The end of investing?

Today's Financial Times runs a story entitled Is it back to the Fifties? which points out that over the past 40 years, ever since the postwar “baby boom” generation joined the workforce, stocks have performed no better than 20-year government bonds.

The point of the article and its title is to suggest that we may now be returning to a era not dissimilar to the 1950s, which "marked the start of a period of relative peace and prosperity [which] came on the heels of a tumultuous 50 years that included two world wars and an economic depression".

Nobody can deny that we have just come through a very tumultuous two years for the global economy. But to suggest this is comparable to the 50 years that preceeded the "golden era" of the 1950s is like suggesting that the wars in Iraq and Afghanistan are equivalent to World Wars III and IV.

While both conflicts have cost thousands of lives and global stock markets had collapsed as much as 75% by one point last year, I've never see anyone hiding in a bunker or people lining the streets in shabby clothing asking for food stamps.

We are now familar with the reason why there hasn't been another Great Depression; governments have learnt the lessons of the past and won't make the same mistakes again. So we have seen a massive injection of cash into the system to ensure that banks remain solvent and companies continue to function.

Meanwhile, finance chiefs around the world are busy "fixing" the financial system so this never happens again.

What should we make of all this?

I suggest looking at it this way:

1) The financial markets have collapsed because the economic cycle turned
2) The economic cycle always turns
3) Financial advisers are not paid to understand the economic cycle. They are paid to sell products
4) If you had understood the economic cycle then you would have been able to anticpate the decline in the stock market
5) Finance chiefs will not be able to avoid the next downturn in the economic cycle
6) Finance chiefs are working to bring about an upturn in the economic cycle
7) This upturn in the economic cycle will be accompanied by a recovery in the stock market

Of course, much of what I have said is either flattered by hindsight or highly speculative. I recognise this uncertainty and believe that only by understanding this uncertainty can you act in a way that protects you from it. Before you can profit from the economic cycle - because that's essentially what you are attemping to do by investing in the stock market - you need to understand it. If you don't, then you should not invest in the equity market. As the past 40 years show, if you don't understand it yet than you never will.