Experience shows that our estimate of the downside is usually an underestimate.
Therefore, some risk-averse investors dare not or refuse to trust the conventional wisdom about long-term strength of equity asset class.
They would prefer cash or safe asset classes like soverign bonds.
They suspect that, in general, high-risk-high-return assets may turn out to be high-risk without a real alpha [i.e. without significant likelihood of excess return].
I see long-term strength only in U.S. equity. I consider all other markets highly unstable, but that is probably simplistic and over-generalized.
Q: Pick a random 10Y window some time into the near future (within your lifetime). What is your estimated probability that SP500 (or another stock market) would show a positive return?
The skeptics would probably say slighly above 50%. Some would say that a fairly priced SP500 could, in theory, shoot up 100 times (above fair value) over a year shortly before that window, and then it would be precarious and could collapse any time. However, such a scenario is unlikely because SP500 is hard to manipulate. The buyers would put themselves at grave risk by bidding up the price.
( In contrast, Beijing rEstate valuataion is possibly 5 times above fair value, and could collapse any time. )
How about insurers? I think they invest some 10-20% in eq, the rest in bonds. Appreciation in their portfolio tends to be durable.
How about CPF (and pension funds)? For decades they have relied on eq to provide the required return. They have been fairly reliable, despite many swan events.
Temasek’s 400b is invested mostly in equities, with 62% allocation to Asia. Apparently, there is long-term strength in Asia equities, but I think this is misleading, because the retail investor would lack the resources of a gigantic fund, and unable to limit numerous losses that add up.
Some would predict an eq hedge fund could hit “positive returns for a few years, then give all up in one bad year”. Well, MLP is one of the biggest hedge funds and we count some pension funds and insurers as investors. We are mostly equities but rather stable over the last 3 decades.
Now I feel Nsdq (or another U.S. index) is susceptible to “fast_window” of 500% appreciation. That would precede a very long trough.
past title: durability of asset appreciation
Q: after an asset appreciates by 100%, how confident are we about its stability? Note cpf and bonds won’t show such high appreciation.
- eg: appreciation of a racing horse .. won’t last long
- eg: One 92s27 classmate (水生？) bought a recreational club membership nearby. The membership is lifetime and transferrable, with a market price. My classmate felt confident that the price has held steady. If it shows an appreciation, how much confidence do you have?
- eg: gold .. a curious story. Somehow it is perceived as more stable than stocks, but still not very stable.
— holding power.. My bias: the stronger investors, the wise investors tend to allocate more to the more “durable” assets, and hold them through a trough, rather than liquidating at a loss.
Q: What if a durable asset hits a swan, and experiences a trough longer than expected? Is it really durable?
A: That scenario is non-academic; it is the reason for risk-management. We would need to reassess the 20Y prospect. Very unlikely we would need to liquidate at a loss.
— swan events .. a major source of instability. I feel U.S. stocks and some rEstate markets recover fast or don’t fall enough to wipe out 3Y of appreciation. I tend to see an economic basis for their appreciation.
In contrast, if the stock/rEstate price is in a speculative bubble, then it isn’t durable. The crash doesn’t need a swan event.
see also scenario plann`: asset devalue over50-100Y
— eg: FWD300 surrender value grows year after year, faster than FLI. The longer you hold, the sweeter.
In constrast, cpfLife has declining surrender value 🙁
— eg: bccy .. no basis for their valuations, so I feel high valuations can evaporate faster.
Binance founder CZ … over 5Y became #1 richest Chinese in the world, but how long did he last?
— eg: rEstate .. appreciation is usually more stable. We are more confident about its durability. I think rEstate have much slower price changes than stocks. The monthly count of transactions is a trickle compared to stocks.
In general but not always, the faster something appreciates, the less durable, unless it is a scarce resource without substitutes.
— eg: SP500.. no other stock index shows the same /durability/ of appreciation.
— eg: single-name stocks ..
For a growth stock, the appreciation is mostly based on projected growth, rather than declared earnings. I feel it is less stable.
Compared to traditional blue-chips, tech blue-chips have less moat, and face more frequent challengers and churn.
I feel traditional, boring stocks seldom show fast appreciation. When they do, I feel more confident about its durability.