Bloomberg reports that bonds beat stocks for the 30-year holding period ending September 30, 2011. These are US Treasuries and US stocks. This is the first time that bonds have beaten stocks over a 30-year holding period. Bonds have achieved that distinction over shorter horizons. Over the long-term, the volatility in stock returns that are witnessed over shorter horizons should be smoothed out. Hence, those who can genuinely buy it, shut it and forget it were supposed to be rewarded for their doggedness and willingness to keep stocks as illiquid assets. But, that is in a world where fundamentals matter.
Stocks have become the favoured asset class for various players in the market place for reasons other than sheer investment returns and providing for the future. It is a test of virility and optimism for policymakers and analysts now. They are rewarded for being optimistic not for being rational evaluators of value (which includes ‘growth at a reasonable price’). Stocks have done so poorly – in relative and in absolute terms – because dividend yields have been marked down, literally and metaphorically. Dividend stocks are boring stuff. Growth stocks are exciting, for analysts. They look like heroes when stocks reach 400 dollars within months of their prediction as Amazon did in 2000. Some of them are now reformed souls, no doubt.
Growth stocks are exciting for firm managers. Their options become more valuable. Returning cash to shareholders is not going to pump up the value of their stock options. What would they do if there is no cash to engage in their macho M&A games that temporarily boost their option values, their image, etc.? So, dividends are for sissies.
Stocks are exciting for investors who seek adrenalin rush in what they do. They satisfy the inherent gambling instinct in us. Dividend stocks are too boring; too safe. No kick.
When would stocks become safer, at least for the long-term?
Not in the near future. Sample this. Either the corporate leaders who issued this statement are stupid or they think we are stupid to believe that political leaders can spark economic growth.
Business leaders from the world’s leading economies are set to press for firm action on growth, trade and social issues at this week’s G20 summit in France, warning of the dangers of political disaffection.
Obsession with growth won’t help. Return to realism would facilitate a return to the bottom from which lasting gains can be achieved by owning stocks. Neither investors nor business leaders are ready for it nor are they bothered with their own long-term interests. In a sense, the failure of stocks to deliver long-term superior investment performance mirrors all that has gone wrong with our societies in the last three decades.
Another trigger for stocks to become favoured long-term investments is when Professor Jeremy Siegel turns pessimistic on stocks.
Societies may reform or re-generate but I doubt if Jeremy Siegel would change his views on stocks. He is trapped in a time-warp.