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A Trip Down Memory LanePart I by Frank Armstrong Our hero examines several US market segments as
well as foreign large and small stocks. Because Japan is such an
important part of foreign market performance, he also follows its
performance. Finally, he compares all these equity markets to bonds
and inflation rates. Armed with past ten-year return information, he
plans to invest in the world’s most profitable markets. He reasons
that ten years seems like a long enough time to measure performance,
and the world has changed so rapidly that longer term performance is
meaningless. After all, it’s different this time. Here is what he sees as he examines the previous
ten year’s performance: His analysis is aided by his understanding of
current events and economic trends. Everybody knows that the US is in
big trouble. The last decade has seen the humiliation of defeat in
Vietnam, civil unrest, and public scandal. The hippies have no work
ethic, productivity is low, and American products both inferior and
overpriced. Inflation and high interest rates being permanent, hard
assets like real estate, oil, and antiques are the only sure things. Only losers would invest in the S&P 500.
Those are yesterday’s companies, and you note smugly that they
failed to even match Treasury bills and under-performed inflation.
Smaller and value companies seem to much more adaptable than the
dinosaurs, but overseas investing led by an emerging Japan really
shines. He places your bets on small, value and foreign
equities. Ten years later he is not surprised to see that
the rust belt S&P 500 still lags every other index except the US
small companies. What happened to the small company premium, anyway?
Japan is still powering along, pulling all of EAFE with it, and is
poised to buy most of the US with their tremendous hoard of
accumulated trading profits. The decline of the US economic model
seems assured. The Japanese understand the new world. Clearly
market share is preferable to profits, lifetime employment is good,
and consensus management rules. US companies just refuse to get it.
You can’t give away an American car. Business Week asks, “Where
will Japan Strike Next?” Meanwhile, the US Government Deficit is
spiraling out of control, threatening to suck the entire economy dry.
There is no political will to contain it. The dollar is on a steady
downhill slide along with US self-confidence. It doesn’t get much
worse than this! Of course, this time it’s really different.
Americans can’t keep up, and when they do have a good idea, somebody
else makes all the money on it. Computers will change the world. But,
they will probably be made in Taiwan. He is fed up. Patriotism only goes so far. He
loads up on foreign equities with emphasis on Japan and awaits certain
riches. Results didn’t quite match expectations again.
How could the Japanese do that to us? And whoever fell for all that
consensus management drivel, anyway? Who could have known that
mini-vans would rule the road, and that Americans would be making
them? Who knew about this Internet stuff, and how are these guys from
Intel suddenly making money with computer chips? Who would have
guessed that a Democrat President would balance the budget, and even
turn in a surplus? It hardly seems fair. How could such a smart guy have been so wrong?
What happened? Next:
Lessons learned. Frank Armstrong, CFP, is the author of Investment
Strategies for the 21st Century, published here,
President of Investor
Solutions, Inc., a fee-only Registered Investment Advisor,
and Chief Investment Strategist of DirectAdvice.com. Note: The
featured writer is solely responsible for the content of this article.
The opinions expressed herein are not necessarily those of MFI or BES,
Inc. Get The Facts:
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It’s
hard to go back in time. But, if an investor could, this is what it
might have looked like. For the sake of today’s exercise we are
going to give our investor access to some market indexes that
wouldn’t have been generally available at the time.
