The Nation's Pulse / Americu"s Stock in Trade
Forbes, Malcolm S. Jr.
"The Nation's Pulse / Americu"s Stock in Trade" You would never know it from all the talk about gold, silver, breakable Chinese porcelain, and the like, but common stocks have been one of the best investments you...
...As for the future, the odds are that equities will do better than most investment alternatives in the next ten years...
...Smaller stocks have done so much better in recent years than those of large corporations that it's no surprise they dropped in price in March...
...But what most people, including many economic journalists, have overlooked is that stocks, despite their recent volatility, have risen impressively since 1974...
...Companies pay them in cash, not by means of accounting gimmickry...
...But that may be changing now--and for good reason...
...Despite their impressive rise since 1974, stocks of major corporations have rarely in this century been so cheap as they are today...
...Book value is how much money would theoretically be left if a company closed its doors, liquidated its assets, and paid off all its debts and liabilities...
...The proof is dividends...
...Stock prices, as measured by the Standard and Poor's 500, a weighted average of 500 large corporations, were up 1 ~, pcrcc~t from I978...
...The DJI, for example, was lackluster in 1979, barely up from a year ago...
...Collectibles don't pay dividends, nor do gold and silver...
...Naturally, this does not mean that all stocks are the same, that each will do as well as the others...
...Stocks have risen faster than houses, and many have out-performed gold and silver as well...
...28 THE AMERICAN SPECTATOR JUNE 1980...
...Moreover, the interest on a bond is fixed...
...the average mutual fund, 125 percent...
...Smart investors realize they might look foolish full while by moving against the crown but they figure that they will be handsomely rewarded for doing so...
...The bond market today, though, is a shambles: Individuals and institutions alike have suffered staggering losses...
...Yet many stocks have done as well or better during the same period: The Value Line Index has rocketed 117 percent...
...All in all, not bad in a year of incipient recession, energy shortages, roaring inflation, and recordbreaking interest rates...
...The Wilshire 5000 Equity Index, which represents the entire universe of stocks, appreciated more than $175 billion in market value...
...and the American Stock Exchange, 290 percent...
...Of course, stocks never go up in a straight line...
...For one of the few times in modern history, most big stocks are selling below book value...
...as measured by the New York Stock Exchange Composite, I6 percent...
...In the aftermath of the most severe contraction since that of 1929-1932, millions of investors swore off stocks...
...The be>t time to buy stocks is when they are cheap and when everyone else wants to sell--like now...
...So, considerable buying power is going back to stocks, because people are beginning to discover that American companies have generally coped with inflation better than was expected, despite the burdens of regulation, environmentalism, and increasing taxes...
...Even so, stocks have a bad image in these inflationary times, an image that results from the great crash of 1968-1974, when stocks lost more than half their value...
...the NASDAQ, 125 percent...
...for the CPI, 87 percent...
...But other measurements, more broadly based, told a different story...
...that they'd better wait until all the uncertainties go away...
...1977, for example, was not a banner year for most equities...
...Although most experts concede that the Index is unrepresentative of the market as a wbole-the DJI is made up of only 30 companies--the media treat it as the barometer of the market's health...
...When these institutions first shunned stocks, they bought bonds...
...and the American Stock Exchange Index, over 60 percent...
...Banks, pension funds, and insurance companies sharply reduced their investments in equities...
...And what about the 1980s...
...With dividends, the" rotat return on either was over 20 percent...
...have performed so well recently is the 1978 capital gains tax reduction, which has benefitted individual investors, who traditionally buy smaller stocks...
...the NASDAQ Over-the-Counter Composite, 28 percent...
...And that's why foreign corporations are purchasing American companies in record numbers...
...are not...
...Conversely, among the best values today seem to be the stocks of the bigger corporations, such as IBM, International Paper, and Dow Chemical...
...AMERICA'S STOCK IN TRADE You would never know it from all the talk about gold, silver, breakable Chinese porcelain, and the like, but common stocks have been one of the best investments you could have made in the past five years...
...In 1973, an investor had to pay $18 for each $1 of a company's earnings...
...the price/earnings ratio was thus 18...
...But even the bull market of the 1960s was punctuated by several spectacular sell-offs, and, besides, the trend line since 1975 has been very positive...
...And many individual investors reasoned the same way, purchasing bonds in record numbers...
...But you pay a high price for certaimv No one can pick the precise market buttom, or its top...
...At the same time, institutions like banks and pension funds have been reducing their proportion of stocks, especially the kind you'd find in the Dow Jones Industrial Index, which again helps s~aller stocks outpace bigger stocks...
...Stocks of smaller companies, commonly referred to as second- and third-tier stocks, as well as those not listed on the New York Stock Exchange, did far better...
...Dividends for the S & P Composite Index, for instance, grew 88 percent...
...It is true that right now high interest rates are hurting stocks, and with all the bad economic news many investors are staying away from the market, (i,~,uring...
...Contrary to popular impression, dividends have kept up with inflation throughout the decade...
...dividends by Malcolm S. Forbes, Jr...
...And they usually are...
...Even the Dow Jones Industrials, with dividends, have appreciated 70 percent...
...They can fall, but usually they rise...
...This good news, however, has been disguised by the popular Dow Jones Industrial Average...
...Since 1975, the average equity has outpaced inflation (as measured by the Consumer Price Index) by a wide margin...
...Why take a chance on stocks, they reasoned, when you could get a sure 8 to 9 percent yield on bonds...
...One reason why smaller stocks Malcolm S. Forbes, Jr., is a senior editor of Forbes magazine...
...And the value of the average house has gone up 100 percent since 1975...
...Today, it is around 7. Major stocks are so low, in fact, that it is cheaper to purchase an existing factory than it is to build a new one...
...That's why hundreds of American companies have been buying back their own stock...
...I t is often pointed out that since 1975, when Americans were first permitted to buy gold, the price of gold has jumped over 150 percent...
...The Value Line Index (comprising about 1700 stocks) rose 24 percent in 1979...
Vol. 13 • June 1980 • No. 6
