Hi Patrick, thanks for another interesting post and congrats on the whole wedding thing. Remember that weddings are not expensive but divorce is quite possibly the biggest financial loss you will ever incur. Good luck for never having to go down that particular black hole.
With regards to these old long-run market analogies, I think we must also realise that the world has changed. Yes, shares will most likely present a very viable long run financial return. But crashes are going to become more imminent and market timing is going to become more important to maximise your returns. As an example, I can switch my Allan Gray retirement annuity funds in and out of equities whenever I choose, typically making a cost-free move once every couple of months. I typically do around 3 to 4% better than their Equity fund as a result i.e. I switch into hedged funds and cash when I suspect a sell-off is coming and then switch back into pure equities at a lower price.
I say the world has changed because 1) permanently low returns in bonds and elsewhere are forcing equity prices up unrealistically, keeping zombie companies alive and making others more expensive; and 2) there are now more bot-traders in the market than human traders.
The problem with 1) is that value is being eroded. Fundamental value investors are struggling to find real value anywhere based on tried and tested valuation methodologies. The markets are simply rallying because everyone knows that equities are the only place to find returns right now. Every man, his dog and shoe-shine kid is in the market. It's a very dangerous situation to be in. The problem with 2) is that bots are happy to make money from being short just as easily as from being long. Previously the market used to follow a right-angled triangle approach i.e. the bull walked up the stairs 80% of the time (the hypotenuse) and the bear jumped out the window 20% of the time (the upright of the triangle). I for one have noticed that this human tendency to want to buy and see the market rally is starting to break down. The sell-offs are happening with greater frequency, are more sustained and thus, although less ferocious in intensity, are probably starting to do more damage to long-only portfolios.
Although hedge funds have been largely ridiculed and seen major cash withdrawals of late, I suspect we will start to see star performing hedge funds emerge as average volatility in the market starts to pick up over time. Equity historical volatility has typically only been around 15-20%. Watch what happens when equity volatility starts to become more like 30-40% and equities start behaving more like commodities. I don't predict this trend will fully emerge for at least another year or so but watch this space....
