Is It Worth Owning Equities at All?

I’m amazed at the spectacular performances currently underway by some key Dow stocks. A number of big, brand-name companies are hitting new 52-week highs in this market, namely E.I. du Pont de Nemours and Company (NYSE/DD), also known as DuPont, and Caterpillar Inc. (NYSE/CAT) — both up about $10.00 a share in the last month. 3M Company (NYSE/MMM) is looking very strong and even AT&T Inc. (NYSE/T) is showing surprising price strength on the stock market.

But, the price strength is not uniform. Just like in the Dow Transports, some component stocks are doing well, while others are not.

It’s very difficult to make any bold calls as to what might happen to the economy and the stock market. A case can easily be made for both the bulls and the bears. The recent positive change in investor sentiment could stay with us a while longer.

In this market, I’d be a value speculator, but not a new long-term investor. I would not overpay for any equity security with the possible exception of some speculative gold trades.

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If you get the opportunity, pull up a 20-year stock chart on 3M. This Dow stock is worth about $63.0 billion at current prices and, according to the chart, looks to have made a full recovery from the subprime-mortgage-induced meltdown. But, you’ll also notice that the stock hasn’t really done anything for the last seven years. It’s just bounced around in a big trading range. Without the company’s dividend payments, stockholders in 3M would have lost money due to inflation.

There are a lot of stories in the marketplace similar to this one. A number of big companies have seen their stock prices make what I refer to as a full price recovery since the financial crisis. But, even with this solid price performance, most of these stocks are trading for about the same money they were a decade ago. This begs the question: is it worth even being in equities at all going forward? With this kind of track record, my answer is: only as a select speculator.

A buy-and-hold investment strategy worked tremendously well in the 80s and 90s. In the last decade, it has proven to be a failure. Without dividends, it would have been a real failure. For the amount of investment risk inherent in stocks, the last decade hasn’t been worth the effort.

Speculators like to move in and out of positions. Investors tend to buy and hold. I’d be a speculator in stocks, but not a long-term passive investor. Investment risk is too high and expected returns are too low.

The single best strategy a passive investor can employ in this market is to sit on cash and wait. Get out of debt and save for the future. Returns on cash are very small right now, but so is investment risk.

We’re in a consolidation phase for both the economy and the stock market. It will be a while yet before a new economic trend takes over. Frankly, I can see the day in the next several years where the interest rate on cash deposits will outweigh the risk premium associated with stocks. There’s a reckoning going on and we are going back to basics.