Poor, Misunderstood Bill Gross Never Said Stocks Are Dead

NEW YORK ( AdviceIQ) -- Bill Gross, the founder of fund company PIMCO and often called the King of Bonds, said in his August Investment Outlook that the cult of equity is dead. Many people assailed him for seeming to condemn stocks as an investment. But he didn't.

To start with the media is generally misrepresenting what he said and missing his message. He did not say that equities are "dead." What he did say was that the "cult of equity" is dying.

Although I do agree with his overall message that investors must be prepared for future returns that are lower than what history suggests, and with some of the other implications, I do question some of his initial analysis.

1. "...investor impressions of 'stocks for the long run' or any run have mellowed..."

I agree with this. We have seen this in our clients. It is not that they are averse to stocks, but their expectations and willingness to throw "all in" to equities has been altered. They are much more wary and more open to risk mitigation than in the past. They really are more tolerant of sub-market returns if it means that they are experiencing less volatility and feel that they are reducing their risk.

2. "Several generations were weaned and in fact grew wealthier believing that the pieces of paper representing 'shares' of future profit were something more than a conditional IOU that came with risk."

I believe that this is clearly the case with individual investors. We have seen this with some of our older clients and with the parents and grandparents of our clients. They had very long-term positions in certain stocks that they were attached to. Some have very beautiful and meticulous hand written ledgers that track each stock transaction.

But we don't see this attachment with our younger clients. And frankly I think that is probably a good thing. I believe that we don't see the attachment because people don't have faith in corporate culture anymore.

In many cases, corporate culture has shifted from more of a focus on long-term shareholder value, as I believe was prevalent for our parents and grandparents, to being more about rewarding executives at the expense of shareholders and workers.

Just look at executive compensation relative to that of an average worker and look at the ridiculous levels of compensation paid. I don't begrudge well-paid executives - let them make millions or tens of millions - if they deserve it. But a culture where an executive comes in, works for nine months, then gets canned or quits and still walks away with millions does not instill a long-term investment mindset in shareholders, not to mention employees.

If corporate culture is not focused on long-term shareholder value then investors shouldn't kid themselves into having long-term disproportionate positions in any one company. Today's investors/shareholders are much more skeptical about maintaining a long term position to allow your "money to do the hard work."

So if this is part of what Gross means, then I unfortunately agree with him.

3. Gross' analysis of stock value growth versus gross domestic product leaves me wondering a bit.

I spoke with a colleague, who is much smarter than I am, about this analysis. My question was: Isn't Gross missing something by just looking at the Standard & Poor's 500? What about those companies that never made it to the S&P 500 and have since gone by the wayside?

Did they not contribute to economic growth, as well, even though they are not reflected in the S&P 500 and didn't their shareholders lose out? Although my colleague agreed that I had something, he stated that there are even more private companies that were never, and will never, be measured by the S&P 500. They contributed to government, laborers and lenders, but cannot be measured by the index.

For another AdviceIQ advisor's take on Bill Gross's "cult of equity" statement, arguing that it's bonds, not stocks, which are "dying," click here .

The other thing that he pointed out was that dividends are not considered. If a the long-term real stock market growth is tied to real GDP growth plus the dividend yield, then it seems reasonable for an investor to get a long-term (as opposed to "really long" term) 6.6% real return.

4. Additionally Gross suggests a 4% nominal return on stocks.

I don't know where this comes from since I think everyone anticipates that an inflation rate of at least 2% to 3% over the next 10 years is the most likely course. It would imply a real equity return of no greater than 2%. That seems a bit too low. I am not smart enough to predict what equities will return for investors, but common sense tells me that it will be some time before we see the average gains that we saw the last 30 years.

5. But when his discussion turned to return expectations of a portfolio of stocks and bonds - that is where I think he is right on.

Investors must get used to the idea that a reasonably balance portfolio, whether it is 70% equities/30% bonds or 50% equities/50% bonds, is not going to deliver what investors have become used to. They must accept this and understand that their money is not going to do the hard work like it used to and that they are going to have to work longer for their money.

So are stocks dead? No! And I don't think that is what Gross was saying.

I think his message is that the "cult of equity" that believes that I can just sock my money away into a benevolent company's stock and let it "work" for my early retirement or even normal retirement is dying.

That people will have to work longer, pension funds will need more funding, and that the paradigm of 8% returns from a portfolio of 60% company stocks and 40% bonds is gone - at least for some extended time.

--By Jeffrey Baumert, a partner at Advisor Financial Services in Woodstock, Ga., for AdviceIQ

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