The following commentary is from an investment professional with Clear Harbor Asset Management who is a participant in TheStreet's expert contributor program.
Many Americans gave up on the stock market after the 2008 crash, and many more appear to be doing so now that the global debt crisis has sparked another roller-coaster ride on Wall Street.
By the end of October, investors had withdrawn over $83 billion from U.S.-based stock mutual funds in 2011-- more than double the withdrawals through the same period last year, according to the Investment Company Institute, a Washington-based trade group. These stock fund outflows -- largely from small investors -- continue a trend that has no precedent in the data, which go back through 1984.
It's understandable. The scope of the systemic malfeasance and irresponsibility that has come to light in the world's leading economies is profoundly disturbing, and people who have worked hard, played by the rules and made a positive contribution to society -- and particularly young people entering the work force -- have every reason to be disgusted and outraged by the mess in which we find ourselves.
It's always wise to approach everything with a healthy dose of skepticism, but rejecting the stock market outright for most (not all) investors now is a mistake. At a time when governments around the world are poised to monetize their debt burdens by printing money and U.S. Treasury bills are trading at record highs, stocks should be a substantial part of an investment portfolio for anyone that owns assets and seeks to preserve their value and increase it over time.
Yes, the S&P 500 has shed nearly a fifth of its value since the
Bubble burst in 2000, but as
recently noted, the bellwether stock index actually climbed 66% from March 24, 2000, through Dec. 2 if you give all the companies in the index equal weighting, regardless of their market cap. The value of the S&P is officially calculated by giving more weight to huge companies like
, which recently had a combined market value of nearly $750 billion, and less to smaller companies like
, which were recently worth less than $10 billion combined.
What does the outsized performance of an equal-weighted S&P tell us? First off, smaller companies generally made far better investments than large ones over the last decade, but more importantly, it tells us this was hardly a "Lost Decade" for stocks. In fact, most of them performed quite well through the dot-com crash, the 9/11 attacks, the housing collapse and the worst financial crisis since the Great Depression.
So, should we go out and buy stock in smaller companies? Not necessarily. In fact, there are signs that that trend could reverse, and large companies may see their stock prices begin to move up while their smaller counterparts begin to muddle along. The key is to find companies that, for whatever reason, are trading at a price that is lower than their intrinsic value, and then to have the emotional fortitude to wait out the market's gyrations and sell at a higher price. If you don't have the ability to do this, then you should find someone who does and hire them to do it for you.
Easier said than done, of course. The record shows that even most people who hired professionals to manage their assets got stuck in the "Lost Decade," and they were charged hefty fees for it. There are two main reasons why this occurred:
1) Most professionals are not very good investors, and they tend to follow along with the financial media and everyone else in the industry, buying the big stocks that everyone is talking about and winding up with portfolios that resemble the S&P and a performance that is mediocre at best. More than $5.58 trillion is benchmarked to the S&P and roughly $1.31 trillion is directly linked to its value, according to an estimate by Standard & Poor's.
2) People have a natural tendency to experience emotional mood swings over the course of an economic cycle. They buy when the stock market is roaring and everyone is partying and prices are high. Then, they sell when things are miserable and everyone has lost faith in humanity and stock prices are low. Unfortunately, this is precisely the opposite of what they should be doing, and many professionals either suffer from this curious case of human nature, or they are unable to convince their clients that they should be doing something that seems totally insane.
This brings me to my last point. Things are pretty miserable right now, and people are leaving the stock market in droves. Many smart people are predicting another recession in the U.S., despite positive signs like some improvement in the November employment report from the federal government, double-digit corporate profit growth, strong auto sales and a positive start to the holiday shopping season. The bleak situation in Europe and signs of instability emerging in higher-growth economies like China have raised the specter of new round of systemic financial meltdowns and economic pain.
As a result, equity price-to-earnings ratios are generally quite low compared with historical norms, even if you look back well beyond the 1990's boom years. And odds are good that things will improve eventually, which means that adding stocks in great companies that fall outside of Wall Street's spotlight to your portfolio now might not be as crazy as it seems.
My firm and I own shares of XOM and AAPL, which are mentioned above.
At the time of publication, Worden and/or his clients were long XOM and AAPL, although holdings can change at any time.