Thursday, July 23, 2009

Arguments Against Stocks a Contrary Indicator?

I’ve seen a great many articles lately arguing against investing in stocks. A good example is an article at Falkenblog that argues that the risk premium is actually zero. Canadian Capitalist does a good job refuting the points in this article, but the fact that so many compelling arguments against stock ownership are being written may be an indicator – or a contrary indicator.

Canadian Capitalist concludes that “stocks seem to be priced to deliver a healthy premium in the future,” which is dangerously close to a prediction about stock prices, but I’m inclined to agree. I remain invested in stocks because of the long history of a risk premium, but I’m hopeful that we’re entering a period more favourable for stocks than the last 15 years or so. The flood of commentators arguing against stock ownership make me feel even better about owning stocks now.

4 comments:

  1. Thanks for the mention. I find fascinating that many investors are drawing conclusions based on one data point and ignoring the long-term risks in bonds. 20 years ago bond yields were in the double digits. Today, they are scraping bottom. Where is the future return from bonds going to come from now that the significant tail wind from dropping interest rates has disappeared entirely?

    There are no guarantees but it seems to me that the odds of stocks outperforming bonds are pretty high at this point (over the next 10 years or more; over the short-term, who knows?).

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  2. CC: I agree. Too often when I hear people talk about bonds, they don't seem to understand the connection between changing interest rates and bond values.

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  3. MJ: I don't think many people understand the bond market at all. This is a weakness most investor needs to address.

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  4. Henry: It would be interesting to test bond holders with a simple question: If you are holding a bond that will come due in 10 years, and long-term interest rates rise by 1%, will that increase or decrease your bond's value today?

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