Equities are dead. Again.

September 6, 2011

–Todd Wenning is lead adviser of The Motley Fool’s Dividend Edge newsletter. The opinions expressed are his own.–

In August 1979, following a decade of high inflation and a shaky stock market that led to depressed investor sentiment, BusinessWeek magazine published a now-famous issue with a cover declaring “The Death of Equities.

What made the cover famous — in hindsight, of course — was what happened to the stock market in the decades hence:

Date FTSE All-Share value Gain since August 1979 Annualised return
August 1989 1,195 398% 17.4%
August 1999 2,920 1,117% 13.3%
August 2009 2,439 916% 8.0%

*Source: Bloomberg

As it turns out, equities weren’t dead at all (note: these returns don’t count dividends). It’s just that investors had left them for dead — and that August 1979 was precisely the time to put money to work in shares.

Today, a similar pattern seems to be playing out following another poor decade for shares and all the economic uncertainty we’re facing.

In fact, investor enthusiasm for shares may be near a generational low point. A survey conducted by Prudential Financial this spring (so, prior to the recent market downturn) found that almost 60% of individual investors had lost faith in the stock market and 44% saying they’d never invest in shares again.

Adding to this point, unlike with previous stock market recoveries, as Jason Zweig of the Wall Street Journal aptly noted in a recent article, investors didn’t come pouring back into equities even after the U.S. market doubled in the 12 months following March 2009. Now, investors chasing performance is normally as reliable as dogs chasing cats, so investor apathy following a period of high returns seems to be telling us that investor interest in equities is rather low.

Even some professional investors, who are often considered the “smart” money, have capitulated. Another recent Wall Street Journal article consulted a number of financial planners to find out what they’re doing with their clients’ money in this market. Worried about market volatility, many of them joined the fray and moved their clients’ funds into cash where they might enjoy safety of principal in nominal terms, but are slowly losing value in inflation-adjusted terms.

Admittedly, it’s not easy to retain a long-term focus when your share prices are falling.

Why might that be? One reason could be our natural propensity for loss aversion. As Legg Mason’s Michael Mauboussin noted in this interview, “We tend to suffer two to two-and-a-half times more from the loss than we enjoy the gain.” In other words, the fear of further short-term losses often outweighs the knowledge that there’s also potential for long-term gains. It’s this anxiety that can shorten our mental time horizons and can lead to poor long-term decisions.

It’s healthy to question and refine your strategy, of course, but it’s also critical to stay consistent. To me, that means buying good companies trading at meaningful discounts to their fair value and then being patient with them, regardless of what may be going on in the market.

All this is to say that general investor sentiment — from professional and non-professional investors alike — has once again turned against equities. If history is any indication that could mean today is a great time to be a contrarian and put long-term money to work in the market.


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