| Sargent & Lundy Savings Investment Plan |
| SIX MARKET MYTHS TO IGNORE |
| The following excerpts are from the July 1999 "Louis
Rukeyser's Wall Street" newsletter. The opinions expressed by Mr.
Rukeyser may or may not reflect those of the SIP Committee.
The cardinal rule of successful investing is "Don't Panic!" One of the most important reasons successful investors have gotten that way in recent years is that they did not panic every time the market showed signs that it might decide to head south for a spell. As they hate to have me remind folks, the overwhelming majority of the would-be market "gurus" of our time have erred sharply, repeatedly and expensively on the negative side. I remain unfashionably convinced that stocks are going to be surprisingly rewarding investments over the next decade. We have many and well-known problems, but America and much of the rest of the world are finally getting their economic acts together, with greater efficiency and less inflation than seemed probably even 10 years ago. It looks to me like one of the most exciting periods in human history. Here are six market myths - as widespread as they are fallacious - that are misleading millions of Americans into missing out on the fantastic wealth-building opportunities in common stocks. MARKET MYTH #1: The little guy has gone crazy, buying stocks like never before and succumbing to a euphoria that can only end in disaster. This argument is repeated by countless financial magazines, newspapers and media commentators whose most distinguishing characteristic is how badly they have missed the record surge up to now. The reality, as usual, is quite different. Take, for example, the scary notion that a hysterical buying frenzy has led us poor, demented individual investors to put an unprecedented share of our savings into stocks. A terrible thought, isn't it? And it has every virtue except accuracy. Fact is, we're nowhere near record levels. Ownership of stocks, including stock mutual funds, as a percentage of total household financial assets is still well below where it was for most of the 1950s and 1960s, when it peaked above 35%. Americans understandably fled from stocks during the stagflation 1970s, and they have only very slowly and cautiously been rebuilding sensible positions in that area. Runaway euphoria it certainly is not. MARKET MYTH #2: Things may be OK now, but look out below when the baby boomers start to retire. The notion behind this myth is that boomers have been pouring money into mutual funds, and this is why the market keeps going up. However, when the boomers start to retire and take out money in about 15 years, we'll all be clobbered in the rush for the exits. Again, it sounds frightening when you say it fast, but this one too collapses of its own weight when you examine those uncomfortable things known as facts. First, the baby boomers will be retiring over the course of a generation - not on the same day. Second, given the inability of these would-be sages to tell us where we're going to be next autumn, I am rudely skeptical of their ability to forecast exactly what's going to happen decades from now. There remains the excellent possibility that something else favorable to equities, economically and/or politically, may occur to counterbalance the expected sales by boomers. Third, and perhaps most embarrassing to those making this glib argument, they have greatly exaggerated the actual role of mutual funds in fueling this market advance. While mutual-fund cash flow into equities has indeed been substantial, it has been a less-important market factor than investments by corporations themselves. In 1997 mergers and acquisitions by U.S. firms alone exceeded $919 billion, surging past 1996's then-record total of $626 billion. This has been a dramatic prop under stock prices, and in fact has resulted in a shrinking supply of stocks - despite all the new issues that garner so much publicity. Buybacks, privatizations and mergers all confirm the belief of corporate insiders that bargains still abound. MARKET MYTH #3: Be grateful for what you've made so far, because dreadful inflation lies just around the next corner. This one is so demonstrably silly that it wouldn't be worth discussing, except for the fact that it seems to be believed - at least every other day - by the hysterics in the bond market. They're terrified by the prospect of any growth other than in their own incomes, and thus they exaggerate all reports of economic improvement. The traders panic with random moves in commodity prices. The winter was cold, so oil prices spiked. Rain was scarce in the U.S. heartland, so corn and wheat prices rose. But in the end inflation is a money disease, impure and unsimple, and the Federal Reserve just hasn't been printing that much money. MARKET MYTH #4: Investors act as if stocks will never go down. Not so. One of the distinguishing factors of this entire bull market has been the way fear routinely checked greed. When a stock group has done brilliantly for a while, there is a tendency to sell it off. This self-correcting action provides buying opportunities of its own. MARKET MYTH #5: The next generation of Americans isn't going to live anywhere near as well as its parents. This same line has been used (with laughable incorrectness) by virtually every generation in the republic's history. We're going through a sluggish patch now, but given the pace of technological and medical progress, the belated streamlining of American industry, and the worldwide move away from socialism and toward free competitive markets, I would make precisely the opposite bet: that the next generation overall will strongly exceed the last in its ultimate economic progress. MARKET MYTH #6: The good news has simply gone on too long. That kind of "we'll have to pay for this" psychology is always persuasive for the guilt-ridding and the constitutionally gloomy, but bull markets do not end on some preordained cycle. They end when the economic underpinnings vanish and/or when popular enthusiasm gets unduly out of hand. Neither condition is yet here. This doesn't mean the market will now go straight up - I can promise you that it will not - but it does mean that steady, consistent accumulation of quality common stocks still has a long and happy future before it. So ignore the myths and make the money. |
This page updated on 7/19/99