More on “The Lost Decade”

There was quite a bit of commentary on yesterday’s Wall Street Journal article on The Lost Decade for stocks.

Our view is that readers of this article should give it a careful and critical look, examining the evidence and the conclusions.  We think that many investors will uncritically accept the basic premise, choosing some other asset class at exactly the wrong time — an expensive decision.

Other Viewpoints

Partly because we feel so strongly about the article, we had a special interest in the reaction of others.  All of the sources below are people that we respect and read regularly.  None of them seem to share our basic concern with the work .  We believe that it was an opinion piece presented as objective research, something that characterizes much of the current mainstream media.  [Thanks to Abnormal Returns for making sure we did not miss anything good!]

David Merkel does not find  this evidence as a good reason either to increase or decrease stock allocations, although he sees more difficulties ahead.

Tim, at The Price of Everything, has similar concerns about current risk.

Gaius Marius cites some other blog commentary, and concludes, "the likely course of aggregate stock prices is significantly lower in real terms."

Bill Rempel has a strong statistical analysis that is well worth reading.  Please check out his own interpretation of the results, but one key statement is the following:

The best that can be said is, in the modern post-WWII era,
low-returning decades like the one just past are typically followed by
average to above-average decades. What’s to worry?

Bespoke Investment Group provides one of their typically attractive charts and concludes, "While the returns could easily get worse, periods that have been this
bad have not lasted longer than 4 years (1937-1941) before they’ve
started to get better."

We especially like the discussion from Kevin Price at The Float (now added to our list of recommended sites).  He points to a 2004 story from the Financial Times (free subscription required).  This story is much more balanced than the WSJ piece.  One can also see how that advice from 2004 would have worked. [not so well]  While he sees the potential for more multiple compression in large cap stocks, he notes that there was plenty of opportunity during the decade.  He also observed the negative market effect from the CNBC commentary.

This is the closest analysis we saw to anyone who saw the impact of this story on the individual investor, perhaps because Peter’s company and ours are in touch with that clientele.  Many bloggers are more attuned to professionals who are expected — rightly or wrongly — to be able to spot such issues.

The thoughtful commentary from these sources, and those we cited yesterday, could help an investor to make wise decisions.  Unfortunately, the readership for these articles is much lower than for the WSJ.  A recurring crucial question at "A Dash" is how much work an investor is willing to do to gain the best information.

TCA-ETF Update

Each Thursday we update the sector ratings and current results from our TCA-ETF model.  There has been continued shifting, since money is moving rapidly among sectors.  This is not ideal for any method that includes trend as a component.

Most investors and traders have difficulty with trend-following models in gyrating and declining markets.  It is frustrating to switch around, often taking losses.  Those experienced in such methods understand that the point is to be on the right side of big moves.  There have been some changes since this list was generated (always delayed by a day or so).  Interested readers can get a complete report on the overall system performance from an interesting and unique test.


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  • Bill aka NO DooDahs! March 28, 2008  

    My concern was not so much that it was “an opinion piece in research’s clothing,” but that it was just … stupid, out-of-context, useless crapola. I got pinged with that article twice that day, and my response both times was “it needs a beating.”
    I certainly tried to aim my post at the DIYer who may be unduly influenced by negative hack pieces like that one in the War Street Urinal, since I peppered the post with phrases like:
    “… presenting the fact that the last so-many-days/months/years have underperformed, without presenting contextual information or actionable strategies, is the kind of “infornography” that gets read by the “Bloomers Babe” in a 15-second slot from the trading floor, but doesn’t do a damn thing to help anybody.”
    “With foreign developed and emerging markets, commodities, REITs, and foreign and domestic bonds all easily available through mutual funds and ETFs, there is no excuse for passive players to not be diversified!”
    “… keep in mind that, for active players, the indices’ performances are irrelevant.”
    “Your system, your asset allocation, and your personal triumph over the fear and greed responses you have to the market, will be the REAL determinants of your success.” ~ which I believe I left as a comment here yesterday.
    I’ve long ago given up on the idea of “unbiased media,” and while the “news” content of the Urinal might be as useful as “news” can be (marginally so), I found precious little (actually, I found nothing) of use there for the DIYer who wanted to improve their trading (ahem! “investing”) process.
    I share your lament that content which might be of actual value to the improvement-seeking DIYer is rare, and much less widely read than content which is useless or actually deleterious to them, but you gotta admit, that’s where the market is! What we do, the audience we try to reach, is a NICHE.

  • Shrek March 28, 2008  

    Its the ever increasing amounts of cheap credit that have been elevating asset prices for at least a decade. Sure, some asset classes will continue to rise, but if they are backed by suspect collateral its going to be a lot tougher.

  • Bill March 28, 2008  

    I actually laughed out loud when I read the WSJ headline. The worst decade for stocks since the 1970’s? That’s not exactly a lot of decades to look at.

  • gaius marius March 28, 2008  

    thank you for the undeserved mention, dr. miller. i should try to contextualize my quote — i personally think this high-fear environment is a good risk to go long for the intermediate term, though that doesn’t come through in my post. but i do also have longer term valuation concerns that lead me to think there will probably be further compression of the earnings, dividend and book ratios at some point in the next handful of years.
    thanks again!