A Not-So-Random Call For a Bull MarketBy
Princeton economics professor Burton Malkiel is famous for his 1973 bestseller A Random Walk Down Wall Street, the seminal investing book that now graces undergraduate bookstores and Wall Street training programs in its 10th edition. The random-walk school, as it is now known, accepts markets to be efficient—as in, they already represent all publicly available information. So to hell with penny-stock solicitations from Boca Raton; there’s no point trying to trade or time the market and the myriad shares it holds when you and I cannot possibly know more than insiders and countless Wall Street spreadsheet jockeys. Be humble and agnostic, keep costs low, and be consistent.
Curiously, Malkiel went a bit against that world view with a column Friday in the Wall Street Journal titled “What Does the Prudent Investor Do Now?”
“Bonds,” he declares, in no random terms, “are the worst asset class for investors. Usually thought of as the safest of investments, they are anything but safe today. At a yield of 2.25 percent, the 10-year U.S. Treasury note is a sure loser.” Malkiel explains how holding that supposedly risk-free investment over the next decade will almost certainly mean taking a loss—either in real terms, thanks to higher inflation, or as a capital loss if the bond has to be sold at less than face value.
Malkiel continues: “Equities on the other hand are still attractively priced, despite their substantial rise from the October 2011 lows.” He then back-envelopes the likely long-run rate of return from common stocks by adding today’s dividend yield of approximately 2 percent to the long-run growth of nominal corporate earnings (around 5 percent). “This calculation,” he says, “would suggest that long-run equity returns will be about 7 percent—five percentage points more than the safest bonds.” A no-brainer move, right? After all, it takes a smidgen over 7 percent a year to double your money over a decade.
Malkiel does hedge: “Still, we are likely to be in a low-return environment for some time to come. While equities appear to be favorably priced relative to Treasury bonds, returns are unlikely to be at the double-digit level enjoyed from 1982 through 1999.”
But who doesn’t hedge? The point is that the good prof—I took his lecture during junior year, two past lives ago—has joined a gaggle of influential market seers who have lately called for investors to get their equity groove back on. This past week, Goldman Sachs enthused about what it called a generational buying opportunity for shares. Last month, Larry Fink, chief executive officer of No. 1 asset manager BlackRock, which lugs $3.5 trillion in assets, said investors should be 100 percent in the market. (Ready, willing, and able to handle the potential resulting deluge is IShares, the exchange-traded-funds empire that BlackRock owns.)
Meanwhile, Barton Biggs, also sometimes known as Notorious BIGGS, votes for 90 percent.
Where does this conspiracy of bullishness meet? I’d love to be a fly on that wall.
All this as the Dow Jones Industrial Average needs to rally just 8 percent to retouch the all-time high it set in 2007, after having already doubled off the low it set three years ago.
Not that anyone seems to care. We’re still a country in bondage, so to speak: equity funds had estimated outflows of $2.57 billion for the week, compared with outflows of $228 million in the previous week. Bond funds? Estimated inflows of $9.10 billion, on top of $10.74 billion added during the previous week. That’s 23 weekly outflows out of 27 weeks over a period that saw the market soar 25 percent.
Broke freshmen will soon have to pony up for A Random Walk With Apathy.