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Back To The Future Investing February 12, 2010

Posted by shaferfinancial in Finance, Uncategorized.
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Investors have been relying on an anomaly; extremely long bull market with an occasional short bear market interspersed.  When stretched out to look at a hundred years of data we understand what a strange period of time that 1980-2005 era was.  The rules that were based on that time period are what most people use for investing.  It is increasingly clear that we can no longer use those rules, but must go back to the rules in place before that.  Investors that labor under the current rules will find themselves in a world of hurt, while those who adapt to the new environment will prosper.

I believe the investor can no longer depend upon the huge productivity advantages that American businesses had during the last quarter of a century to continually increase profitability of all business.  There will still be big winners, but there will also be big losers too.  GM, Kodak and Xerox are just the tip of the iceberg of companies once thought to be invincible, that are failing.  Investing in a well diversified basket of companies will no longer suffice and will produce inferior returns because they will inevitably include too many losers.  The speed at which investors can switch in and out of investments will create enough whipsaw to destroy firms stock value so quickly as to make the buy and hold mutual funds strategy silly.

I think value investing will again become the way to invest but with a shorter fuse for selling.  We have already seen Warren Buffett changing his strategy in this direction, entering and exiting large blocks of equities as ConocoPhilips, Eaton and Home Depot.

Back to the future investing will feel different, require a different mindset, and will leave the lazy or passive behind.  The real estate world will be different too.  See this excellent post.  Hitch up your wagons, it’s going to be a bumpy ride for us all, but with the right mind set it will be a successful one.

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Comments»

1. Jed Dahl - February 15, 2010

It would be interesting to study the post war period when tax rates hit the 95% range. I don’t see us getting above a 50% tax bracket this time around, but the main reason the 1980-2005 era has been so unique was because of the tendancy the Government has had towards tax cuts. Now that the Bush tax cuts are expiring, and the certaintly that the current administration will not look to cut taxes, investors will have less money. I expect the next 15 years to look like the post-war era.

I think dividend stocks are going to be the big winners for the next 15 years.

2. shaferfinancial - February 16, 2010

Jed, interesting theory. The 20 year post war average return culminating in 1964 was 14.95%. This compares to the 20 year period culminating in 1999 of 17.88%. The 1945-64 period is the 7th highest 20 year return. The highest marginal tax rate in the post war 20 years ranged from 70% to 94%. In the 1980 to 1999 time period it ranged from 39.6% to 70%. There was apparently good returns in both high marginal tax periods and low marginal tax periods. The 20 years culminating in 1999 remains unique in the lack of down years or any real bear market. In that time period there was only two down years out of 20 with a -3.1% in 1990 and a -4.92% in 1981. Easy to sell an indexing philosophy using data which the majority came from that unique period.

3. Jed Dahl - February 16, 2010

Wow, good stuff. The 14.95% really surprises me. I didn’t know what to expect, but it sure wasn’t that.

Thanks.


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