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Since 1996. Good Advice is Weak Advice is Marginal Advice is Bad Advice is Good Advice

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April 13, 2012 – Comments (0)

Every so often I like to take a look backwards into history.

Since the TMF stock charts have been recalibrated to only go back ten years as if that is all that matters in this new age of investing, history begins two years ago, ancient history begins five years ago and uncovering information from over ten years ago becomes an achaeological dig.

Seriously people (TMF people) whats up with that? Coca Cola begins in 2003 in this new age?

Last night I tried to google up some information about what investment advisors were saying in 1950.  After 20 pages of what todays investment advisors were saying about investing years ago, I finally hit upon an article written in 1996 called 'Best Investment Advice;'Use your common sense'. 

It was written in Dec 1996 by Humberto Cruz and published in the SunSentinel, I think. It is based upon an interview with an investment advisor named Bill Berger who managed Berger investment returns to outstanding returns from 1974 - 1994. The 'common sense' quote in the title is his. Here are more;

 Such an approach exemplifies Berger's philosophy - that high-quality, profitable companies make profitable investments. "A true investor," Berger said, "is looking for a rate of return, not to make a profit by trading stocks."

That rate of return, over time, has reflected a company's profits. And that makes Berger optimistic about the future despite stocks' lofty levels. The return on shareholders' equity for the stocks that make up the Standard & Poor's 400 Industrials - basically earnings per share divided by book value per share - has increased in recent years to what Berger calls ''a new plateau of profitability."

"The standard was a 10 percent return," he said, and that has been about the historical return of the stock market since 1926. "The new standard appears to be closer to 15 percent or, for some of the best companies, 20 percent."Based on that measure, stocks may not be as overvalued today as it may appear.

In 1994 Mr Berger retired from the fund and in 1995 the NY Times wrote an article trashing the funds performance with its new manager - kind of a short term outlook. A few years later in 2002 the Berger family of funds were being absorbed into Janus.

Back to the "new standard of returns" Mr Berger spoke about. 

If you were an S&P 500 investor in Dec of 1996 when Mr Cruz wrote his article in only three short years you saw the S&P 500 fund climb from 750 to 1500, a really nice return.

If you were an S&P 500 investor in Dec of 1996 when Mr Cruz wrote his article in only six short years you saw the S&P fund climb from 750 to 800, a really weak return. 

If you were an S&P 500 investor in Dec of 1996 when Mr Cruz wrote his article in only ten short years you saw the S&P fund climb 750 to 1500 which is less than half the rate of return you got the first time it went to 1500, kind of marginal advice.

If you were an S&P 500 investor in Dec of 1996 when Mr Cruz wrote his article in 12 now becoming longer years, you saw the S&P fund climb from 750 to 700, which makes for kind of bad investment advice.

If you were an S&P 500 investor in Dec of 1996 when Mr Cruz wrote his article in 16 now much longer years, you saw your the S&P fund climb from 750 to 1400 which makes his advice good advice again, but not as good.

In the twelve years prior to Mr Cruz's article the S&P climbed from 150 to 750, making Mr Bergers prior success almost a "can't miss" because everything went up.

To me this suggests that something significant has changed for the rate of return on the S&P 500 to go from what was more than 12 years of steady increases to what it has done in the most recent 12 years.

I have my opinions as to what happened to make things different, I think this article by Morgan Housel is correct to say the reasons are many, but fails to mention what I consider the biggest two/three.

The S&P could very well crack that 1500 barrier and go on to greater heights, but I do not think that the underlying factors which created the historical abberation known as the "middle class" are still in place in America. And I think the S&P returns of the 1976 -1996 era depended upon the existance of that middle class to happen.

Despite the optimism of some, I am pessimistic about overall stock market returns.

The other title for this article was "Three Pops and Two Drops".

(since 1996) 

Best wishes,

Steven 

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