On the heels of just a horrendous market and game-changing moves by the U.S. Government to appropriate invest salvage prop up large financial institutions, investors are left holding the bag. Equity prices are being driven as much by the outcome of government intervention as it is by long-term views of cash flow.
The rules of investing are being rewritten before our very eyes.
What’s changing
Buy and hold called into question
US stock prices have fallen more than 60 per cent in real terms since the market peaked in 2000. Retirement investors are wondering what went wrong. Even if they did everything by the book, many of their plans for retirement are called into question. These investors are questioning what the role of stocks should be in their portfolios.
In a recent FT article, a lot of inked was spilled over an upcoming article by Robert Arnott for the Journal of Indexes. Says Arnott:
“It supposedly didn’t matter how long you waited. But the notion that the long run will bail you out no matter what stupid things you do in the short run I think is dead. And the notion that if you have the better asset class it doesn’t matter what you pay for it is on its deathbed.”
While mutual funds companies and the tax code promote buy-and-hold investing, it’s clear that just buying and holding for the rest of your life is fraught with more risk than most investors were aware of. Owning an index and passive investing a la John Bogle and Vanguard meant that these investors still lost a lot of money. As more companies become quasi-State owned entities, investors need the tools to assess what all this means for their portfolios. I don’t think the tools exist to do this and the silence is deafening from the once-mighty investment banks and their equity analyst minions.
Changing times requires a change of mindset
Bill Gross, of bond monolith PIMCO, said in his April market commentary on PIMCO’s web site, that we’ve entered a new world of economics and investing, one in which “there should be no doubt that the bull markets as we’ve known them are over and that the revolution is on. Investing is no longer child’s play.”
As per the Guru Investor blog, Gross explains that the future of investing will depend on the future of the global economy:
“rewards spring from beginning prices and valuations that correctly anticipate the global economy’s future growth path and volatility. In terms of that old maxim ‘buy low – sell high,’ this means at the minimum that an investor during this period of re-rating must ‘buy low.’”
Gross continues:
Gross says investors should favor stable income rather than speculative growth or the subordinate liability structures of most private market balance sheets, and “shake hands with the government”, as PIMCO has done recently in snatching up investments that are or likely will be backed by the feds.
Investor Relations woefully behind the curve
In speaking to a financial journalist last night about how some forward-looking corporations are turning to social media to help get the word out (eg. eBay twittering their investor calls), it made it clear to me that by definition, advances in financial communications are always going to move slower than the market. While the demand for financial information is growing, companies, in a post Regulation FD world, may be communicating more frequently with investors, but they’re not doing it better. There are a lot of reasons why this may be the case but the adoption of social media by publicly traded companies is definitely a lagging indicator. We need the regulatory and structural architecture of the markets and the companies that comprise them to catch up with the sorely lacking investor’s demand for understanding.
The future renaissance of investment research
This financial crisis has essentially torn down the walls of traditional research houses. In its wake, we have literally thousands of analyst-bloggers writing about individual securities and macroeconomic issues from a variety of standpoints. Many of these bloggers have day jobs while others are entirely focused on their research.
I’ve written before about how the remaking of traditional investment bank driven research has found a splintered milieu with numerous different voices each promoting their own screed. While the volume and quality of sheer investment research must be growing exponentially with the advent of the financial blogosphere, this hasn’t helped the majority of self-directed investors make sense of their portfolios as a whole. Investors may be able to find more research about high dividend stocks in the wake of a weakening dollar (as my friend, Cliff, is doing such a great job writing) but they don’t understand risk or the long term prospects for their asset allocation any better than they used to. We need professionals and new tools, beyond the great stuff happening in the personal finance space like Mint.com, to fill the void.
Hat tip: The Guru Investor
