Most people love stocks.
With good reason.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Positive Emotions Toward Stocks
The average long-term return on U.S. stocks is 6.5 percent real. It’s the strength of that return that makes retirement a realistic possibility for most of us. Most of us understand that being able to participate in the economic growth of our nation by owning stocks is a wonderful thing and experience positive emotions about this asset class as a result. Say the word “stocks” and most of us experience warm emotions.
But it is not a good idea to feel only positive emotions in regard to anything you buy. A person who loves, loves, loves cars is likely to get taken in the purchase of a car somewhere along the line. The same is so of a person who loves, loves, loves houses or big-screen televisions or shoes or anything else.
An effective purchaser of cars is someone who is well aware of the virtues of cars but also at least somewhat aware of how car buyers are sometimes induced to act in ways not serving their own interest. A person who appreciates that there are some cars that offer less than an amazing deal for the money charged is better positioned to identify the car-buying opportunities that constitute amazing value propositions.
Negatives To Stocks
Yes, stocks are great. But there are negatives to stocks. The biggest one is that stocks are the asset class most likely to bring to life the Get Rich Quick urge that resides within all of us. As a people, we can price stocks wherever we please. There’s always a temptation to price them too high and thereby to push the long-term return to a place much less than what the economic realities would justify. Buying stocks heavily at such times can cause an investor to experience the pain of a price crash, which can serve as a devastating setback to his or her hopes for achieving his or her financial goals.
Stocks are bad!
Not in an overall sense. In an overall sense, stocks are good. But stocks have their bad aspects. The overall reality is that stocks are mostly good with some bad aspects. It is when we lose sight of the bad aspects that those aspects become dominant because it is only by being aware of the bad aspects that we can act to limit them. Those who truly appreciate what’s good about stocks want all investors to be aware of what’s bad about stocks so that stocks can become more good than they have ever been before.
All of this is baby talk. What I am saying here is so obvious that it should not need to be said. Unfortunately, recent stock market history shows that it does need to be said. Today’s CAPE level is an obscene number. It puts a dark cloud over our nation’s economic future because high stock prices cause price crashes and price crashes cause economic contractions. Today’s CAPE level is telling us that we have come to love stocks too much, that we have become so blind to the negatives of stocks that we are hurting ourselves.
There are times when the CAPE level tells us just the opposite, when it tells us that we have come to love stocks so little that we are pricing them at levels far below their true value. That should never happen! It’s crazy for us all to pretend that we possess less in the way of financial assets than we really do possess. It causes us to spend less, which translates into enjoying life less. I don’t think it would be too far off the mark to say that to hate stocks is to hate ourselves.
Which is another reason not to love stocks too much! It is when we let our love of stocks get out of hand that we push prices up to the levels that cause us all to experience the pain of a price crash. The right attitude to have toward stocks is a sense of gratitude for the opportunities they open to us combined with an appreciation that, like most other things in life, the good in stocks is countered to some extent by negatives that we never want to lose sight of entirely. He who loves stocks in a balanced way loves stocks best.
Rob’s bio is here.