A couple of weeks back, you may remember that I extolled the virtues of a free US website called InvestorsInsight (www.investorsinsight.com), which features the views of John Mauldin, the Texas-based commentator.
He is, I think it’s fair to say, a bit of a bear at present – but he hasn’t been ignoring the plight of the adventurous investor. In fact, he’s been trying to work out a road map for the next couple of years. In his view, mainstream equities will remain a dangerous place and he reckons we’ll have to work a bit harder to make extra returns.
So I caught up with him on one of his recent trips to London to find out what he thinks we should all be doing next.
His first piece of advice for adventurous types is to stop believing that equities will “inevitably” produce higher returns than bonds. “If you start today in the US, and go back to 1966, you would have been better off buying a 20-year government bond each year, rolling it over, than you would have been investing in the stock market,” he says, echoing a recent paper by Rob Arnott, the US analyst, that suggested that the cult of the equity was officially dead.
“For 40 years, there has been no risk premium and yet we tell investors we’re going to give you a 4-5 per cent risk premium for stocks over bonds – that’s the long-term premium,” says Maudlin. “Well, I’d suggest that 40 years is the long term – that’s a pretty long run.”
The sacred cow that needs to be slaughtered, in Mauldin’s view, is the strategy of “buy and hold” investing – beloved of nearly every fund manager in the UK, and the argument behind making regular monthly equity investments over the long term.
“Buy and hold investing is something that was basically foisted on investors by an industry that wanted to keep assets under management,” claims Mauldin. “So, if you’re a long-only manager and that’s your hammer, then all the world looks like a nail. If you’re a fund manager, you’re not going to stand up and say: ‘You know, I don’t think it’s a good time to invest in my fund. I think we’ll just shut it down.’ You’d be fired!”
He reckons we need a new term to describe the equities game, and that term isn’t “investing”. “We need to get away from the notion that somehow the stock market is investing,” he argues. “No… it’s a different form of gambling. And you’re gambling on rising productivity, you’re gambling on rising price to earnings ratios, you’re gambling on all sorts of things. From time to time, not a bad gamble. But, in bear markets, remember that your errors get compounded.”
Can you imagine the word “gambling” appearing in an Isa advert?
Mauldin’s big point is that we’re nowhere near finished with this bear market – although he accepts that we’re not about enter a new Great Depression. “When we think of depression, we think of 25 per cent unemployment, and GDP dropping 15-20 per cent and I don’t think we’re going to see anything like that. Now, could we see 10-12 per cent unemployment in the US? Absolutely. Probably we will. Is it going to be bad? Yeah. I think we’re going to see negative earnings surprises and it will just keep coming at you. And eventually people get so frustrated as the economy doesn’t turn and then next year – because of the tax increase and other things – the economy can dip right back down again, putting pressure on earnings, putting more pressure on consumer savings.”
Add to this rather sanguine view Mauldin’s observation that “the housing crisis isn’t going to go away until 2011”, and you can begin to understand why Mauldin reckons investors should not be in a rush to go long on equities.
“The reality is, if we’re in a true secular bear market, which I think we are, we’ve got time... there’ll be some time to catch it. If you miss the top 20 per cent, 30 per cent, no big deal. I want to see the economy stabilise; I want to see corporate earnings stabilise. My guess is at some time this year, we probably do see a real bottom in the stock market.”
So, should we all just sit tight on a mountain of cash or should we start looking at more adventurous ideas – maybe alternative assets?
“If I had the cash, I might be sitting around waiting to pick up what’s going to be the rubble from commercial real estate,” says Maudlin. “I think in the US, and probably in UK and parts of Europe, there’s going to be some tremendous opportunities here in a few years as the commercial real estate debacle just craters, as we’re unwinding so much leverage. You’re going to be able to pick up very, very good properties that cash flow from day one.”
But Mauldin also recommends looking beyond commercial property for some alternative returns. “I’d look at volatility plays, market timers, fixed-income traders, that type of thing. The macro [hedge fund] space, and also private credit is going to be a huge, huge business, as the banks, are constrained. They’re having to raise capital, so you’re beginning to see funds created that that are starting to offer trade finance of various forms of lending and they’re going to take the market share from the banks. And you can make fixed income returns of 8, 9, 10 per cent. That’s not a bad return at the end of the day”.
adventurous@ft.com
