Wednesday, September 08, 2010

Is "the cult of equity" really over?

Today's buzz is about an apparent declaration that "the cult of equity is dead". That is a quote from Robert Buckland, Citigroup Inc.’s global strategist - at least according to reports in Bloomberg, Financial Times, and so on.

What is the significance of that? Well, as you know, you can invest, in no particular order, in (a) real estate, (b) gold and other metals or commodities, (c) so-called alternative investments (antiques, art, stamps, and so on), (d) bonds or (e) shares (Americans call the last "stocks").

The received wisdom has been that, in the long run, investment in shares outperforms investment in the other categories, specifically bonds.

However, the problem is that in the long run we are all dead!

So the question is never what is or isn't good in the long run, the question is WHEN do you want to get back your cash by selling your investments and what is the relative valuation of each of these categories and of your choices within those categories!

The fact is that, in the last three years, bonds have not only outperformed stocks, they may well continue outperform shares in the next decade (assuming current trends continue, which is of course never a safe assumption!).

So what should you do? If you are in stocks, is this a good time to get out, when the value of your shares is low? Perhaps, if by cutting your losses on your current shares you can switch them into other shares - or indeed into bonds which you may expect will go much higher following the assertion by Mr Buckland of Citigroup.

However, bonds are currently overpriced - and you can expect much greater volatility in bond prices - not least following Mr Buckland's declaration.

If only by contrast, shares are relatively reasonably priced.

So my recommendation is that, IF you want to stick to shares, find one or more companies that have low leverage and a stable dividend.

However, the best is to invest, as I have said earlier, in smaller companies where you can walk around the premises, sniff out what is going on by talking to employees, and ask straight questions of the CEO or senior executives.

You can't, in a similar way, find out what is going on big companies or in big governments, whether in China or in the USA.

Since investing is, at the end of the day, a matter of trust, I prefer to have as solid grounds as possible for any trust that I may choose to place in a company or government. Sphere: Related Content

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