The Death of Equities

Markus Muhs - Aug 13, 2019
40th Anniversary Special

August 13th, 1979, exactly 40 years ago to this date, was the publication date of a rather famous (or infamous) article in BusinessWeek entitled "The Death of Equities".

You can read The Death of Equities in its entirety here, courtesy Barry Ritholtz's blog. (note: Barry did not write the actual article)

The historical importance of this article wasn't just that it was the most obnoxious example of financial noise media getting it wrong and doing as they always do, trying to scare us out of our equity positions (just as they were trying so hard to do last week with "market turmoil" special reports). It was also a demonstration of just how horrible the 1970s were for stock investors, how long secular bear markets ("mega bear markets") can last, and in hindsight how stocks have always won in the long-run. 

"For investors, however, low stock prices remain a disincentive to buy."

WHAT???

Reading the article, it contains plenty of familiar themes that you could just as easily find in today's financial noisemedia, from demographic trends ("young people just aren't buying stocks..."), to talk about all sorts of alternative investments, to worries about share buybacks.

Interestingly, the start of the article talks about institutional investors turning to gold, following a 700% rally after the gold standard was abandoned. In real terms the price of gold from August 1979 dropped by more than half over the ensuing 20 years. Lesson: never ever ever ever ever do with your money that which the financial noisemedia is telling you others are doing, even when they say it's what professionals, institutions, or the wealthy are doing. 

There is a good lesson on diversification hidden in the article, and it isn't that you should diversify into gold or other alternatives. It's mentioned that the French stock markets were up quite a bit over this period of weakness for U.S. stocks. I also looked up what the Nikkei did from 1968 to 1982; it more than quintupled. International stocks look like laggards today, but they likely will save your portfolio again in the future. With the oil boom of the 1970s, Canadian stocks probably also did well, but not so much in the 80s and 90s. Diversify!

From late 1968 to 1982 the S&P 500 simply hovered above and below the 100-point mark for 14 years. Just to emphasize how many years that was: The S&P 500 was lower at several points after the first Space Shuttle launches than it was at points prior to the first moon landings. That has to be really frustrating for investors.

This frustration culminated with the above magazine cover after almost eleven years of the markets going nowhere. With 1970s era inflation applied, you lost over 6% annually in purchasing power by having your money invested in stocks over those eleven years.

Now, if I were your financial advisor in 1979 and told you that this article was malarkey and that you should ignore the financial noisemedia (as I tell you today), three years later I would look like a complete fool, and the author of the above would seem vindicated. In August 1982 the S&P 500 was even lower. In the interim, you would have taken all your money out of stocks and bought gold, at prices that were all-time highs when adjusted to inflation. For stocks, this ended up being the bottom and markets rallied 60% over the next year and fully tripled over the next five.  

It's always hard to exemplify the value of good financial advice, because it has far more to do with emotional support and behavioral coaching and almost nothing to do with stock or fund picking. Sometimes it even means telling you that you're wrong and that your brain is defective (the fact that all our brains are defective is the core thesis of behavioral finance). If you invested in U.S. stocks from August 1979 to present... well you can see the numbers below. Along the way though were many articles like the one above, lengthy periods of terrible performance, and market crashes (even if I kept you invested in 1982 and you saw your portfolio triple, would you have stayed invested after the 1987 crash?).

For those who were earning money and saving, such long spans of range-bound markets were a gift. We could save monthly in our RRSPs for 10 or more years without having to worry about those things we were buying--stocks--becoming too expensive. Depending on your age, there very likely will be one or two or three more "mega bears" in your lifetime. 

In the time since August 13, 1970 (the TRIUMPH of stocks!):

  • The Consumer Price Index is up 3.5x
  • The S&P 500 is up 28-30x (depending on which week you check it)
  • The S&P 500 cash dividend is up 10x and rising.

 

Markus Muhs, CFP, CIM