and get some benefits from doing so. Investing is a crucial activity for many people, because it’s the foundation of their financial well-being. Making successful investment decisions requires a close focus on a few significant long-term certainties, and ignoring all the uncertainties that are mostly short-term in nature and thus of no lasting relevance.

Farewell

After 62 years of deep involvement in investment management and writing about it, now at the age of 87 I think I’ve reached an appropriate time to end the writing of monthly Ruminations. This is a hard decision because I continue to be fascinated by investing, and I enjoy writing about it. But I think this is a sensible move. I don’t want to stay past my prime the way great athletes like Willie Mays and Brett Favre did – trying desperately to find fly balls in the outfield or throwing one interception after another. (Not that I consider myself a “great” investor!)

In closing, I’d like to pass on a few thoughts about key things I’ve learned from my many years of generally successful experience. Most of these will be familiar to my long-time readers; but they are worth repeating.

China Risen

After three and a half decades of China rising economically, it has finally risen to reach parity with the U.S. in physical size of Gross Domestic Product.

Thirty six years have now elapsed since Deng Xiaoping released his country from the harsh anti-business Communist economic policies of Mao Tse Tung and pointed China toward a market economy. Since then the innate capabilities of the hard working Chinese people have propelled its economy from a small, weak position (with a GDP less than a quarter the size of America's) to a strong, relatively prosperous position of equal size with the highly efficient American economy.

Here We Go Again – Another Bubble

In the past 33 years investors have experienced three huge bubbles in the stock market (oil stocks in 1979-80, technology in 1999-2000, and housing and financial stocks in 2003-6). In each case investor enthusiasm drove the shares of a group of companies that were generating exceptional profit growth at the moment up to ridiculous, unsustainable price levels. Then, when earnings gains slowed down, to a more normal pace or less, stock prices collapsed. Declines over the ensuing two years ranged from 45% for oil shares, to 85% for the tech group, and 85% for both housing and financial stocks.

Today we ' re well along in a different kind of bubble, but certainly it has reached a precarious state of risk. Surprisingly, this one is in bonds, good old stable bonds.

Building Capital: A Crucial, and Difficult Activity

For the great majority of individuals, businesses and non-profit organizations, few activities are more essential to their long-term well-being than building capital. And the process of doing that is often difficult.

Evaluating Investment Performance

Americans love to keep score, whether it's for sports teams and the performance of their players, the changing rank of billionaires (as compiled by Forbes magazine), or in a more serious vein evaluating corporate profits and assessing the figures in government budgets, or many other things. But nowadays no group is more obsessed with "how'm I doing" than investors.

Still in the Game

There's a new word gaining usage these days: Declinism. (In fact, it's so new that it's not in the dictionaries most of us have on our shelves.) On this side of the ocean, declinism refers to the expected deterioration of the economic strength and global geopolitical status of the United States. Elsewhere it's being applied, with more justification, to many European nations and a few others, like Japan.

The Perils of Complexity

Five years ago, just as the financial crisis was about to erupt, I wrote about "the new financial world", summarizing a series of dramatic changes in the way key elements of the financial sector were functioning compared to the past and citing the many new financial instruments that brilliant mathematicians, the "rocket scientists" of Wall Street, had developed. I said most of these were very complex and potentially risky trading vehicles. But little did we know then how badly they would turn out!

2011 - A Mixed Bag

Investors would have been well served to hit the snooze button a year ago. Though not without excitement, 2011 will go down as the stock market's most volatile year in recent memory but, surprisingly, it concluded just a short putt from its starting point. We discuss the elements of an interesting but fruitless year for most investors.

Investment Wisdom Persists

Common sense is a key element to wisdom, and wise advice is timeless. Some thoughts on the "Predictables" that lead to good long-term investment decision making.

China: Great Success But An Enigma

China is a behemoth that has periodically dominated the global economy and then gone into periods of relative insignificance. This discussion looks at both China's past and the issues that could derail its current rapid growth.

Dividends Do Matter - A Lot

Over the long span of history, dividends have represented a larger part of your portfolio returns than you might expect. Learn how dividend paying stocks enhance your portfolio's performance.

Ebbs and Flows of Stock Sectors' Popularity

Beware of the temptation to follow the herd and buy the most popular stocks. Three rules of thumb to avoid getting caught when the music stops.

Is Anyone Looking Out for You?

The answer is "Yes" if your interests and those of your investment advisor are aligned. Learn what to look for.

No Lake Wobegon for Investors

In this timeless piece, Mr. Perry discusses the risks of chasing short-term investment performance, the reasons why investors fail to achieve superior long-term returns and suggests ways to avoid some of the most common mistakes.