Investment Performance

Investment Performance: Charting the Stock Market’s History To Find Where the “New Money” Is

By Dr. Steve Sjuggerud, President, Investment U
Monday, December 23, 2002: Issue #199

It’s a new year, and it’s time for some new thinking about making moneybecause, quite frankly, the “old thinking” isn’t working.

The old thinking is “buy and hold.” But with the average stock mutual fund down 20% this year, most investors who subscribed to the “buy and hold” thinking lost money. That makes the third year in a row that the old way of thinking has lost money.

The old thinking is that stocks are always a good investment for the long run. The one message that you absolutely must take from today is that this is not true. There are occasional times throughout history when stocks in general are a bad investment. And now is one of those times.

In recent E-Letters, I’ve shown you that when stocks are expensive, they might not be a good investment. What I’ll say right now may be hard to believe. But it’s true: Even after falling for three years, stocks are still more expensive now than at any previous stock market peak. In today’s issue, we’ll review investment performance classes since the late 1960’sto see if we can find where the money is today.

So, If Stocks Are Still Expensive, What Might Work Now?

The last time in recent memory we had a stock market peak, where stocks were expensive and interest rates were low, was the late 1960s. In 1967, interest rates were below 5%. And stocks traded near 20 times earnings. This was very similar to the late 1920s, where interest rates were at 5% or less, and stocks traded at 20 times earnings. And it’s similar to today, where interest rates are at less than 5%, and stocks are above 20 times earnings (they’re actually at 30 times earnings today).

What I’d like to do is take a look at our last peak in stocks – the late 1960s – and see what investments performed best after the stock market peak back then. Then we’ll draw some conclusions about what might work now

After the stock market peak in the late 1960s, stocks fell for a long time. In 1980, stocks actually became very cheap, trading at less than seven times earnings. (Now that’s cheap!) However, interest rates in 1980 were in the double digits.

Charting Historical Investment Performance

Let’s see how different investment classes performed annually from 1968 to 1979, after the stock market peak of the late 1960s.

19.4% Gold
19.1% Chinese ceramics
18.9% Stamps
15.7% Rare books
13.7% Silver
12.7% Coins (U.S. non-gold)
12.5% Old masters’ paintings
11.8% Diamonds
11.3% Farmland
9.6% Single-family homes
6.5% Inflation (CPI)
6.4% Foreign currencies
5.8% High-grade corporate bonds
3.1% Stocks

I’d like you to notice a few things here

1. Note that stocks were the worst performing asset class out of all these classes from 1968 to 1979. Clearly, stocks are not always the best way to generate wealth. There are 12 years where they were the worst choice you could make.

2. Second, note that stocks didn’t even keep up with inflation, which ran at 6.5%. In other words, you lost money in stocks over that 12-year period if you take inflation into account.

3. Finally, note that the things that were out of favor in the height of the stock market boom (investments such as gold and silver, coins, property, etc.) were the very things that performed the best after the boom had ended.

It’s Time To Consider Investments You May Have Ignored

I could go on. But you can read the table and draw your own conclusions. The simple point is, after stocks were expensive, people didn’t make money in stocks for at least a dozen years. Meanwhile, asset classes they’d never considered before did extremely well.

So, this year, decide that the old thinking is out. That “buy and hold” won’t work. And decide that you’ll learn more about other asset classes than stocks.

I’ll be right here to help.

Good Investing,

Steve

Today’s IU Crib Sheet

After the market peaked in 1968, stocks were the worst-performing asset class for about a dozen years, judging from the table above. That table is from Burton Malkiel’s A Random Walk Down Wall Street, a pretty darn good investment book even if I don’t agree with his thesis.
Check out the following special report I recently put together for Investment U subscribers: 12 Timeless Rules of Investing: Guidelines Every Investor Should Embrace, But Few Actually Do

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