We all all used to investment advisers reminding us that the stock market is a long-term investment and should only be considered for a 5 year plus investment.  However, the publication of the  Barclays Equity Gilt Study 2009 with its “lost decade” references resulted in much reappraisal of this with some commentators talking of 0-20 years as being a safer investment time horizon.

There appears to be something very illogical in the idea that if one invests in a portfolio of sound profitable businesses that it is impossible for a shareholder to share in their success.  But this in fact is what happened in the decade following 1998 with a -0.3% annualised return from US equities and 1.05% nominal return from UK equities.  Were McDonald’s, P & G, Johnson & Johnson, Glaxo, BP, etc. really doing so badly?   Maybe not.  But if you had invested in the Dow on the 2nd January 1998 your investment would have increased by a mere 2.7% over the next 10 years – without taking into consideration the dealing costs and the bid/offer spread.


With the poor stock market performance over the last 10 years – described as the ‘Lost Decade”The Barclays Equity Gilt Study 2009, which examines the long-term returns on a variety of assets, calls the past 10 years a “lost decade” for shares, where “equities have been the worst-performing asset class since 1997, sharply underperforming all other asset classes.”The report says“in nominal terms, the -0.3% annualised return from US equities since 1998 is the fourth-worst 10-year return of the past 83 years. Only those 10-year periods ending in 1937, 1938 and 1939 have delivered lower returns. Similarly, over the past 109 years, only the decade ending in 1974 saw a weaker 10-year nominal return from UK equities. For the sake of the record, the 1964-74 UK equity return was 1.02%, while the 1998-2008 return was 1.05%.”

The last consecutive decade in which stocks produced a lower real return than Treasuries, was 1967-77 in the US and 1927-37 in the UK.  Barclays says during the past 110 years, there have been some 16, 10-year periods that bear resemblance to the decade just past and like in the past decade in which investors who prudently re-invested their dividends lost money after inflation – each time, they made money in the next ten years, by an average of almost 11% a year even after factoring in rising prices.

This unfortunately is Ben Graham’s “Mr. Market” coming into play.  He is famously quoted as describing the market as a voting machine in the short term and as a weighing machine in the long term.  Sometimes the “short term” can last a decade or more and the poor investor has to suffer the irrationality of “Mr. Market”.  His only salvation are the dividends – and this is the reason I will never invest in a company that doesn’t provide a reasonable level of dividends and a demonstrable will to maintain the dividend during hard times and to grow it in line with profits during the good times. Remember that a company has only two ways to reward its shareholders – through share value growth and through dividend payments.  Yes, a company can use share buybacks to try and bolster the share price but the shareholder reward is still in the hands of “Mr Market”.  A dividend payout is out of reach of the psychotic “Mr. Market”.

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