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Thursday, May 2, 2013

Why Is it Going Up?

Well, another month over, and another month of positive returns for the global stock market. Why? This is the most common question we have received so far this year.  Most of the economic news is not very encouraging (except home sales) - unemployment is still way too high, the European economic malaise continues, the US gov't still can't get its fiscal house in order.....  So why is the stock market continuing to rise?  Of course, it's not possible to actually nail down one cause.  Short-term fluctuations in stock markets are due to multiple changing factors that are extremely difficult to peel away.  However, I would say that there are two primary factors that are helping equity prices to appreciate.

The first is that there is no good alternative. There is a glut of cash around the world, and it has to go someplace.  Interest rates are at record lows, which mans that the price of "safety" is extremely high.  So, some of the money is naturally finding it's way into equity markets.  The "better than anything else" argument may not be very compelling, but it is actually one of the primary reasons for investing in stocks to begin with.  The stock market has historically been a very scary place to put money.  Prices change very quickly and unexpectedly   This volatility has caused many investors to flee the markets at precisely the wrong time.  We would much prefer to invest clients' money in assets with more predictable returns.  The problem is that there aren't any such accessible and affordable investments that will likely provide positive long-term returns over time in excess of inflation.  So we're stuck with the stock market.

The second reason for the continued rise in equity prices is that global corporations are very healthy.  Much of them have clean balance sheets and positive cash flows.  Their prices are still relatively inexpensive in historical terms.  What more could we ask for?

There will most certainly be down months in the near term.  We don't know when or why they will happen.  It's a natural part of long-term investing.  In the meantime, we should stay patient and relaxed, knowing that the economy continues to move forward.

Finally, the Berkshire Hathaway annual meeting is scheduled for this weekend. I have quoted Warren Buffet many time in this blog.  Here is an excerpt from his annual shareholder letter that was published in March.  A bit of optimism to go along with the beautiful spring weather we have been having in Boston:

"A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)
Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.
My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when  the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.
The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.
If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you."