[As a humble letter writer]
FINANCIAL TIMES, Letters to the Editor
Tuesday, December 28th, 1999
Mystified market observer seeks enlightenment
>From Mr Doug Henwood--
Sir, In his article on long-term UK equity returns ("A smaller share", December 22), Philip Coggan repeats standard arguments on how stocks have to outperform bonds to compensate investors for their greater risk. There seem to be few principles more established in financial theory, academic or popular. I am mystified by this, for at least two reasons.
One, I never heard a good explanation of why the famously pitiless and impersonal "markets" should be so accommodating of human needs. Just what is this miraculous compensatory mechanism by which financial instruments obey the laws of the capital asset pricing model? Is it only that investors "think" they will be so compensated, so they pour money into stocks year after year, thereby validating their own assumptions (spuriously, if pleasingly)?
And two, despite having written a whole book about Wall Street, I have never heard a good reason why stock markets should so consistently outperform real economic growth over the course not merely of decades, but of centuries. Maybe I missed something in the course of several years of research, so I await enlightenment by the sophisticated readers of the Financial Times.
Doug Henwood Left Business Observer 250 W 85th St, New York, NY 10024, USA
__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com