One of the aspects that makes investing so interesting is the enormous impact psychology has on results (and profits) people achieve (or don’t). What makes this so fascinating is there is an absolute plethora of information and research out there available for investors to utilize to educate themselves, yet so few do.
One such instance where the effect of psychology has impeded investor returns in the eternal battle of stocks vs. bonds. In 2012 stocks, at least according the press of popular opinion had nothing but bearish head winds blow against them. There were debt ceiling issues, the threat of credit rating downgrades, a slowing economy, double dip recession, the list was endless.
Equally, bonds were supported (according to the media) by favorable tail winds and the grossly over used ‘safety of Treasuries’ mantra.
Yet for all the issues stocks has going against them, they actually outperformed bonds. Below is the relative graph of stocks as measured by the ETF SPY relative to Bonds as measured by the ETF TLT bond fund.
For the calendar year of 2012, TLT returned just 1.47%. I guess a return to be happy with if you believed deflation was going scourge the markets and collapse the prices of assets the world over. SPY however returned a respectable 11.69%.
Using SPY and TLT as proxies, stocks outperformed bonds on an absolute basis by some 10%. On a relative basis stocks were leaps and bounds ahead of bonds.
What is the lesson we can take away from this?
Be wary of blindly following the crowd and the popular opinion. Just because there a multitude of people and press publications espousing reasons for why a market will / should do something does not mean it necessarily will. In fact the stronger the consensus, the more likely that the exact opposite will happen!
Think about it for a minute. If everyone is bearish on stocks then who is left to sell? By definition if everyone (in a generalized sense) is bearish then they will have sold their stocks. So if they have sold out of stocks, who is left to sell and drive the price further down? The answer? Very few. Because of this the path of least resistance is up.
At the start of 2012 very few people would have predicted much less been willing to invest in the view that SPY would return nearly 12% for the year and dramatically outperform bonds. Yet this is exactly what happened.
Looking forward I pose the question, ‘is this bullish run coming to an end or is it just getting going?’ My guess – it still has a significant way to run and hence there is a good deal more upside in stocks. When the press of popular opinion is singing the praises of the stock market and focusing on all the great tail winds then I will be thinking this Bull Run is on its last legs. Until then I am backing equities
There are number of big cap stocks I like that when bundled together give investors a good, broad diverse exposure to the overall market. Stocks such as Bank of America Corp (NYSE:BAC) – in 2012 returned 100% (hmmm… bet not many people realized that!) Even with this retirement crunching return, Bank of America Corp (NYSE:BAC) is only trading at a Forward PE of 9.3, with a PEG ratio of just 0.65. Whilst Bank of America’s dividend yield is small at just 0.3%, it is useful to keep in mind the payout ratio is a very conservative 16%.