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Decline And Fall Of The Cult Of Shares

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http://www.guardian.co.uk/business/2008/ju...es.stockmarkets

In 1981, the chairman of the US Federal Reserve, Paul Volcker, shocked Wall Street when he declared a zero-tolerance policy towards the rampant inflation that had hit 14 per cent, devastated the US economy and led to the dollar plunging on foreign exchanges.

The tools Volcker employed became trademarks of the governments of Ronald Reagan and, to a lesser extent, Margaret Thatcher: limiting the growth of money supply and ratcheting up interest rates. Two years later, Volcker could boast that the medicine was working as inflation was cut to little more than 3 per cent, while similar, if more tardy progress, was being made in Britain.

But the side effects were severe. American unemployment soared to levels not seen since the Great Depression and social unrest increased, with indebted farmers rioting in Washington. Likewise in Britain, joblessness rose sharply and inner-city discontent culminated in race riots in London, Liverpool and Bristol.

Financial markets reacted differently, crashing initially, then climbing as confidence grew that the stagflation of the 1970s was at an end and that companies would be able to leverage their balance sheets, paving the way for the biggest mergers and acquisitions boom since the end of the Second World War. As share prices took off, the cult of the equity was born.

A folklore grew up that stock prices would keep rising and that as long as investors kept their nerve through the occasional rout - the crash of 1987 or the recession of 1991 - share investment was a one-way bet. Taking 1980 as the starting line, the next 20 years would show stock prices easily outperforming government bonds, or cash, and inflation-busting returns were the norm: between 7 and 10 per cent a year.

It would take the technology crash of 2000-01 and the credit crunch for regulators and financial players to ask whether the cult of the equity had gone too far. In 2003, the answer seemed obvious with UK listed companies reporting pensions deficits that totalled £55bn, according to the Confederation of British Industry. Many of the same pension funds are today nursing a deficit of £12bn.

Stock-market historian David Schwartz says : 'It is one of the biggest myths that shares offer generous returns provided your time horizon is a long one.If you look at average annual returns from 1900, stocks come in at about 1 per cent; it is only if you re-invest dividend income that the figure rises to 4 or 5 per cent.'

Schwartz says 1980-2000 was the exception to the rule and that during the first half of the 20th century, US equities adjusted for inflation showed almost no growth. According to Samuel Brittan, chief economist of the Financial Times, the inflation-adjusted value of the FT Index in 1970 was no higher than in 1936. By the time Thatcher came to power in 1979, it was below the level of the worst Depression years of the 1930s. Wall Street did not reach its 1928 peak until 26 years later.

Mark Harris, of New Star Asset Management, says: 'Statistics are easily manipulated; the key is when to buy and sell. If you liquidated shares that you held for five years at the end of 1999, you would have done very well. Timing, as always, is everything.'

And just like houses share prices can only ever go up in the long term.......

If enough stupid people chase shares like they have done they go up, as soon as the chase stops share prices tumble as there is no longer the demand to keep them over inflated.

Again a bit like housing.

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http://www.guardian.co.uk/business/2008/ju...es.stockmarkets

And just like houses share prices can only ever go up in the long term.......

If enough stupid people chase shares like they have done they go up, as soon as the chase stops share prices tumble as there is no longer the demand to keep them over inflated.

Again a bit like housing.

Heh, so now not only is 'housing as a pension' stupid, but it seems that a 'pension as a pension' is stupid as well. May as well blow all your money and jump off a tall building as soon as you become unable to work :-)

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http://www.guardian.co.uk/business/2008/ju...es.stockmarkets

And just like houses share prices can only ever go up in the long term.......

If enough stupid people chase shares like they have done they go up, as soon as the chase stops share prices tumble as there is no longer the demand to keep them over inflated.

Again a bit like housing.

What is your measurement when you say shares are overinflated?

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<i>Stock-market historian David Schwartz says : 'It is one of the biggest myths that shares offer generous returns provided your time horizon is a long one.If you look at average annual returns from 1900, stocks come in at about 1 per cent; it is only if you re-invest dividend income that the figure rises to 4 or 5 per cent.'</i>

Isn't this what most pension funds do anyway - the reinvested dividends are rightly counted as part of the return?

The secret to any investment is buy low, sell high and take the profits and dividends along the way. Easier said than done mind, but some people seem to be able to do it.

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selling high and buying back low works for me.... moves are in general quicker in dropping markets as fear is a stronger emotion then greed... markets grind higher but crash back.....

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Paying into a pension gives a rubbish return too, I pay 10.56% of my salary into a final salary scheme that will pay 2/3 final salary or 1/2 final salary if I take a lump sum at 65. I might only be drawing it for a couple of years and get hit by a bus... its a scam I tell you.

A better idea might be for me to just save 10.56% of my salary in used notes and blow it all on hookers and cocaine when I get to 65 and go out in a blaze of excitement.

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<i>Stock-market historian David Schwartz says : 'It is one of the biggest myths that shares offer generous returns provided your time horizon is a long one.If you look at average annual returns from 1900, stocks come in at about 1 per cent; it is only if you re-invest dividend income that the figure rises to 4 or 5 per cent.'</i>

Isn't this what most pension funds do anyway - the reinvested dividends are rightly counted as part of the return?

The secret to any investment is buy low, sell high and take the profits and dividends along the way. Easier said than done mind, but some people seem to be able to do it.

"Isn't this what most pension funds do anyway - the reinvested dividends are rightly counted as part of the return?"

Exactly. The FTSE total return index is what we should be looking at.

"The secret to any investment is buy low, sell high and take the profits and dividends along the way. Easier said than done mind, but some people seem to be able to do it."

I think it is very difficult to time the market - Buffett would tend to agree

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What is your measurement when you say shares are overinflated?

Because they have been based on false profit.

Profits have been big because households have gone into debt to purchase goods with equity releases. This pushed up share prices as the sentiment was hey company X was doing well look at the profit it's making. To add to this cocktail you have Private Equity and mergers bumping up share price as everyone hoped they would be part of the next big buy out/merger. Again pushing up the share price to artificial levels.

Therefore share prices where over inflated in value.

You might also want to add in the Pension funds by large amounts of shares as well which will have distorted the price upwards.

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I think it is very difficult to time the market - Buffett would tend to agree

I don't know when he "started" but you could argue he's happened to be in the right place at the right time. It will be interesting to see if he does as well over the next 20 years as the last.

As regards timing, it would be hard to argue that buying, say, DOW/S&P or FTSE today could produce a worse outcome than buying last summer. Buying today guarantees you will beat the indexes for '08. So is timing really that difficult?

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Because they have been based on false profit.

Profits have been big because households have gone into debt to purchase goods with equity releases. This pushed up share prices as the sentiment was hey company X was doing well look at the profit it's making. To add to this cocktail you have Private Equity and mergers bumping up share price as everyone hoped they would be part of the next big buy out/merger. Again pushing up the share price to artificial levels.

Therefore share prices where over inflated in value.

You might also want to add in the Pension funds by large amounts of shares as well which will have distorted the price upwards.

So when I look at a typical diversified portfolio containing shres such as

GSK

BP

UU.

LLOY

these are all artificially expensive?

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Grauniad = NuLab toilet roll

Since their preferred party has been in power, the FTSE has basically stagnated.

Alternatives?

Invest abroad - especially emerging markets, where NuLab can't ruin the economy and society.

If the grauniad had bothered to research this, they would have found many markets that have increased in value.

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So when I look at a typical diversified portfolio containing shres such as

GSK

BP

UU.

LLOY

these are all artificially expensive?

IMO the UK FTSE index will continue to drop to around 3,000 (when the commodity bubble bursts).

Although GSK is a good quality defensive, it will probably drift down with the index.

Of those, I'd particularly avoid BP as it will crash with the oil price.

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Exactly. The FTSE total return index is what we should be looking at.

Have you got a graph for the ftse total return, or do you know where I can find one, google isn't very helpful looking for that.

edit: Spelling.

Edited by CharlieChuck

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As regards timing, it would be hard to argue that buying, say, DOW/S&P or FTSE today could produce a worse outcome than buying last summer. Buying today guarantees you will beat the indexes for '08. So is timing really that difficult?

Hell yes!

You write this with the benefit of hindsight. Go back to October last year, as the markets were making new highs (against all common sense it seemed), would you have written about how obvious it was not to buy last summer?

You may be one of the few that gets it right, but it certainly isn't easy for the majority.

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I don't know when he "started" but you could argue he's happened to be in the right place at the right time. It will be interesting to see if he does as well over the next 20 years as the last.

As regards timing, it would be hard to argue that buying, say, DOW/S&P or FTSE today could produce a worse outcome than buying last summer. Buying today guarantees you will beat the indexes for '08. So is timing really that difficult?

I would agree with you 100% that he may be have been lucky rather than skilful. However, i can dig out many other examples of why it is extremely diffuclt to time the market.

"Buying today guarantees you will beat the indexes for '08. So is timing really that difficult?"

Why would you be comparing yourself to the index for the whole of '08?

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Grauniad = NuLab toilet roll

Since their preferred party has been in power, the FTSE has basically stagnated.

Alternatives?

Invest abroad - especially emerging markets, where NuLab can't ruin the economy and society.

If the grauniad had bothered to research this, they would have found many markets that have increased in value.

"Since their preferred party has been in power, the FTSE has basically stagnated."

Dividends?

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What is your measurement when you say shares are overinflated?

Like all asset classes they have benefited from an explosion of the quantity of money since 1995. Just like houses...

Look at how much the index has gone up since then and compare to inflation. It gives you the measurement you seek.

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Have you got a graph for the ftse total return, or do you know where I can find one, google isn't very helpful looking for that.

edit: Spelling.

I get mine from Bloomberg - I have tried in the past to find free data but have failed

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So when I look at a typical diversified portfolio containing shres such as

GSK

BP

UU.

LLOY

these are all artificially expensive?

BP has been going nowhere even given the price of oil. I more or less accidentally sold mine at their peak last year. Damn glad I did too. What's going to happen to their share price when the Russian oligarchs put the final nail in BP's Russian interests?

GSK what happens to them when health service an budgets tighten and discretionary spending on meds drops as a side effect of the crunch?

LLOY is a bank...nuff said, regardless of the fact that they are in a better position than some other banks.

UU seems to be following the FTSE quite well - up when it is up and down when it is down.

So, yes, I suspect these are all expensive at present. I hold one share at present, and will be dumping that as soon as I can (waiting for the outcome of a court case.)

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BP has been going nowhere even given the price of oil. I more or less accidentally sold mine at their peak last year. Damn glad I did too. What's going to happen to their share price when the Russian oligarchs put the final nail in BP's Russian interests?

GSK what happens to them when health service an budgets tighten and discretionary spending on meds drops as a side effect of the crunch?

LLOY is a bank...nuff said, regardless of the fact that they are in a better position than some other banks.

UU seems to be following the FTSE quite well - up when it is up and down when it is down.

So, yes, I suspect these are all expensive at present. I hold one share at present, and will be dumping that as soon as I can (waiting for the outcome of a court case.)

Can you give me your definition of expensive - I tend to look at P/E and yield, but i guess you have alternative measures?

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Like all asset classes they have benefited from an explosion of the quantity of money since 1995. Just like houses...

Look at how much the index has gone up since then and compare to inflation. It gives you the measurement you seek.

"Like all asset classes they have benefited from an explosion of the quantity of money since 1995"

Where are you getting this info from, as Bloomberg isn't showing this?

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Hell yes!

You write this with the benefit of hindsight. Go back to October last year, as the markets were making new highs (against all common sense it seemed), would you have written about how obvious it was not to buy last summer?

You may be one of the few that gets it right, but it certainly isn't easy for the majority.

That is why I was saying that if you bought now, today, i.e. not with the benefit of hindsight, that you would be buying the same "assets" for 20% less than last summer. That says nothing about where they will go in the future. If they are higher by 31/12/08 you are in profit. If they are lower by 31/12/08 you will still have out-performed the market by 20% more than if you bought last summer. Buying today it is impossible to underperform the market for '08 simply because you're buying below the '08 high.

In fact, there were plenty of technical analysts pointing out a top around 14,100 if you hunt them out, and to sell this last rally mid-may. Just as there are plenty of technical analysts pointing out a near-term low is coming very soon. I would agree that most people probably think today is an excellent time to go short. As usual though it depends entirely on your timeframe and which sectors etc. My personal experience is that even when the technical indicators are screaming "buy" or "sell" it is still psychologically very difficult to do so because of all the contrary media "opinion". I am in that position with US banks right now. Chart says to me - Buy, they will bounce 15-20% from here. Very hard to do that given the cicumstances though.

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In fact, there were plenty of technical analysts pointing out a top around 14,100 if you hunt them out, and to sell this last rally mid-may. Just as there are plenty of technical analysts pointing out a near-term low is coming very soon. I would agree that most people probably think today is an excellent time to go short. As usual though it depends entirely on your timeframe and which sectors etc. My personal experience is that even when the technical indicators are screaming "buy" or "sell" it is still psychologically very difficult to do so because of all the contrary media "opinion". I am in that position with US banks right now. Chart says to me - Buy, they will bounce 15-20% from here. Very hard to do that given the cicumstances though.

That's because you are looking at a chart. A chart lacks common sense and lacks vital information like all the banks are/potentially insolvent. If this information could be fed into the chart it would be returning the following information the banks are ducking ducked. Do not buy at any price.

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Very interesting article.

However it is a bit strange that they say "only if you reinvest dividends" does growth reach 4-5%.

Of course you need to reinvest dividends for the calculation to be meaningful.

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That is why I was saying that if you bought now, today, i.e. not with the benefit of hindsight, that you would be buying the same "assets" for 20% less than last summer. That says nothing about where they will go in the future. If they are higher by 31/12/08 you are in profit. If they are lower by 31/12/08 you will still have out-performed the market by 20% more than if you bought last summer. Buying today it is impossible to underperform the market for '08 simply because you're buying below the '08 high.

In fact, there were plenty of technical analysts pointing out a top around 14,100 if you hunt them out, and to sell this last rally mid-may. Just as there are plenty of technical analysts pointing out a near-term low is coming very soon. I would agree that most people probably think today is an excellent time to go short. As usual though it depends entirely on your timeframe and which sectors etc. My personal experience is that even when the technical indicators are screaming "buy" or "sell" it is still psychologically very difficult to do so because of all the contrary media "opinion". I am in that position with US banks right now. Chart says to me - Buy, they will bounce 15-20% from here. Very hard to do that given the cicumstances though.

"That is why I was saying that if you bought now, today, i.e. not with the benefit of hindsight, that you would be buying the same "assets" for 20% less than last summer."

I don't understand the point of that statement. It may have been the case that the FTSE was 20% higher, in which case you would've been paying more

"In fact, there were plenty of technical analysts pointing out a top around 14,100 if you hunt them out,"

I'm sure there were plenty that weren't. I keep asking for liks that show me that TA works, but noone will post any

"Chart says to me - Buy, they will bounce 15-20% from here"

Perhaps the chart is influenced to some degree by Nostradamus

"I would agree that most people probably think today is an excellent time to go short"

So why isn't the market reacting?

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  • 399 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% +
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      • Even
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      • up 5%



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