There appears to be something very illogical in the idea that if one invests in a portfolio of sound profitable businesses that it is impossible as a shareholder to share in their success. But this in fact is what happened in the decade following 1998 with a -0.3% annualised return from US equities and 1.05% nominal return from UK equities. Were McDonalds, P & G, Johnson & Johnson, Glaxo, BP etc. really doing so badly? Maybe not. But if you had invested in the Dow on the 2nd January 1998 your investment would have increased by a mere 2.7% over the next 10 years - without taking into consideration the dealing costs and the bid/offer spread.
With the poor stock market performance over the last 10 years - described as the 'Lost Decade"The Barclays Equity Gilt Study 2009, which examines the long-term returns on a variety of assets, calls the past 10 years a "lost decade" for shares, where "equities have been the worst performing asset class since 1997, sharply underperforming all other asset classes."The report says"in nominal terms, the -0.3% annualised return from US equities since 1998 is the fourth-worst 10-year return of the past 83 years. Only those 10-year periods ending in 1937, 1938 and 1939 have delivered lower returns. Similarly, over the past 109 years, only the decade ending in 1974 saw a weaker 10-year nominal return from UK equities. For the sake of record, the 1964-74 UK equity return was 1.02%, while the 1998-2008 return was 1.05%."
This unfortunately is Ben Graham's "Mr Market" coming into play. He is famously quoted as describing the market as a voting machine in the short term an as a weighing machine in the long term. Sometimes the "short term" can last a decade or more and the poor investor has to suffer the irrationality of "Mr Market". His only salvation are the dividends - and this for the is the reason I will never invest in a company that doesn't provide a reasonable level of dividends and a demonstrable will to maintain the dividend during hard times and to grow it in line with profits during the good times. Remember that a company has only ywo ways to reward his shareholders - through share value growth and through dividend payments. Yes a company can use share buy backs to try and bolster the share price but the shareholder reward is still in the hands of "Mr Market". A dividend payout is out of reach of the pschotic "Mr Market".
0 Comments