Jim Bianco, president of Bianco Research, summarizes the dominant investment advice of recent years as follows: "You gotta be in stocks because bond yields are so low there's no return potential." Stocks, on the other hand, can get you capital gains. According to Bianco, the basic drawback of this approach is that it isn't true, or at least hasn't been true for the last 30 years.
Investment advisers, folks like "Stocks for the Long Haul" author Jeremy Siegel and proponents of fundamental analysis haven't been running a scam to get individuals long stocks. Bianco says long-haul outperformance of bonds over stocks simply isn't "supposed" to happen and, at least according to Siegel's work, has never occurred. Yet here we are.
The cornerstone of modern finance is rooted in the idea that stepping out on the risk curve leads to out-sized returns. This is the logic behind Operation Twist; by keeping long-term riskless rates artificially low capital is hypothetically driven into riskier assets. The Federal Open Market Committee wants to get money to flow out of Treasuries and into things like stocks and capital investments. Alas, corporate America's refusal to invest may not be stubborn or "evil" but simply rational.
The implications of Bianco's work, which can be seen here (free report from March available), amount to the idea that everything we assume about fundamental stock analysis is flawed, at best, and damaging at worst. As Bianco puts it, "fundamental research is very good at telling you about the corporation itself but not necessarily what's discounted in the stock price." Stock prices don't catch up, or at least haven't recently or over the last 30 years.
Bianco's research illustrates the major point of contention between "traders" and those who regard themselves as "patient." Specifically, those who deride the merits of trading presume they have a superior methodology. Trading may be flawed but returns for buying and holding stocks over the last decade have been virtually nil. I'm touching the third rail of the investing industry as a whole by saying so but maybe the conversation isn't stock investing methodology but the merits of holding stocks at all. If near- term returns are random and long-term stock returns underperform Treasuries, there's little point to playing stocks at all.
Bianco isn't ready to dismiss the financial industry's raison d'etre but he does suggest a rethink of what we know about investing. Stock analysts need to "admit we have a problem here," Bianco says. "We don't understand the fundamental relationship between stocks and bonds."
Are we all wasting our time even talking about stocks? I personally want to know what you think. Let me know in the comment section below.
- Jim Bianco