With respect to the column I titled Can the Market Keep Climbing?, I got one pat and one pan. “Ahh, Andy, Andy, Andy,” wrote Dan H. Oops, I figured — I’m in trouble. But no. “If only I had listened to this kind of thinking in August 1995 when I had just succeeded in turning my one-stock portfolio (SGI) into a cool $1,114,000, rather than today’s $116,000. Perhaps someday I’ll write you the definitive cautionary tale about letting the tax tail wag the investment dog. [I presume this means he failed to sell in order to avoid paying capital gains tax.] Hopefully, a few people will recognize themselves in your column and it will make some kind of difference to them. Alas, there will be those pesky Emerson fans who will quote his, ‘Put all your eggs in one basket, and then watch that basket.’ The problem is, people fall in love with the basket, and they start watching the basket instead of watching the damn eggs.”

I’m not sure I follow that last little bit — especially if he had just one egg in his basket (SGI). But I’m not going to quibble when someone agrees with me, let alone the brother of the husband of the daughter of the chairman of the Senate budget committee, Pete Domenici. (In a P.S., Dan reveals this connection and says he passed on my stuff about the recently introduced Auto-Choice bill to Senator Domenici. Go, Dan!)

I fared a little less well with my friend Less Antman, whose opinion and insights I regard very highly, but who doesn’t seem to be related even to a subcommittee chairperson, let alone Domenici, so I don’t mind sparring with him from time to time.

Less writes:

“Far be it from me to give you a tongue-lashing for trying to time the market again, especially since anyone who would follow your advice today probably already followed it in the past and has nothing left in the market to sell at this point <g>.”

The <g>, as you know, stands for “good-natured grin,” which is of course exactly how I take it. I don’t think I ever told anyone to sell all his or her stocks, and I haven’t sold all mine. But it’s true: I’ve sometimes suggested lightening up, or selling half in your tax-free account, or shifting some to overseas funds — and I’ve frequently suggested not owning stocks at these levels on margin, or with money you might need in a year or three. (Less agrees with me on those cautions, so, as usual, there are only subtle distinctions between his point of view and mine-such as that I’m right and he’s wrong <g>.)

“Remember Paul Samuelson’s joke about stock market declines predicting 9 of the last 5 recessions?” Less’s message continues. “Someday, you will be immortalized for having forecast 20 of the last 2 bear markets <g>.”

I’ll admit there are things I’d rather be immortalized for. (“The man who invented the clickle,” perhaps, or “the man who went on at such length about auto insurance reform they finally just threw up their hands and enacted it to get him to shut up.”) But immortality doesn’t come cheap or easy, so if it has to be for predicting 20 of the last two bear markets — even though I have forecast only one bear market, and am 100% right that it will come exactly when I say it will (“someday”) — so be it.

In hindsight, of course, my caution has proved unnecessary. It was born of the period 1968-1974, as I watched stocks descend from euphoria to an environment in which many sold at six times — depressed — earnings. (Yes, Virginia, there was such a time.) These last five years, by contrast, and with hindsight, you should not only have kept 100% of your long-term money in stocks, you should also have committed your short-term emergency savings to the market, and then levered to the hilt with margin (just so long as you didn’t fill your portfolio with SGI). You should also have dropped your fire insurance, as it turns out, since your house did not burn down.

But the next five years? Well, the same terrific macro trends are in place: lower nonproductive expenditures for defense, freer trade, near worldwide acceptance of market capitalism, astonishing technological advance. But none of this is a secret, and the stock market seems already to take much of it — perhaps even too much of it — into account.

Less understands all this at least as well as I do, yet believes one should never attempt to “time” the market (guess when it’s time to get in and out) — a view I, too, have long largely espoused.

Indeed, an awful lot of people now espouse it . . . and that may be a problem. If not today, one day. It’s just when everyone catches on (and when they invest in stocks not based on value but on, say, their need to build a fortune in the relatively short time remaining before retirement), that markets have a way of becoming uncooperative.

“Let me explain why this hold-for-the-long-pull tactic will self-destruct if ever it becomes universally believed in,” wrote Nobel-prize winning professor of economics Paul Samuelson in the Fall 1994 Journal of Portfolio Management. “If you adhere to the dogma that stocks must beat bonds in the long-enough run, there is no P/E level . . . at which you will take in sail [lighten up your holdings]. A ponzi bubble is ever possible, and given past psychologies of boom and bust, ever-higher P/E ratios become a self-fulfilling prophecy. I cannot prove to you that every bubble must burst. After all, anything can be carried on to twice where it has already reached. But . . . at high enough P/E ratios, equities will cease to display in the future their historical superiority over bonds.”

This is not to say Samuelson saw the market, at its mid-1994 level, as a bubble about to burst. Or that he sees it that way now that it’s doubled. But because he was writing about the difficulties in “active asset allocation timing,” he was afraid his readers might “think I have climbed on today’s bandwagon of Become a Long-Term Investor Who Buys and Holds in the Confidence Acquired from History, Which Assures that Stocks Do Better in the Long Pull than Non-Stocks Do.”

“As will be seen,” he continues, “I give two cheers at most for this new dogma. There have been worse dogmas. And there will be worse ones to come. However, as I shall explicate, once everyone comes to believe in and act on Always Hold Stocks, that tactic will self-destruct in the way that the Tokyo Equity Bubble self-destructed after New Year’s Day 1990.” (The Nikkei Dow was 40,000 then. Seven and a half long years later it is 20,000 — and that’s up a lot from its low.)

We are not at “Nikkei 40,000” — a long way from it, in fact. But it is to keep from getting there that Alan Greenspan and Warren Buffett and such are sounding notes of caution.

Invest . . . invest for the long pull . . . invest partly or largely in stocks . . . but not blindly. Samuelson’s 1994 equation-laden article is entitled: “The Long-Term Case for Equities (And How It Can Be Oversold).”


One last thing to say, in fairness to Less. He rightly pointed out that my earlier column was flawed in the simplistic way it equated profit growth with growth in stock prices. Most public companies reinvest all or most of their earnings — these days, often, by buying back some of their own shares — so that when profits rise 5% (say) profits per share, and hence stock prices, may rise faster. Less has a lot of interesting things to say on this point, and has done a better job of thinking about it than I have. If I ever feel I understand it well enough, I will share his comments with you — and poke as much fun at him as I am able <g>.



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