It is tough to keep the buy-and-hold faith these days. This chart of the S&P 500 over the last 10 years shows that had you bought U.S. stocks at any time during 1999 and 2000 you would have less wealth right now in nominal dollars than you did then, i.e., the index is lower today than it was 8 or 9 years ago. You would have received a small dividend yield during this time, perhaps 1.7% on average (source), but that is less than you’d have gotten in a money market or CD and less than inflation, which has been at least 32 percent since 1999 (source; uses the standard CPI, which underestimates cost-of-living increases).
Corporate revenues have grown hugely during this period, if only thanks to inflation. What happened to the investor’s share?
1999 and 2000 was the very peak of the dot-com bubble. Looking back 6 years (to mid-September 2002), counting the recent turmoils, the S&P500 has had average non-inflation-adjusted growth of 4.9% per year. Looking back 12 years (to 1996) the growth is 4.6%. Looking back 20, the growth is 7.7%.
We are also in the midst of a financial market crisis, which has driven the market down. When I did similar calculations a few weeks ago, the 20-year growth was over 8%.
The answer obvioudly is that corporate kleptocracies will plunder as much as they can get away with, given the abysmal state of what passes for corporate governance in America. Normally, they would grab the so-called equity risk premium, but it seems like they got greedy and opted to go for all the returns. I wonder if this is due to the rise of index funds, that won’t even vote with their dollars unlike other punter-investors.
The Belgian financier Albert Frère had a saying that the difference between a small minority shareholder and a large minority shareholder is the difference between a small chump and a large chump. The whole problem of ensuring you are not robbed blind by your employees is called agency theory and subject of much learned treatises in business schools, most of which claim that you should align your agents’ incentives through mechanisms like stock options. Of course, like most B-school theories, they utterly fail the test of the real world and ignore the fact that incentive schemes can and will be gamed.
The only mechanism that can ensure honesty from corporate managers is the same mechanisms tyrants used in the past to keep their governors in line, the use of spies and redundant lines of command competing for their master’s favor.
Best bet would be to look at well-run regional banks, big enough to be nicely profitable but not too big to be run by Wall St. scam artists. As well, companies with products they are sellling overseas, such as maybe Caterpillar, which sells a lot of machinery to Brazil, Russia, India, China (BRIC).
Yup, and if you take into account inflation and the severe devaluation of the US dollar over the same period, the index is down by about a third or so in real purchasing power.
This is nothing new; in inflation-adjusted terms, the S&P500 endured a secular bear market from 1966 to 1982. Those who bought at the peak when LBJ was president did not break even until Bill Clinton was in the White House.
I highly recommend the book “Irrational Exuberance” by Robert Shiller for a more extensive discussion of long-term trends in the stock market.
I am of the opinion that we are still in the midst of a secular bear market which began in 2000; when will it end? My uneducated, blind-stab-in-the-dark is 2018, based on demographic considerations.
Cheers,
Réjean
Today I lost the faith and ended all my investments in stocks. Maybe it comes back, but all experts seem to agree that it is extremely unsure what the future will bring. Too much uncertainty for me. Today 6% interest on a 5 year deposit seems like a very good deal.
What did you do?
Easy. The investor’s share went to management and employees through all the options that were issued. The investors don’t notice because of the slow dilution, but over the long term, like this, it is quite evident. The company benefits from this practice, since it doesn’t need to record this compensation as an expense. (That’s why they continually grow revenues.)
Broadcomm is/was an excellent example of this. They would offer engineers below average salaries and back-dated stock options to make up the difference,plus more.
So the land owner makes money.
the house builder makes money.
the real estate broker makes money.
the bank makes money.
buyer suppose to make money because the house prices were double every 5 years.
So Who looses. If you can answer this.
then you can answer whether stock market is suppose to go up
forever.
Actually, stock options have been recorded as expense in GAAP financials for several years, since the issuance of FAS 123R.