Taking Stock: Will longtime ownership return?

Dear Mr. Berko:

The past 10-plus years of this market have been a wild ride both up and down. This volatility makes investors like me think of the stock market as the Big Casino in the Sky. If the market maintains its wild ways, people like me who started investing in the 1960s with a feeling of comfort, will stay out because we are afraid of losing money as we did in the last decade. Will this market ever return to the time when you could own a stock for 10 years? This may be a boring subject, but I think it’s an important one, and I would appreciate your comments.

G.P., Moline, Ill.

 

Dear G.P.:

 

Bingo! You hit the cue ball square.

 

Most folks use brokers who have been in the business during the last 10 to 20 years. These lads have been weaned on a market (1990 to 2009) that created a generation of investor/brokers whose reference and knowledge are a result of excessive optimism that derive from the tech and housing bubble years and unbridled bearishness – again, the result of the tech and housing bubble years. 

 

And like Major League Baseball, Wall Street was on speed and steroids. And like baseball, Wall Street has its “hall of shame.” So unless you’ve been in the market since the early ‘50s or ‘60s, you’re unlikely to experience the true nature of cyclical bull or bear markets. 

 

What post-1990 investors know as the norm is an S&P that was built and destroyed by volatility and momentum. In 15 of those 19 years, the S&P gained or lost more than 20 percent. And by comparison, in the 39 years between 1950 and 1989, the S&P lost or gained 20 percent only 11 times. Meanwhile, the 1990-2009 generation experienced the lowest interest rates and the most enormous housing bubble in U.S. history. 

 

Well, all of this is ending abruptly as a rabbit’s tail. Investors and brokers who relied on volatility and momentum realize that their successes were the exception, not the rule. Near-zero interest rates are ending, and stock returns will approximate their long-term historical averages. Interest rates will rise and return to normal levels, and people who put money in bonds and bond funds will understand that they can now lose money from interest rate risk as well as credit risks. 

 

Today, the momentum analysts, technical analysts, volume analysts and chartists who have made money during the last 20 years are having trouble finding opportunities. And, as one technician recently told me: “My charts are not finding traction ... the patterns are not presenting themselves.” 

 

Today’s investor/broker doesn’t know how to read a financial statement. And the few who do are skilled in finance rather than accounting and consider long term as that time span between summer and winter. The art of picking stocks has almost been forgotten and replaced by computers that make choices “lickety split, from there to there and back again in the blink of any eye.” 

 

But a big change is coming, and I am glad for it. I was always comfortable with Graham and Dodd’s 1934 publication called “Security Analysis,” which is Warren Buffett’s stock market bible. 

 

So if you are a product of the 1990-2009 markets, then I suggest that you gird loins for good change that makes sense. There will be a return to the stock market of your fathers and grandfathers, in which making money was a function of logic, intelligence and the basics of cash flow, net profit margins, return on equity and capital, and book value as espoused by Graham and Dodd. 

 

And those of you who have read this column for the past 30 or more years know that capital ratios, dividend growth, etc., always figure in my analysis. I let my fingers turn the pages, not a computer program. The future belongs to those who posses what a retired University of Florida professor, John Spanier calls “Fingerspitzengefuhl!” 

 

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.

© 2010 Creators Syndicate Inc.

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