Predictions for the economy and markets for 2012 have been bleak, and 2011 was much worse than expected. There may not be much to celebrate this New Year’s Eve.
That may be good news, at least for investors.
The last time things looked this bad — even worse — was three years ago, hard on the heels of the bankruptcy of Lehman Brothers, with global markets plunging and the financial crisis still unfolding. The following year the Standard Poor’s 500-stock index gained a robust 23.5 percent.
What explains the paradox? Efficient market theorists would say that all the bad news and pessimism about the future are already reflected in stock, bond, real estate and other asset prices. Market prices are in large part predictions, not snapshots of the present. So-called contrarian and value investors, like Warren Buffett, have argued that pessimism is often overweighted in asset prices, which makes widespread gloom a bullish indicator. Mr. Buffett went on one of his largest stock buying sprees this last year, even as the economic news worsened.
These views have been validated by recent research in the field of behavioral economics, which suggests that investors tend to be unduly influenced by recent trends, both good and bad, and project them into the future. Of course, if pessimism over 2012 turns out to be well founded, or if things turn out even worse than expected, then even depressed asset prices will fall further. The trick is to identify conventional wisdom that’s wrong, or at least unduly pessimistic. So I asked three widely followed experts in their respective fields — United States stocks, fixed income and real estate — who have successfully embraced contrarian views (at least most of the time) for their advice for 2012.
Bill Miller:
‘Buy and hold is not dead’
Last month the well-known mutual fund manager Bill Miller announced his retirement as portfolio manager for the Legg Mason Value Trust, a mutual fund that made history by beating the S. P. 500 for a record 15 consecutive years. He was named fund manager of the decade by Morningstar in 1999. But no one is infallible, and Mr. Miller stumbled in 2008 by betting on a recovery in United States financial stocks that never happened.
His fund has now trailed the S. P. 500 for five of the last six years. His ill-timed bet on financial stocks illustrates the peril of being a contrarian when the conventional wisdom turns out to be correct, but Mr. Miller’s record winning streak still stands (and he’ll continue to manage Legg Mason’s Opportunity Trust mutual fund).
Like many contrarians right now, Mr. Miller is bullish on stocks. “A great deal of pessimism is already built into the U.S. equity market,” Mr. Miller said when I caught up with him late this year. “The market is trading at 12.5 times earnings. Basically, the market is expecting no growth in corporate profits from here indefinitely. The S. P. 500 dividend yield is higher than the 10-year Treasury yield. This only happened at the bottom of the financial crisis, and before that you have to go back 50 years.
“After two years of headlines on Europe, beginning with Greece, my view is, everything about Europe is discounted except the complete collapse and disintegration of the European Union,” Mr. Miller continued. “Everything but the worst-case scenario is baked in. Recession? Yes. Political dysfunction? Yes. Bad austerity policies when they need to promote growth? Yes. Those are in the headlines every day and it’s priced into U.S. stocks. I’m not so sure about European stocks.”
Mr. Miller is enthusiastic about large-capitalization, high-quality United States stocks. “Contrary to what appears to many to be the case, the U.S. economy has been accelerating. We’ve had good growth, and it’s improving.” After a decade in which the S. P. 500 was essentially flat, “people think the only way to make money is to allocate tactically and trade a lot. Now everyone wants to be a global macrotrader. I wouldn’t let anyone do this. I’d rather get some high-quality companies that have never been cheaper. I’d buy and hold. Buy and hold is not dead.”
Bill Gross:
‘A deserted asset class’
Article source: http://feeds.nytimes.com/click.phdo?i=4b1f3c2c851693f702200212a10aaa17