Thursday, March 22, 2012

Founders Fund Venture Partner: "6 Reasons Why I Don't Invest In The U.S. Stock Market"

If you know Founders it's possibly because of partner Peter Thiel (PayPal, Facebook, etc.)
Via Savitz at Forbes:*
Auren Hoffman is founder and CEO of Rapleaf and venture partner at Founders Fund. You can follow him on his blog (Summation), on Twitter (@auren), and Facebook (aurenh).

It has been conventional wisdom for the last 50 years that if you are a long-term investor, your best return will be in stocks. Almost every financial advisor will tell a 30-year-old to put upwards of 90% of their portfolio in equities.

Most people above median wealth have a substantial allocation of their liquid portfolio in the stock market. Some people pick individual issues (Apple, GE, Wal-Mart, etc.) and some invest in managed mutual funds (Fidelity, say), while others invest in index funds (the Vanguard S&P 500 fund, for instance).

Stocks are less than 10% of my portfolio. This is a long article (read time is going to be at least 12 minutes) but I implore you to read it in full.

“Never invest in a business you cannot understand.” Warren Buffett
That’s great advice from the Sage of Omaha. But we should take it a step further:
Never invest in a security you do not understand.

So the question is: do you actually understand the stock market?
Prices of stocks seem to be a mystery to even the most experienced investor. There are often market swings of over 1% per day.

Supply and demand
Most investors argue that fundamentals (like expected earnings) drive price. That doesn’t seem to be a complete explanation as we have had a market which has basically remained flat since the late 1990s.

The best explanation, beyond “fundamentals,” for long-term market movements: supply and demand. In this case, “supply” is the amount of total stock for sale and “demand” is the total dollars looking to buy those securities.
The key factor here is the demand. While supply (investible stocks) does change, its change is very small relative to the demand (amount of money looking to invest in the market). So as more money goes into the market, the market goes up. If money is coming out of the market, then the market goes down. It is basically that simple.

To properly be a long-term stock market investor you need to read the mind of the public. You should only put your money in the stock market if you think everyone else will keep money there. So to inform your portfolio allocation, we want to figure out if money is going to flow into the market or leave the market over the next 30 years.

Let’s examine the six key factors why money might be leaving the U.S. stock market:
  • 1. Retirement Savings
Retail investors, via their 401(k) retirement plans and pension plans, are one of the largest groups of investors in public stocks. One of the big reasons the market has been flat over the last 15 years (and not collapsed) is because so much retirement money has come into the market. Most of that money is held by people who are close to retiring and will likely be coming out of the market, albeit slowly, over the next 30 years.

Asset allocation would suggest that people should shift away from equities as they get closer to retirement. I don’t have data on this, but I would guess that most boomers still have over 50% of their portfolio (excluding real estate) in equities (even after the 2000 and 2008 crashes). This is way too high. Since many of these people are counting on the retirement income to live, they might flee from the volatility of the stock market and move to safer investments.

Robert Arnott, chairman of Research Affilitates (and an asset manager for PIMCO), recently said: “The ratio of retirees to active workers in the U.S. will balloon. As retirees sell stocks and then bonds to support themselves, there will be fewer younger investors to buy those securities, keeping a lid on prices.”...MORE
 *When he was running Barron's Tech Trader Daily blog Eric seemed to thrive on earnings season, posting up to 25-28 times per day. I started referring to him as the "hardest working man in show business journalism". He has contacts in the tech world, especially in the Valley, that other journo's would kill for.