Dogma and Denial

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“Don’t Be Trapped by Dogma – Which is Living With the Results of Other People’s Thinking” -Steve Jobs

There is a very strong and popular dogma out there that says, ‘you must own US stocks all the time no matter what.’ It’s really at the heart of the “buy and hold” mantra which is something I’ve railed against recently.

I’ve railed against it because it’s pretty plain to see that there are times when US stocks are attractive to own – the vast majority of the time, in fact. But there are also times when they really aren’t.

Right now just happens to be one of the very few times US stocks have offered investors a negative 10-year forecast return based on Warren Buffett’s favorite valuation metric (total market capitalization to GNP).

So I ask, “why in hell would you want to hold something that is likely to give you a negative return over the coming decade?”

I imagine these dogmatists would answer, “because you can’t time the market.”

To which I would answer, “On what time frame? Because it’s pretty clear that this tool is fairly good at predicting 10-year returns. (It’s about 83% negatively correlated).”

Admittedly, on a one or two year time frame it has little or no value in timing but is that your investment horizon? If so, you shouldn’t hold ANY stocks at all, US or foreign! On the other hand, if your time frame is 10 years or longer you should probably be very interested in what a measure like this has to say. And it’s not just this one. There are measures that are even more closely correlated to future 10-year returns that say essentially the same thing: stocks are extremely highly-valued/offer unusually low rates of return.

And there are plenty of other asset classes to own that offer more attractive prospective returns! Hell, the 10-year treasury bond, at a mere 2.2% yield may offer better returns than US stocks over the coming decade with FAR less risk (so long as you intend to hold to maturity). In fact, nearly ANY other country around the world offers better value/prospective returns than US stocks do right now.

So why the hang up? Why are investors (and their advisers) so stuck on dedicating the majority of their investable assets to US stocks despite the fact that they are so unattractively priced?

My best guess is they are simply in denial. They are so enamored with the returns they’ve witnessed over the past five years that they simply refuse to even entertain the possibility that stocks may serve up anything less going forward. And that’s just a shame because it’s precisely at times like these investors should question this sort of dogma, rather than near the end of a bear market when they usually finally do decide to abandon it.