Thursday, August 26, 2010

Fighting the Last War

From this Fortune article:

...how could you have had three extended and anguishing periods of stagnation* that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make...People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.

The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium? - Warren Buffett


What has occurred most recently informs behavior. The last decade has been terrible for stocks so investors decide to own less just when some of them finally start to become attractively valued. Check out the entire Fortune article.

Adam

* In 1899-1920 the Dow started at 66 and ended the period at 72. In 1929-1948 the Dow started at 381 and ended up at 177. Finally, in 1964-1981 it went from 874 to 875. In each case, the extended periods of stagnation for stocks were followed by market booms of 400% or more.
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