The market is still a good place to be

March 22nd, 2010

The guys with the money are going to make more
Peter Lynch, the legendary investor says that the past 20 years, so-called to investors as the “lost decade”, has not shaken belief that the stock market will continue to offer great returns.

Has there been change?
In a recent interview, Lynch gave his view of the recent crisis and its consequences for the markets. He had no hesitation in sounding optimistic about the next hundred years for the stock market. We asked the obvious question: has there been substantial change in the economy and the markets leading to the “lost decade”?

The Past Decade
“The past decade is one decade out of a hundred years in which we have known the markets,” Lynch says, “We started it at an extraordinary peak in the stock market as a result of the sharp rises in 1999, but in a sense the past decade was the lost decade on the stock market mainly because stocks were overvalued.”

Should we quit the market?
“We’ve had 11 recessions since World War 2, and this is the twelfth and the biggest that we have experienced in the US. But remember that only 2 or 3 years ago, the market was at an all-time high. Now the question is how we will emerge from this recession, and whether we will return to the growth patterns at the rate we saw before it.”

Stocks are best
Lynch expounds his stock market theory, and explains why he thinks stocks are the best investment. “Since World War II company profits in the US have grown at 6-7% a year. If we add to that the dividend yield, which is 2% a year, that is approximately the average annual return on stocks,” he explains. Lynch avoids making explicit stock recommendations, but he does not stint with examples. “Look at companies like IBM, Procter & Gamble, Coca Cola, Pepsico, Walgreen, or Exxon Mobile. I estimate that they will make more money in ten years’ time than they make today, so that their share prices will rise to reflect that growth. Not all of them will do that, but there is a close connection between the share’s behavior and the profits that the company produces.”

Rising profits
“In general, stock market companies have succeeded in growing their profitability and that’s the reason to buy shares,” Lynch sums up. “When you buy shares in a company, if it manages to produce profits, you are a partner in those profits. On the other hand, if you buy an IBM bond, after 20 years, the company will repay you the money and say ‘thank you very much’. It will pay you the interest, but it will not be loyal to you, and you certainly will not enjoy the fruits of its success. That’s the big difference between bonds and stocks.”

You cannot know the entire market
“All you need is 3 or 4 good stocks.”

This entry was posted on Monday, March 22nd, 2010 at 12:34 pm and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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