Yesterday I ran a letter from Mary, who says all she really asks of her mutual funds is that they do at least as well with her money as she could do in a money-market savings account. Anything beyond that, to her, is gravy.
Although I doubt she was entirely serious in this — and it sounds as if she has enough money not to have to worry much in any event — clearly, she’s not expecting a lot.
Not so most investors. You probably saw it, but if not it’s worth highlighting the table the New York Times, and perhaps other publications, ran last week. It came from Montgomery Asset Management, which had surveyed 750 mutual fund investors as to the level of annual returns they expected their mutual funds to provide them over the next year and the next decade.
In fact, Montgomery has been gathering this data quarterly since the start of 1997, and if the data is to be believed and the sampling techniques trusted, investors are becoming more euphoric by the month. It’s as if St. John’s Wort had been added to the national water supply, if not something stronger.
In January, investors said they expected to see their returns top 15% for the next year and 21% annually for the decade ahead. In April, they were only a hair more upbeat, but by July their ten-year expectation had climbed to top 25% and in October — drawing the notice of the New York Times and others — they were looking for a gain of about 22% for the year ahead and annual returns of 34% in the coming decade.
The first thing to say is that if this is the case, there will almost surely be a tremendous number of disappointed investors ten years from now. No way is the Dow headed for 149,000 in ten years (today’s level compounded at 34%). Even the icon of investment success and nation’s second richest man, Warren Buffett, has not been able to compound money at that rate — and suddenly, going forward, we expect this to be the norm?
The second thing to say is — AEIEIEIEIE! Which may be misspelled, but is roughly what the cavalry used to say when they spotted 20,000 Indians coming over the ridge.
Another applicable phrase might be: irrational exuberance.
This is not to say there will be a crash, or that our outlook in America is not bright. But one sure sign the market is not poised for unprecedented appreciation over the next decade is that so many people apparently believe it is.
Quote of the Day
Every debt is ultimately paid, if not by the debtor, then eventually by the creditor.~Jim Grant
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