TABLE 8.3 In an Optimistic Environment, Caution Is Labeled Pessimistic

considered too bearish? The answer is that we live in an investing climate dominated by Professor Siegels view that stocks are the best investment, so almost any portion not in stocks is viewed as bearish.

Putting almost half your money at risk seems to be quite a bold suggestion. Nevertheless, Mr. Bernstein was conservative compared to his peers. Table 8.3 shows the recommendations of a set of leading Wall Street firms highlighted by the Dow Jones Newswires at the time that Mr. Bernstein was under fire for being bearish.

This is not a list of the Wall Street bulls; this was the entire list selected by the Dow Jones Newswires! It shows that Mr. Bernstein was more pessimistic about stocks than all of his peers on this list.

This suggests that there is more pain ahead for stocks. While Mr. Bernstein has been getting less flack of late, Wall Street is still extremely bullish on stocks. Investments are profitable when they are hated. Recall

that 1982 was the best time to buy U.S. stocks in a lifetime. At that point, stocks were universally hated and essentially ignored.

Reasons to Own Stocks Even If They Are Only Average Investments

When I was a teenager, I spent some time at the local roller skating rink. In addition to enjoying the huge bell-bottoms and other clothes from the 1970s (the decade that taste forgot), I was puzzled by one of the establishments rules. As an unskilled but thrill-seeking skater, I was constantly getting in trouble with the staff for skating too fast.

While I am sure that I did skate too fast, the rules made no sense. No skating faster than average was the law posted around the skating club. I spent many hours grappling with the logic. If even one person skates slower than the average, then by pure mathematics, someone else (and maybe many people) must be skating faster than the average. So the rule made no sense. The skating rinks employees were unimpressed with my logic, but I learned the mathematics of averages.

When it comes to investments, the logic of averages is unavoidable. No investment class can be above average indefinitely. Stocks have had a long run and are not cheap. So I dont recommend buying stocks in the hopes that they will have higher returns than other assets.

Even if stocks are only average, however, there are some good reasons to buy them. First, stocks provide protection against inflation and deflation. By buying stocks, and therefore the real assets that they represent, you are locking in purchases at todays prices. This means that if inflation rates rise, the value of those underlying assets should also rise. Similarly, if prices fall, the assets controlled by the corporation will also fall. So stocks provide protection in the event that the United States long run of almost perfect inflation rates ends.

Second, stocks provide protection against currency swings. Because many U.S. companies derive substantial revenue from international sales, stock prices are buffered against changes in the value of the dollar.

In 2003, for example, the U.S. dollar lost about 20% of its value against the euro, and lost substantial ground against most other currencies.18

The decline of the dollar made most Americans poorer. When we go to buy a bottle of French wine or a car made in Japan, our dollars buy less. However, the earnings of many U.S. companies were helped by the decline in the dollar. Continuing our Microsoft theme, a piece of software that sold for 100 euros brought in over 120 dollars at the end of 2003 versus about 100 dollars at the start of the year. By selling the exact same product at the exact same price in foreign currency Microsoft reaped higher returns.

Stocks can be bought for risk-reducing reasons even if they are going to be only average investments. This is an interesting turn of events. Stocks are often thought of as the high-risk, potentially high-reward investments. It may be that stocks have become average investments with some risk-lowering features.

Another reason to buy stocks is the ability to avoid taxes legally. Both capital gains and dividends are subject to low tax rates. In addition, it is possible to build your own tax-advantaged mutual fund. The technique is to own a lot of stocks and to make sure that before the year ends, you sell enough of the losers so that your tax bill is zero. This feature of stocks has always existed, but until recently it was not feasible for most people because of high trading commissions. The online brokerage revolution has made it possible to legally defer paying taxes on stock market gains indefinitely.

Just as a family loves all its children, even the ones who are not superstars, there are good reasons to own stocks even if they are going to be only average investments.

Even If You Do Not Buy Any Stocks, You Own a Lot of Stock

The final chapter of this book contains a summary of my recommendations for investing. For most people, my suggestion for stock investing will be lower than that advocated by Wall Street. Imagine for a moment