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Rip: The Lost Decade For Shares

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Stacks of high-quality shares, from GlaxoSmithKline (LSE: GSK) to Autonomy (LSE: AU) to Pearson (LSE: PSON), now trade at a fraction of the valuation they did 10 years ago. Back then, Dow 36,000 was one of the most popular books. Today, The Great Depression Ahead is flying off the shelves.

Ten years ago was the time to be worrying about a lost decade. Not today

The sheeple continue to go to the bond slaughter. The public always buy high and sell low.

The negative image of shares fills me with joy.

Before anyone says 'but look at Japan - 20 years', just bare in mind that Japanese stocks peaked at 50-100 times earnings. The FTSE peaked at around 25-40 times earnings.

http://www.fool.co.uk/news/investing/investing-strategy/2010/09/09/rip-the-lost-decade-for-shares.aspx?source=uhpsithla0000002

Published in Investing Strategy on 9 September 2010

7 comments

The FTSE has fallen. Many blue chips trade at a fraction of the price they were a decade ago. But now is not the time to give up on shares.

Ten years ago, the FTSE 100 stood at exactly 6,600. A decade later, today, it trades around 5,400.

There's the "lost decade" for you. Add in dividends and it's not quite as bad. But there's no question about it: The past 10 years have been absolutely horrendous for shares.

Serenity now

Patience has been pushed to the limits. That's a given. I can't count how many news articles I've seen profiling frustrated investors who are ready to throw in the towel.

They assume market returns from most of the post World War II through the late '90s were a fluke, unlikely to ever be repeated again. As volatility jumped over the past few months, there's been an almost Pavlovian-like uptick in this sort of response. "[The] market hasn't gone ANYWHERE in 10 years" a caps-happy reader recently emailed me. "Only a FOOL can look at that and STILL BE LONG STOCKS RIGHT NOW."

I don't buy it. If we're going to dwell relentlessly on this lost decade, let's get an important point out of the way: 2000 was the peak of the most wacked-out stock bubble the world had ever seen. As long as 2000 is used as a base year, any and every historical comparison will look atrocious.

Over in the US, in 2000, the S&P 500 traded at an insane 28 times trailing earnings. The UK wasn't much different. That was a recipe for sheer misery, which is exactly what followed. And a lot of people knew it. As early as 1996, analysts were getting nervous -- that's when Alan Greenspan gave his "irrational exuberance" speech.

Sacked, at the top of the market

In the UK, the defining moment of the bubble was the sacking of controversial fund manager Tony Dye.

Dye famously avoided the high-growth, high-risk internet stocks, maintaining large positions in cash, consequently ensuring the funds he was managing significantly underperformed his rivals. In February 2000, just weeks after the FTSE had peaked at close to 7,000, Dye was sacked. It was downhill for the market virtually from then onwards.

As I remember it, just about everyone knew shares were a bubble bound to burst, but they didn't want to leave any money on the table. So they stayed in, confident of their ability to get out before the carnage hit.

This attitude -- that markets were blatantly overvalued but should still be bought with abandon -- created a complete disconnect between shares and the value of their underlying businesses. And that disconnect robbed future returns.

By soaring from 3,000 to 7,000 from 1995 to 1999, when business performance justified nothing of the sort, the FTSE was guaranteeing that future earnings improvements would not be rewarded with higher shares prices.

And that's exactly what happened. Consider that as shares lost ground over the past decade, over in the US, S&P 500 earnings have actually grown 51%. Dividends? 42% growth. Again, it's a similar picture in the UK.

These growth rates aren't spectacular, but they uncover an important point: Lousy returns over the past decade had little to do with what happened during those 10 years, and a lot to do with where we started 10 years ago. By starting with painfully high valuations, shares were ensuring poor returns from Day 1.

Paid for performance?

To show how powerful this phenomenon was, take two companies: Vodafone (LSE: VOD) and British American Tobacco (LSE: BATS).

In 2000, Vodafone was a stock market darling, along with everything TMT (technology, media and telecoms). By contrast, the boring old 'bricks and mortar' business of cigarette manufacturing and marketing was seen as a low-to-no growth industry with a massive litigation cloud over it to boot.

So whats happened in the past 10 years? Vodafone's shares slumped almost 50% whilst British American Tobacco's shares have soared 400%.

The only difference between these two outcomes is that, 10 years ago, Vodafone had implausible expectations and traded at an outrageous valuation, whereas most people had forgotten that British American Tobacco even existed.

More than earnings, more than GDP, and more than interest rates, the single most important factor that determines future returns, is starting valuation. That's the only reason we've had a lost decade.

Moving on

So where are we today? Pretty close to the polar opposite of 2000.

The FTSE trades around 11 times forecast earnings,. The dividend yields of many FTSE 100 companies are higher than gilts, often seen as a strong buying signal.

Stacks of high-quality shares, from GlaxoSmithKline (LSE: GSK) to Autonomy (LSE: AU) to Pearson (LSE: PSON), now trade at a fraction of the valuation they did 10 years ago. Back then, Dow 36,000 was one of the most popular books. Today, The Great Depression Ahead is flying off the shelves.

Ten years ago was the time to be worrying about a lost decade. Not today.

Edited by ringledman

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I concur heartily. Though I would add one more Caveat - if you look at past recessions, we may still be in a bear market rally so don't be surprised if the FTSE drops below 5000 again in the next 5 years.

Still - gird your loins and buy as the market falls!

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I concur heartily. Though I would add one more Caveat - if you look at past recessions, we may still be in a bear market rally so don't be surprised if the FTSE drops below 5000 again in the next 5 years.

Still - gird your loins and buy as the market falls!

5000 possible over next 5 years as bear markets last 10-18 years or so. But why is this a given as everyone says?

The FTSE100 could just as easily rise to 6,600 (previous peak) over the next 5 years (an annual rise of 5% or so) and so end up from now but still remain within the so called 'bear market'.

Posters here think it a given that the FTSE100 will retest the low. Joe public thinks the FTSE will retest the low or fall below 4000-5000. even Moneyweek think this!

Everyone thinks the market will crash. Faber said in his last report that this will be the most widely anticipated stock market crash for some time!

Markets top out on euphoria. The only euphoria currently is in the bond bubble.

Granted there are some cyclical trash in the 100 like the banks, travel, retail, etc, however the high yielding defensives have regressed significantly to a decent value over the past decade.

Edited by ringledman

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5000 possible over next 5 years as bear markets last 10-18 years or so. But why is this a given as everyone says?

The FTSE100 could just as easily rise to 6,000 over the next 5 years (an annual rise of 5% or so) and still end the bear market up from now.

Posters here think it a given that the FTSE100 will retest the low. Joe public thinks the FTSE will retest the low or fall below 4000-5000. even Moneyweek think this!

Everyone thinks the market will crash. Faber said in his last report that this will be the most widely anticipated stock market crash for some time!

Markets top out on euphoria. The only euphoria currently is in the bond bubble.

Granted there are some cyclical trash in the 100 like the banks, travel, retail, etc, however the high yielding defensives have regressed significantly to a decent value over the past decade.

Markets top out on euphoria and bottom on capitulation.

The only market i can see in some form of mass public capitulation is cold hard cash

having said that im certainly not bearish equities yet

Edited by Tamara De Lempicka

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The sheeple continue to go to the bond slaughter. The public always buy high and sell low.

The negative image of shares fills me with joy.

Before anyone says 'but look at Japan - 20 years', just bare in mind that Japanese stocks peaked at 50-100 times earnings. The FTSE peaked at around 25-40 times earnings.

http://www.fool.co.uk/news/investing/investing-strategy/2010/09/09/rip-the-lost-decade-for-shares.aspx?source=uhpsithla0000002

I agree the sheeple are piling into the bond slaughter. I would never buy in at these prices but if I was a high frequency trader I'd want to ride the bond mania bull to the top and then short it.

When mentioning the Japanese market it is important to think of the price of the NIKEII in sterling terms. It hasn't actually dropped at all in sterling/dollar terms.

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The fact that people are saying it's time to get back into the market means it's not time to get back into the market.

yes. The time was when the dow was sub 7000 and the FTSE 4000.

We are long past that now.

Most people now are desperately hoping for a pull back in shares so they can pile in. This makes a significant crash unlikely. (i.e. most bears are ultimately bullish but grumpy because they know they missed the bottom)

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The sheeple continue to go to the bond slaughter. The public always buy high and sell low.

The negative image of shares fills me with joy.

Before anyone says 'but look at Japan - 20 years', just bare in mind that Japanese stocks peaked at 50-100 times earnings. The FTSE peaked at around 25-40 times earnings.

http://www.fool.co.u...hpsithla0000002

Completely backs up that Director of the Bank of England who said recently:-

That the City/banks have just borrowed loose money off each other, sloshed it around the City and skimmed it on commissions for their Bonuses!

They have 'produced' virtually nothing to add to their banks capital base for a decade!

Edited by erranta

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The sheeple continue to go to the bond slaughter. The public always buy high and sell low.

Which "sheeple" is that exactly ? - I doubt 1 in 100 people in the street even know what a traded bond is.

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And ... cant see the FTSE going anywhere without significant increase in money supply.

The basic thrust of the argument that because some sky-high PEs were achieved in the past therefore stocks are now "cheap" is b*llocks. Those PEs were about as good an example of an unsustainable bubble as your ever going to get - as soon as the growth runs out of steam people will look at the pitiful yields and bail. I see no evidence of general public sentiment that stocks are a good bet and that another such bubble is going to be fuelled.

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Which "sheeple" is that exactly ? - I doubt 1 in 100 people in the street even know what a traded bond is.

The sheeple buy what Hargreaves and lansdowne tell them to buy. Doesn't matter if they know what it is

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The sheeple buy what Hargreaves and lansdowne tell them to buy. Doesn't matter if they know what it is

Hey nohpc. Just curious why you used h&l for example. I just set upan acct with them and find there "research" useful but try to use other sources as well but why so negative towards h&l because they seem quite independent and quite often there recommendations are similiar to trustnet. Cheers

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Hey nohpc. Just curious why you used h&l for example. I just set upan acct with them and find there "research" useful but try to use other sources as well but why so negative towards h&l because they seem quite independent and quite often there recommendations are similiar to trustnet. Cheers

I am actually a fan of Hargeaves and Lansdowne .Just used them as an example of a large company that sells funds to people. I find their research to be okay but am always weary they are trying to sell it to you at the end of the day.

They did push bond funds at the right time and almost timed the bottom of the market perfectly. They have lots of bond funds to chose from now but don't push them anymore. However, the sheeple who didn't pile in on the initial advice will now be buying in at the wrong time based on the old advice given to them without understanding what a bond even is.

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Which "sheeple" is that exactly ? - I doubt 1 in 100 people in the street even know what a traded bond is.

Joe public investing in fixed capital bonds from their banks and building societies.

Pension trustees allocating a huge percentage to bonds.

Investment advisors likewise doing the same.

The FT ran an interesting article a few weeks back showing the inflows into bond funds mirroring the equities inflows in 1999-2000. Likewise the outflow of funds from equities mirrors that of bonds in the late 90s.

It's a bubble that someday will pop.

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This is the reason to invest. You don't invest when everyone is talking up the bubble.

I've noticed lately that there are far more articles in the newspapers comparing dividend yields of stocks with savings and bond rates and going on to say that perhaps now is the time to be investing in the stock market. I've pulled all my money out of it , i think the bubble is about to pop , its had a good 18 months.

I look at the likes of Vodafone with its huge debt mountain , GSK paying all its profits out on legal fees, Balfour Beatty withs it huge unfunded pension problems , then the likes of Aviva , Standard Life who are one greek default away from administration , the retailers who are in for a very tough few years. These dividends , as seen with BP , could be cut very easily.

I think a buying opportunity of a lifetime is coming within the next 2 or 3 years , but that time isn't now. I can see the FTSE going up another 200 points before the rug is well and truly pulled

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They did push bond funds at the right time and almost timed the bottom of the market perfectly. They have lots of bond funds to chose from now but don't push them anymore. However, the sheeple who didn't pile in on the initial advice will now be buying in at the wrong time based on the old advice given to them without understanding what a bond even is.

They did time it right, didn't they? I would add that sheeple tend to pile in on investments that have already made good, ie past performance. Virtually always the wrong thing to do, unless you believe the investment is still fundamentally undervalued. By the time an investment reaches mainstream awareness, most have already missed the boat.

Unfortunately for equities, bonds and the like, there is no 105% LTV credit available to fuel the Ponzi, so the effect of sheeple piling in will be limited.

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They did time it right, didn't they? I would add that sheeple tend to pile in on investments that have already made good, ie past performance. Virtually always the wrong thing to do, unless you believe the investment is still fundamentally undervalued. By the time an investment reaches mainstream awareness, most have already missed the boat.

Unfortunately for equities, bonds and the like, there is no 105% LTV credit available to fuel the Ponzi, so the effect of sheeple piling in will be limited.

Psychologically if you buy into an investment that is out of favour you are very likely to lose money short term but make much more long term. The converse is true for buying an investment that is heavily in favour.

The important bit is stomaching the short term losses when buying the out of favour investment.

Some of my "duds" are Ishares clean energy ETF. I bought at about 60% from it's peak price and I'm down 25%

Another dud is Deutche bank vietnam ETF. Bought at 20% from the peak and now down a further 20%

There are certain sectors and geographical areas that I have noticed spectacular gains in recently (some I have been involved in and some not ) but with globalisation I think the safer play is keep buying the duds and selling the goodies as almost all countries are likely to have a boom and bust cycle.

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Psychologically if you buy into an investment that is out of favour you are very likely to lose money short term but make much more long term. The converse is true for buying an investment that is heavily in favour.

The important bit is stomaching the short term losses when buying the out of favour investment.

Some of my "duds" are Ishares clean energy ETF. I bought at about 60% from it's peak price and I'm down 25%

Another dud is Deutche bank vietnam ETF. Bought at 20% from the peak and now down a further 20%

There are certain sectors and geographical areas that I have noticed spectacular gains in recently (some I have been involved in and some not ) but with globalisation I think the safer play is keep buying the duds and selling the goodies as almost all countries are likely to have a boom and bust cycle.

Ah, the problem is that 9 times out of 10 you may be throwing good money after bad. Picking that one winner is the difficult bit. Have fun. :)

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Ah, the problem is that 9 times out of 10 you may be throwing good money after bad. Picking that one winner is the difficult bit. Have fun. :)

if dealing with individual shares yes. I have no faith in my ability to beat any given index.

That is why I now only buy ETFs rather than individual companies.

COI: Just got wiped out by Connaught going bust.

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