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What If Equities Are Dead?


Bottom line: Take profits when you have them.

Greetings from New York, where we're taking a trip down memory lane, sparked by yesterday's anniversary of the Miracle on Ice. Young Minyans don't remember those days firsthand but we gray beards do.

In 1980 the US was getting mocked and boot-stomped around the globe. Our military couldn't handle Iran let alone the evil Soviets and our global impotence led to an energy crisis with no end in sight. Yes, kids, back in the day, OPEC was a group of bullies as opposed to their current status as self-defeating clowns.

In 1980, America was suffering a "crisis of confidence" so bad that President Jimmy Carter famously slit his own political throat with his infamous "Malaise Speech". The actual speech was a call to arms but is remembered as a 30-minute whine-fest and Carter was drummed out of office in short order.

Carter made his speech six months prior to the Miracle. Not coincidentally, this was just one month after the most famous cover story in Wall Street history, BusinessWeek's "Death of Equities" prophecy of doom which hit the news stands on August 13, 1979.

As noted by Kevin Depew just yesterday, it often pays to be on the other side of magazine covers. BusinessWeek barely missed the bottom of a seven-year slump that saw stocks going nowhere. After a deep recession in the early '80s, the market snapped back in 1982, beginning a rally that paused briefly, albeit painfully, for the next 16 years. By 1984 it was morning again in America and it seemed everyone was invited to the party.

Losing My Religion

I'm not here for patriotic chest thumping. We don't need it. Today the debate isn't whether or not America is a second-rate, rusting Super Power. The country is able to project its power throughout the world. September 11, 2001, turned us into something resembling an international Kaiser Souze: Cross the US and we'll take out your government, your citizens, your friends, and anyone you know provided they don't have the money or power to make them more valuable alive than dead. Save for some whining about China, the American machine has never looked better, relative to the rest of the world. We may be sowing the seeds of our destruction but in the here and now where would you rather be?

The question isn't one of self-esteem. We're America, dammit. The question for investors is whether or not being the best in the world makes it worth getting a piece of the action via stock investment.

The answer is, "not for the last decade".

S&P 500 August 1998 to Today: Unchanged

It's enough to make a dedicated stock head such as myself want to chuck the whole game and fulfill my true destiny as the lead singer of a boy band. Here's some other conclusions to be drawn from almost 12 years of absolute nothingness:

  • If equities aren't dead, blind faith in "buy and hold" should be. The thing about buy and hold, or "investing like Buffett," is that it was always a bit of snake oil. Companies have life cycles and in the very long run we're all dead. Even if you've held blue chips like Microsoft (MSFT) (up a mere 3.5%), Intel (INTC) (down 21%), or Enron (dead).

  • The gloom isn't tech or scam specific either. 1998 was just the start of the turn-of-the-century bubble. Coca-Cola (KO) is down 20%, Washington Post (WPO) is down 19%, and General Electric (GE) has fallen a jaw-dropping 65%. Curiously, Berkshire Hathaway (BRK.A) itself, which of course owns huge stakes of Coke and Washington Post, is up 85%. It helps to have a national icon at the helm.

  • Trading isn't the answer for most, despite the obvious volatility. Trading is a full-time job as those of us who survived through the Internet collapse know. We tried selling the idea that anyone can trade at the beginning of this fiasco and it ended in tears. Put it this way: Remember those "Let's light this candle!" electronic broker commercials? Stuart, the trader's boss, was buying Kmart, which went to zero.

  • Adjusted for the falling dollar, US stocks in the last 11.5 years have underperformed: inflation, oil, gold, and comic books.

  • We did beat Japan, which is down for the last 20 years ("USA! USA!").

  • The aughts, as in "I ought to have sold in 1998," were the worst decade for stocks since the 1930s.

  • If you made money trading over this period it's time to lose your amateur status and turn professional.

  • The endless regulatory changes to accounting, trading, and securities laws during the period have predictably benefited only politicians, lawyers, and accountants. Investors are just as susceptible to fraud and losses as they ever have been.

It's a bleak set of observations, I know. If you're looking for solace I can offer the notions that stocks are generally cheaper than they were 11 years ago. What's more, given the amount of strain the system went through over the last decade it's a positive that we're flat. Then again, you can't eat a sense of the glass being half full.

Bottom line is this: Investing is for grown ups. You can't have too much information and it's impossible to be too cynical. Protect your capital, read your Minyanville, and never, ever, be afraid to take profits when you have them; they may not be there by the time you fall out of love with a stock.

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No positions in stocks mentioned.

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