Reasons to Avoid Buying Stocks, and

Why You Should Ignore Them

NYT
Published: February 22, 2013

THERE are always reasons not to buy stocks. Investors may think the Dow
Jones industrial average is too high, as was the case in 1954 when the index
topped 360. In 1941, there was Pearl Harbor. In 1962, the Cuban missile
crisis. In 1997, the Asian financial crisis.
The list, adding up to 78 for each of the years from 1934 to 2012, was
compiled by Bel Air Investment Advisors.
But the punch line to this list was that stocks went up by an annual
compounded rate of 10.59 percent over those 78 years, with occasional
plateaus, and that $1 million invested in 1934 was worth $2.4 billion in
2012.
As for the last three years, the list singled out the European financial crisis in
2010, the downgrade of United States credit rating in 2011 and the political
polarization of 2012. Investors were, in fact, generally reluctant to buy
stocks. Yet in each of those years, stocks either rose in value or, at worst,
were flat.
The reason for such hesitancy is obvious. Investors are still scarred from the
2008 crash and they perceive stocks as risky, a feeling reinforced by a good
bit of volatility in the markets in recent years. Yet as stocks rallied earlier
this year, money from individual investors began to trickle back into equity
funds. This could be good for an intrepid few.
The stock market is the same place it was in 2000 with double the
earnings, said Todd M. Morgan, senior managing director at Bel Air
Investment Advisors. Stocks are set to outperform bonds over the next
three to five years.
This may very well be true, but most people still think fearfully about stocks.
What would it take to get more people to buy stocks? And by this, I dont
mean going all in as investors did in the late 1990s, but creating some
semblance of a balanced portfolio.
Mr. Morgan and other advisers said that investors are being misled by talk
about near-record levels for the Dow Jones and Standard & Poors 500-stock
index today. When adjusted for inflation, the levels approached earlier this
year are not true highs. A new high for the Dow, for example, would be
around 15,600.
What is more telling are the earnings and dividends of companies. Niall J.
Gannon, executive director of wealth management at the Gannon Group at
Morgan Stanley, calculated that the dividends on S.& P. 500 stocks were

$15.97 in 2000 and $31.25 in 2012. Earnings per share were $56 in 2000
and $101 in 2012. In other words, two major measures of a stocks
attractiveness have doubled in the last 12 years, but the index has not kept
pace.
A big mirage is going on in investors minds, Mr. Gannon said. They think
stocks are expensive because theyve used index levels as the measure.
And investors arent confident that stocks will continue to rise, given the
volatility in recent years. They may well fall in the short term, but over the
next few years they are more likely to give investors a better return than
bonds. Mr. Gannon pointed to an earnings yield on the S.& P. 500 of around
7 percent.
But these are rational arguments for individual companies. They do not
account for concerns that the actions of the Federal Reserve have skewed
stock prices, another rational fear.
Michael Sonnenfeldt, the founder of Tiger 21, an investment club whose
members each have at least $10 million to invest, said the feeling from the
groups annual conference was that the 14,000 level on the Dow was
worrisome because it could be the result of all the money the Federal
Reserve has put into the system and not based on company fundamentals.
The group, he said, was also worried that the Federal Reserve, having kept
interest rates artificially low for so long, could have created a situation
where investors suddenly demand higher interest rates at a government
bond auction. A crisis like that could lead to deflation, and not inflation
where stocks are considered a hedge.
Whats telling is that Tiger 21 members reported increasing their allocation
to equities by 3 percentage points in the last six months. Its not a
stampede, he said. The focus has been on dividend-paying stocks, not
growth stocks or tech stocks.
For people with far less than $10 million to invest, the catalyst to buy stocks
will probably be losing money in the bonds they own. Over the last three
years, youve lost out not being in stocks, said Bernie Williams, vice
president of discretionary money management at USAA Investments. But
you still made money in bonds. From that perspective, investors are not
really feeling the pain.
There is an alternative view, of course, that says the unwillingness of people
to invest in stocks now is completely normal and that what happened in the
1990s with stocks and in the 2000s with real estate were anomalies, at least
for average investors.
The alternative to investing or saving is spending today and that is always
infinitely more pleasurable, said Don Phillips, president of investment
research at Morningstar. Throughout the 80s and 90s, you had this
amazing bull market and it gave you this immediate gratification that
usually only spending gives you. Now weve been through a more realistic
period, and people realize that is not always the case. The reward is
deferred, and there may be severe losses.

Mr. Phillips noted that if people were able to pick a winning stock 55 or 60
percent of the time, they would be remarkably successful. But in spending
money on something they want today, their success rate is automatically
100 percent.
I think for a mature American adult, investing should be an expectation,
Mr. Phillips said. So much of the discussion around the recent tax increases
is that investing is something only the 1 percent does. That fuels this mindset that makes investing seem unrealistic for most people.
Greg B. Davies, head of behavioral finance at Barclays Wealth and
Investment Management, said people could persuade themselves to
increase their allocation to equities by joining investment clubs where the
group, in theory, would be better at making a decision that was painful.
People could also slowly buy the stocks they want, a process called dollarcost averaging.
The classical economics position on all of this is that it is irrational and you
should ignore it, Mr. Davies said. Thats not very helpful advice. We do
have an emotional response.
He said he would instead encourage average investors to forget about
maximizing their risk-adjusted returns and aim for their best anxietyadjusted returns.
For those with more fortitude, the simplest solution is to take the long view
as in 10 or 20 years, which is a lot of delayed gratification.
Whenever youre having a discussion like this, time horizon is a key
consideration, said Bill Stromberg, head of global equities at T. Rowe Price.
Most investors have been conditioned to think the next six to 12 months
out. Its too hard for anyone to predict whats going to happen then.
And while no one I spoke with expected stocks to return to double-digit
returns year after year, a simple argument could be made for a return based
on a dividend of 2 percent and earnings growth of 5 to 6 percent.
Thats not a home run for anyone, but its better than you get in bonds,
Mr. Stromberg said.
It is entirely possible that stocks will lose value across the board this year or
the stocks you pick will fall significantly. But that is why every adviser
stresses diversification and a long view. What matters is how a portfolios
returns look in a decade or two, not tomorrow.