Three futures…
This article sees three possible futures for the economy in this recession, and discusses the consequences for investors….
Three futures
Posted on March 12, 2009 by Richard Beddard
Filed Under Investing, Markets |
Two out of three ‘aint bad
Filed Under Investing, Markets |
Two out of three ‘aint bad
From the desk of James Montier:
In a research note earlier this month, Mr Montier postulates three futures:
- The optimistic path, in which government stimuli create inflation,
- A Japanese style protracted work out with low growth and low inflation, and a…
- Great Depression modelled on the 1930’s.
He concludes:
In the first two outcomes, value should do well. In the third, holding any equity is likely to be a poor decision. Since I don’t know which of these paths is more likely, I continue to believe that a slow steady deployment of capital into deep value opportunities in the face of market weakness is the most sensible option.
How value investing, buying shares in companies on low price to book (net asset value) ratios, would have worked in Japan:
Investors who bought and held would have earned a 3% annual return versus a market return of -4%. Investors who sold the most expensive stocks short, would have earned a return of 12%.
But in the Great Depression, cheap stops and expensive stocks both lost badly and buying shares was, quite simply, a bad idea.
The difference was the severity of the economic crises. In Japan, growth has been flat. In the 1930’s in the US, industrial production declined by 50% peak to trough.
His strategy, to buy value stocks gradually:
…Represents a regret minimisation approach - I end up with some exposure, and I’m dollar cost averaging down if this turns out to be the Great Depression 2. Alternatively, if the stimulus works, or the US follows the Japanese example, then as Jeremy Grantham says, “If stocks look attractive and you don’t buy them and they run away, you don’t just look like an idiot, you are an idiot.”
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