The Compelling Case Against Stocks

Last Updated Sep 23, 2011 9:32 AM EDT

With stocks down 7.1 percent, or $1.1 trillion, this week alone, there are many compelling cases against owning equities. Here's one that seems to make a lot of sense:

At least 7 million shareholders have defected from the stock market. And now the institutions have been given the go-ahead to shift more of their money from stocks and bonds into other investments. Further, this "death of equity" can no longer be seen as something a stock market rally, however strong, will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms.
"It will take two or three years of confidence building, of testing, before the market can seriously act like it did earlier," says William J. Fellner, a professor of Economics Advisers.
The problem is not merely that there are 7 million fewer shareholders. Younger investors, in particular, are avoiding stocks. Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market.
Says Alan B. Coleman, Dean of Southern Methodist University's business school: "We have entered a new financial age. The old rules no longer apply."
The rest of the story
I lifted the statements above from a famous 1979 Business Week cover story entitled "The Death of Equities." I took one editing liberty only to remove dates so readers would not know how long ago these statements were made.

Do the statements in this 32 year-old article making the case against equities sound familiar? My personal favorites are "the old rules no longer apply," and the reference to 10 year performance which sounds just like the recent "lost decade."

Well after that famous article was written, over the next four years, stocks doubled in value and clocked in a 2,500 percent return over the following couple of decades.

The moral of the story
Those that jumped off the "old rules that no longer applied" in 1979 missed out on some stellar returns. Not to say that was the last time. In March of 2009, those who accepted the new paradigm of the great depression ahead missed out on stocks getting to within three percentage points from their all-time high in 2007. I'm hoping you see a pattern here.

Warren Buffett once said, "I know what will happen, I just don't know when." Well, I know three things will happen:

  • Equities are not dead and will recover.
  • Abandoning old rules in favor of new rules and new paradigms will prove foolish.
  • Most investors will largely miss out when equities do recover.
Admittedly, I just don't know when each of these will happen.

Note: image from

More on MoneyWatch
Bond Yields Approach Zero
Stocks a Decade After 9/11
Fourth Consecutive Month of Stock Losses
  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.