Puzzled

Charles Jannuzi jannuzi at edu00.f-edu.fukui-u.ac.jp
Tue Mar 5 21:45:46 PST 2002


joanna bujes wrote


>Can anyone help with this? Doug? >Is it saying that the only folks who
>made money in the buble were the >professionals? the insiders? I don't
>quite follow.

It would seem the 'average' investor they are talking about is someone who did a lot of fund switching and market timing in order to try and beat the market (or beat their perception of it, as in doing better than what others were doing or just what they themselves had done the previous quarter).

At least that seems to be the behaviour they describe to explain the returns of only 5% or so. Perhaps if someone had picked three good funds from Putnam (e.g., blue chip, high tech, and small cap) and just kept their money parked, their performance would reflect pretty much that of the overall market.

Other studies show something else alarming, however. The standard sales talk for mutual investment funds is that stocks beat bonds which both beat money accounts, and the relationship is higher risk brings higher returns.

However, as Enron or Argentina shows, you can lose your shirt on bonds, private or gov't, if you are going at them to try and beat the markets and are diversified. Japanese bond investors given the sales pitch about what a sure thing Enron bonds were (gosh, energy deregulation and American management know-how for Japan seemed like such a SURE THING!) are now rueing the day. Thank god the analysts responsible have turned their analytic power on solving the bad loan problem here--heavy irony intended.

But the more interesting phenomenon, to me anyway, is that even long term you can't say with any very convincing probability that stocks beat bonds. Even if you can invest your money for over 20 years, the extra stability that diversified bond investing brings can and has often outperformed stock investing. For one thing, that's because you might have been the most calm and patient fund investor for 19 years and 364 days and the day before you cashed in, the market crashes and doesn't recover soon. Happened in Japan in the late 20th century. Some people died waiting to time their exit from the Nikkei.

I think that US-headquartered capital needs a major breakout about now, before people get totally turned off by a stock market that has not gone anywhere for two years. If it doesn't find that next big thing (post internet, post telecommunications, post energy deregulation, post new new economy--the next bet would seem to be to buy up distressed assets in Japan, at least if you are a Bush or Bin Laden), we won't be laughing about how ridiculous the thought of Dow 36,000 was but crying over how real Dow 3600 is. I myself think it would be the best thing that could happen for fair globalization and development, but if the total empire hits such a rough spot...well, it will make for interesting times, I'm sure.

Charles Jannuzi



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