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Shares Beat Everything Else

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An old post but worth thinking about uber bears -

http://www.fool.co.uk/news/investing/2009/07/22/shares-beat-everything-else.aspx

In the world of investment, shares beat everything else -- property, gold, cash, ostriches, the lot.

the reason shares make for the best long-term investment becomes obvious when you think about what they are. A share is a small chunk of a business; a tiny portion of the totality of human effort. And human effort is the only thing that actually creates wealth -- human effort, combined with capital (which is itself the product of previous human effort) turns dirt into stuff.

All other investments are secondary to that, with no other actually creating new wealth -- they are all dependant on the stuff that shareholders earn. Sure, in the short term, demand can drive property prices ahead of shares, but that depends on how much people have to spend, which is totally dependant on the actual wealth generated by turning dirt into stuff.

The same goes for everything else. Gold and other shiny things only have a magpie value that is backed by the stuff created by human effort. In themselves they are almost worthless, with their only value being that of a stuff token (it works the same way as book tokens -- in the long term, the value of book tokens can't exceed the value of the books in existence).

Gilts and bonds? Those are fancy names for lending money to the government or to companies. But that money, and the money needed to pay your interest, comes from the same human-endeavour stuff that you get directly from ownership of shares, and in the long term it can't beat it, because there's no other source of stuff.

So, given that buying shares gives you a direct investment in the only thing that actually generates wealth, and that other secondary investments are wholly dependant on that generation of wealth for their value, how can any other investment possible beat shares in the long run?

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Depends which shares and when you buy them.

I buy and sell a bit of Glaxosmithkline , and have made a bit over the years. They have been trading at between £10-£13 over the last ten years.

However at one point in 2000 they hit £23 , anyone who bought them then is sitting on massive losses.

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So, given that buying shares gives you a direct investment in the only thing that actually generates wealth, and that other secondary investments are wholly dependant on that generation of wealth for their value, how can any other investment possible beat shares in the long run?

I'm not an uber or ultra anything, but if you live in an inflationary world, the lazy man's way to riches is to look for a hard tangible asset that is very good at claiming an income from those that actually generate wealth and that is very easy to leverage to the max.

Borrowing to buy shares is not as easy (for most people) as borrowing to buy a house.

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Depends which shares and when you buy them.

I buy and sell a bit of Glaxosmithkline , and have made a bit over the years. They have been trading at between £10-£13 over the last ten years.

However at one point in 2000 they hit £23 , anyone who bought them then is sitting on massive losses.

Disagree. Add in the 5% or so that Astrazenecca has earnt in dividends since 2000 and that is an additional 62% return or so..

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"the reason shares make for the best long-term investment becomes obvious when you think about what they are. A share is a small chunk of a business; a tiny portion of the totality of human effort. And human effort is the only thing that actually creates wealth -- human effort, combined with capital (which is itself the product of previous human effort) turns dirt into stuff."

The only place this wealth can be created is on that dirt and as they say, they aren't making any more of it.

On the whole i agree with the writer's points and he does (unlike many) appear to be trying to clarify rather than baffle. But he appears to have forgoten that the dirt itself is (unfortunately) held as an investment and this 'investment' doesn't run into the kind of competition that production does.

Edited by Stars

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I don't think there is one investment fits all.

There are periods when all investments will appreciate or depreciate in value depending on market conditions and you adjust your investments according to the current conditions.

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Of course, the FTSE today is NOT the same FTSE from 7 months, 7 years or 70 years ago.

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Guest sillybear2

There was no real planning constraints in 1918, historically we used to build a lot more houses than we currently do.

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When you look at the historical FTSE index you are not looking at the same thing each year since it is a winners index. All the companies that went bust are removed from the index, all the companies that did badly are relegated from the index. Thus when Enron goes bust, it is simply taken out of the index and replaced by the next biggest company. However Enron shareholders did not get to swap their shares in this manner.

Likewise when two companies merge or one is acquired, the value of the company and hence the value of the index rises. Thus the index will rise whenever companies enter periods of merger and companies have been getting bigger. The FTSE 100 would reach its maximum if all the small companies merged to make 100 big ones. Yet no new profits have been generated.

The best way of looking at shares is to look at average returns on investment funds, ideally tracker funds.

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I'm wondering whether to buy some shares now, or whether there will be a better buying oportunity in the next couple of years. When the financial crisis struck, some HPCers were banging on about the share market falling further and further. It seems to me, that 4400 might have been the floor.

It's true though about leverage. The anti BTL won't like it, but snapping up dumped rental properties when the crash finally does arrive, with leverage, will be a good investment. Especially if we get inflation.

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Isn't BP in loads of pension funds because their shares were "safe"?

I think you have to have a balanced portfolio, and be warned that some shares could do badly. Which will hopefully be ofset by others doing really well.

Banking shares are always safe as houses :lol:

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What a load of claptrap.

Equity yields have continued to plunge (it sounds far less sexy when you call a spade a digging implement, no?) because it behooves reserves world-wide to exclude asset prices from their inflationary measures.

Or to put it another way, neither Greenspan nor Bernanke have a remit to target irrational exuberance in that market - so the winners are left free (of nasty increases in their cost of capital) to run. It remains to be seen what Zhou Xiaochuan's stance on the issue is (so far, lots of wind and no motion).

Input costs (and therefore tangentially, land values) do not enjoy this luxury - the Great Satan is apparently price instability but specifically as it applies to the spread between core prices and the risk-free rate.

There's a very simple reason for this (and now we come to the meat of my post).

Permitting the capital markets to get on with what they do best (showering and stripping entities of capital depending on prevailing sentiment) is the single method we have of fostering generally loss-making economic activity - providing (and this is a biggie) that property rights are upheld.

This is the "putting it all on black" scenario - if sufficient capital flows are directed at the latest fashion, it's probable that some positive change (however small the uplift actually is) in productivity (output per unit input) results.

You have a text-book example of exactly this unfolding before your very eyes (it's merely the latest in a long, long series, so don't get your panties in a bunch if it's not your own private hobby horse).

Nice iPad. Shame about the suicides.

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it very much depends on your time horizon.

I think this crisis has made a fair few punters broaden their research from the last 20 years to the last 200.

equities,particularly those that are UK centric,could well be about about to enter a period of sustained underperformance.

Yep, and we do not even have a conclusion for the realistic view yet.

http://www.squarecirclez.com/blog/where-is-the-dow-jones-heading/1787

The Optimistic View

If the growth of the last 40 years continues, the Dow will be at around 40,000 by 2020. This model takes into consideration the crash of 2008.

DJIA projection

djia-projection.png

The Realistic View

I make the case in the article that the Dow may follow Japan’s Nikkei. Since the peak of the late 1990s (fueled by rampant speculation on house prices – sound familiar?), the Nikkei has continued to fall, so that it is now down to where it was back in the early 1980s (or about 80% loss of value).

nikkei.png

Edited by Confounded

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Since the peak of the late 1990s (fueled by rampant speculation on house prices – sound familiar?), the Nikkei has continued to fall, so that it is now down to where it was back in the early 1980s (or about 80% loss of value).

The Nikkei reflects the view that uplift in productivity is more likely to occur elsewhere, and the FDI flow stats back it up.

Unlucky.

Conversely, both the stock and flow metrics are currently vastly overstating China's ability to boost the global rate of return.

There's a lesson in here somewhere.

It may prove expensive.

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Guest sillybear2

The Nikkei reflects the view that uplift in productivity is more likely to occur elsewhere, and the FDI flow stats back it up.

Unlucky.

Conversely, both the stock and flow metrics are currently vastly overstating China's ability to boost the global rate of return.

There's a lesson in here somewhere.

It may prove expensive.

There's just the small issue of dealing with energy supplies to fuel that perpetual compounding growth, and economics doesn't seem to understand geology, it messes with their simple supply and demand curves.

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There's just the small issue of dealing with energy supplies to fuel that perpetual compounding growth

That's a possible misattribution, you can boost productivity on falling output levels too, and the former rather than the latter is what policy makers tend to focus on...

Even something as simple as moving from annualised to spot pricing of inputs can create an apparent uptick (as the supply chain begins to destock and also is handed a "survive or die" economic imperative reduce waste).

Again we'll start to see exactly some of this I wager in the decade ahead.

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DOW priced in oz of gold:

I expect it to hit 1 (down from a high of 42).

How does that work then? Was that because DOW shares at the peak weren't worth the money, i.e. the yield was extremely low, and the only reason you'd buy them was for capital appreaciation or what?

If the yield of a share is reasonable at present, then it'd be a good buy, unless you expect earnings to start dropping. Wouldn't it? Given I'm thinking of buying shares, and keeping hold of them for years.

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How does that work then?

It's an amusing tautology* - reserves expand the monetary base when deflationary risks outweigh inflationary risks.

And vice versa.

The goal is price stability (effective real rates verses core price inflation).

Whether it's a useful goal or whether it's lizard-men stealing our futures is open to debate.

(* and a useful sales tool)

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If the yield of a share is reasonable at present, then it'd be a good buy, unless you expect earnings to start dropping. Wouldn't it? Given I'm thinking of buying shares, and keeping hold of them for years.

Yes, that's exactly how you should invest in shares if you care about 'safe' (bearing in mind that, in the absence of other safeguards, 'safe' still leaves you exposed to scenarios like RBS or BP). A good yield and a safe future expectation are the only real guarantee you're not buying a bubble.

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A good yield and a safe future expectation are the only real guarantee you're not buying a bubble.

This one's a jackalope.

The three outcomes on the table are :-

1/ I got zinged

2/ The other side got zinged

3/ I got lucky

The problem is that shareholders drive companies to capture as much of the uplift (expansion above gdp growth) as they can.

Which then triggers the business investment cycle, necessitating a visit to the local loan shark (if your company stops once they've spent their real capital, they'll lose out to a competitor who's willing and able to borrow someone else's to gamble).

Which then triggers a game where the lender tries to capture as much of the uplift as they can (boosting yield or improving collatoral).

In amongst all this is the poor (getting poorer) retail investor - struggling against the headwinds of market makers adding liquidity, ultrashort flow traders taking it, government intervention, and the aforementioned debt markets.

Any yield expectation in other words is either already overshot by prevailing price trends on the equity or fully rolled up into prevailing price trends on the bond - there's nothing, in my view, on the table for anyone at all in this market.

In the relatively recent past, "buying the dips" has produced a lot more 3's than 1's or 2's (it's been a wild ride); this has lead many in the industry to promote this as a viable strategy.

I'm keeping an open mind...

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Yes, that's exactly how you should invest in shares if you care about 'safe' (bearing in mind that, in the absence of other safeguards, 'safe' still leaves you exposed to scenarios like RBS or BP). A good yield and a safe future expectation are the only real guarantee you're not buying a bubble.

Strangely, I'm thinking of buying some B.P. shares as a bit of a gamble. So much for the "safe future expectations" Nearly bought some Barclays shares when they were £1. Don't know if I would have held my nerve when they went to fifty pee, but would have been laughing now if I did.

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  • 146 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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