Chris Lau - Seeking Alpha

Sunday, March 29, 2009

Bonds or Stocks?

In John Mauldin's Thoughts From the Frontline newsletter, Mauldin summarizes an article to be published in late-April by Rob Arnott, Chairman of Research Affiliates. Arnott compares the performance of bonds and of stocks from 1802 to present.

Here are the highlights in comparing bond investments over stock investments:

  • Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s
  • Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds
  • In the late '90s, stock bulls would point out that there was no 30-year period where stocks did not beat bonds in the 20th century
  • After 2000,  yields on stocks dropped to 1%, compared to 6% in bonds

This point was interesting:

  • When someone tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their homework. At best, they are parroting bad research that makes their case, or they are simply trying to sell you something

On timing the market:

  • 20-year returns you will get on your stock portfolios are VERY highly correlated with the valuations of the stock market at the time you invest. That is one reason why I contend that you can roughly time the stock market
  • Valuations matter, as I wrote for many chapters in Bull's Eye Investing, where I suggested in 2003 that we were in a long-term secular bear market and that stocks would be a difficult place to be in the coming decade, based on valuations. I looked foolish in 2006 and most of 2007

On Financials (rule change):

  • Mark-to-market rules for assets in distressed markets were suspended
  • They [US Financial Accounting Standards Board (FASB)] widened the definition of "temporary" impairments of troubled assets, which will "allow banks to write up the value of some troubled assets if these have been hit by falling markets without (yet) suffering any significant credit losses." (

Consequence? Banks can report a healthier balance sheet, at least until the commercial mortgage and credit card problems start having to be written off.

In regards to last week's February housing sales figures:

  • the 4.7% rise was "plus or minus 18.3%". That means sales could have risen as much as 23% or dropped 13%. We won't know for awhile until we get real numbers and not estimates. Hanging your outlook for the economy or the housing market on one-month estimates is an exercise in futility, and could come back to embarrass you
  • Ignore month-to-month estimated data. The key thing to look for is the direction of the revisions. If they are down, as they have been for over a year, then that is a bad sign

Source: Thoughts From the Frontline newsletter

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: 

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My Comments:

The market rules keep changing. This time, it is the accounting rules. Investors need to be aware of such changes. Comparing one set of figures from one year to a previous one ought to take the mark to market rule change into consideration. 

When improving figures are reported for financials, remember that fundamentally, nothing may have changed, the numbers have simply been reported differently.