Your heart will surely tell you that Bill Miller’s arguments in Large Cap Stocks Represent a Once in a Lifetime Opportunity are insane. However, your mind may tell you that he just might be right.
The public’s distaste for equities is palpable and understandable. Negative returns for 10 years in stocks while “riskless” treasuries have soared, and right after one of the best 6 months treasuries have had in the decade, is more than enough to convince folks that stocks are just not where you want to invest long term.
Then there is the really long term. Long term treasuries as measured by the Barclay’s Capital Long Term Treasury Bond total return index have beaten equities as measured by the S&P 500 year to date, and in the 1-, 3-, 5-, 10-, 15-, and 20-year time frames. It’s a tie at 25 years. Over 20 years of consistently superior returns over stocks in an asset guaranteed by the U.S. government seems to be sufficient to drive a stake through the heart of the idea that you want stocks for the long term. Gentlemen and ladies both prefer bonds. Who doesn’t?
It is almost a tautology in capital markets that the best investments are those with the worst previous returns, where expectations are low, demand is down, and prospects appear at best highly uncertain. In 1980 bonds had been through a 30 year bear market relative to stocks, inflation was soaring, yields were at historic highs, yet expected to go higher, and a long bull market in bonds was at hand. The idea that U.S. interest rates would be at all time lows 30 years later would have been dismissed as ludicrous. The situation is now reversed, with stocks having underperformed bonds for decades.
The point here is simple: U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest. I do now, and if you are reading this, so do you.
His whole article is well worth the read. If Bill Miller is right, does your investment strategy allow for the flexibility to capitalize on the type of move in large cap stocks that he foresees?
