Stocks always make money??
Excerpt from the Daily Reckoning Newsletter:
"Imagine that you do your maths (as they say in England)
and that you come to the realization that - as a scientific observation - stocks produce greater profits than bonds. If this were accepted as scientifically valid... it would be irrational for investors to put their money into anything other than stocks. Stocks would, then, rise dramatically - convincing even diehard skeptics, who would then buy stocks, too. Stocks would be hot... while bonds would cool down and ice over. Pretty soon, bonds would yield 10% or more (in 1978 you could get 15% from a U.S. government bond!)... and stocks would produce no yield at all... and no hope of capital gains, for all the world's money would be already invested in them.
"But the observation that stocks outperform bonds is based on investors' attitudes and reactions from a period when investors did not believe that stocks were better
investments. Stock prices from the period - much lower -
reflected the belief that stocks were, on the contrary, risky... and that investors needed a greater return to make up for the risk.
"And so it doesn't take long for the sharp, cynical
investor to see that the 'stocks are always better than
bonds' idea is flawed. The smart money pulls out of the
boiling stock market... just as Buffett, Soros, Rogers,
Templeton, and Grantham have largely done already. Later, the mob of lumpeninvestors catches on... and may, in a moment of sudden panic, realize that its goose has been cooked. Stocks crash. In effect, this generation of investors rediscovers the risk that their fathers and grandfathers always knew was there - the kind of risk that 'science' can't measure... the kind of risk the Feds can't protect you against."