Time and again, commentators on this blog get angry with me for suggesting it is rational to avoid investment in shares.
This morning the bFT agrees with me, via its Alphaville column.
It turns out that over the long-run a rising tide has lifted far from all stocks. Like not actually lifted them at all.
The median global stock as an investment has been worse than local cash instruments or dollars in a cookie jar.
That’s a finding based on the work of Arizona State professor Hendrik Bessembinder.
So, three questions.
First, why all the nonsense claimed about saving in shares when most destroy value?
Second, why the myth that capitalism works when very clearly it does not? The only companies that break the noted trend enjoy actual or quasi monopoly power.
Third, why do we waste so much money on the financial services sector when they deal almost excessively very in failed commodities?
It’s time for different thinking,
So, the actual Bessembinder finding:
Investments in publicly-listed U.S. stocks enhanced shareholder wealth by more than $55.1 trillion in aggregate during the 1926 to 2022 period, even while investments in the majority (58.6%) of the 28,114 individual stocks led to reduced rather than increased shareholder wealth.
That’s a pretty big jump in wealth there. And his other piece:
So, what did I say in my paper regarding the implications of my research for investors? Rather little. I made note of some new ammunition for each side of the great active versus passive debate, but I did not advocate for either.
Research indicates that it is difficult to improve on the results delivered by broadly diversified index investments.
So, err, his conclusion is exactly the opposite of the one Spud arrives at.
Funny that, eh?
In fact, Bessembinder is insisting that the individual investor absolutely should make use of the services of financial managers:
This consideration points to passive index strategies for those investors who are not well equipped to evaluate investment managers. On the other hand, it makes sense for some investors, particularly those who are larger and more sophisticated such as pension fund and endowment managers, to search for talented investment managers.
Isn’t it just so odd that Spud can’t grasp that?
Finds one line in the paper that agrees with him so everything he’s ever said is proven correct.
Does he never step back and consider if his arguments pass the smell test? The financial services sector looks to be making a shit load of cash to me (10% of GDP?) so maybe it’s doing something right?
I can’t say I’d be particularly interested in the opinions of an obscure professor of a hick university Any more than I would any random Nobel economics prizewinner. How many billions do they bring to the battlefield?
I might be interested in the opinions of someone’s made a lot of money.
If 58% of stocks are duds then 42% make money. I’m not sure what $55 trillion over a century is in annualised terms but I’d guess at somewhere around half a shedload.
“ The only companies that break the noted trend enjoy actual or quasi monopoly power.”
That’s utter bollocks. Look at any list of the best long-term performing shares and they’re in very competitive businesses.
Sure, some of them depend on IP rights, but since this report is looking over decades (nearly a century), they’ve had to create, develop and market those rights, time and again – and there’s been plenty of competition in doing that.
Best performing stocks over 30 years (might be a US list, but never mind):
http://www.kiplinger.com/investing/stocks/603777/30-best-stocks-of-the-past-30-years
Apple
Microsoft
Amazon
Alphabet (google)
Tencent (Chinese online)
Tesla
Walmart
Meta (Facebook)
Samsung
Johnson & Johnson
Taiwan Semiconductors
Berkshire Hathaway (investment vehicle)
Nestles (chocolate)
Proctor & Gamble (soap & stuff)
Exxon
JPMorgan
Home Depot (Yankee B&Q?)
Kweichow Moutai (Chinese booze)
Visa
Roche (healthcare)
Mastercard
Alibaba (Chinese eBay?)
United Health
Altria (fags – Marlboro etc)
Intel
Coca-cola
LVMH
Oracle (software)
Disney
Nvidia (graphics processing units)
I’m not seeing anything there that’s got there by just sitting back on a monopoly position. OK, perhaps Disney, and I don’t know about the Chinese ones.
But the rest, even where they’re relying on IP, have had to develop that IP in a competitive market over the last few decades, and certainly over the 100 years this study is looking at.
“it makes sense for some investors, particularly those who are larger and more sophisticated such as pension fund and endowment managers, to search for talented investment managers”: that’ll be those pension funds that had a calamity with their investments recently because they had invested in long Gilts without laying off the bet. Them ‘uns?
Had a look at the AV article, fun enough, the BOJ/ETF one is much more amusing.
Although I do wonder why Bessembinder is rolling over 1-Month Bills as the comparison, as opposed to running the same analysis using, say, 3, 5 and ten year bonds?
As far as I can see (no, I haven’t read the papers), all he’s really discovered is that securities already assumed to be riskless, with a very short life, outperform ones already assumed to be more risky in the first damn place, over much longer timeframes. This is apples and oranges stuff.
I mean, Duh.
If Richard Murphy knew anything about investing, he wouldn’t be feverishly working any leftist grift he can find at a time when he should be tidying up for a comfortable retirement.
“Although I do wonder why Bessembinder is rolling over 1-Month Bills as the comparison, as opposed to running the same analysis using, say, 3, 5 and ten year bonds?”
Because he wants to compare cash to equities. I imagine the world and his mum have already compared bonds and equities.
Well, yes, but maybe he should actually compare cash to equities, by sticking a wedge under the mattress for a hundred years and see what happens.
The underlying research may appear interesting, but is actually pretty obvious. It’s saying that if you scatter a very large number of apple seeds over a big area, then hardly any will grow into trees. But that doesn’t mean that we can’t get an orchard by that method – the behaviour of lots of small actions is not merely the behaviour of one small action scaled up.
Is this idiot seriously suggesting that investing in equities hasn’t been the best or among the best builders of wealth in the last 100 years?
Here in OZ, the stock market has returned 13% on average since 1900 (not sure if that includes dividends). In a first world economy that’s outstanding.