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Brett Arends' ROI
Feb. 5, 2010, 1:25 p.m. EST · Recommend (1) · Post:
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Dimon's pay unlikely to fuel outrage
By Brett Arends, WSJ.com and MarketWatch
LONDON (MarketWatch) -- Bonds are safer than stocks.
Government bonds are safer than those issued by companies.
And government bonds issued by "developed", Western countries are safer than those issued by "risky" emerging markets in the Third World.
So say three standard financial rules that have been repeated for decades to ordinary investors from Bakersfield to Boston.
But try telling them this weekend to anyone holding sovereign bonds issued by the governments of Portugal, Italy, Greece and Spain.
Safe?
Financial markets have now priced in a 30% chance that Greece will default within the next five years and a nearly 20% chance in the case of Portugal, according to CMA DataVision in London, which tracks the data. The perceived risks for Spain and Italy aren't much lower.
Sure, maybe the markets are being too gloomy. But the participants buying and selling bond insurance are sophisticated and they can't all be stupid. Would you bet your life savings that they are wrong?
Payroll report proves disappointing and Europe bond worries persist, Barrons.com's Bob O'Brien reports.
News that some European Union sovereign bonds are actually quite risky means yet another sacred cow of investing has been turned into hamburger.
One of the under-told stories of this financial crisis has been the way it's made mincemeat of so many of the financial "rules" we grew up with in previous decades.
Do stocks outperform bonds? Nope. That's what millions were told in the late 1990s. But since then, stocks have done worse. Indeed, stocks have done even worse than an ordinary bank account -- something that the old rules of money said was virtually impossible.
Are "value" stocks (in other words, cheaper stocks, usually in more established companies) safer than "growth" stocks? Hardly. Once again, that's what people were told. Many Americans who are nearing retirement were encouraged to load up on value stocks on the grounds they were "safer." But the results were horrendous. Value funds actually plunged much further in the crash than those investing in the supposedly "riskier" stocks of faster-growing companies.
Will "diversification" protect you? That was another canard. Investors were encouraged to spread their money across different "investment styles" -- Large Cap Value, Mid Cap Blend, Small Cap Growth, International, and so on -- in the belief that this "diversification" would keep them safe. So much for that. They all fell together when the crash came. Most of these investment styles are meaningless terms anyway. There is no such asset class "Mid Cap Blend," any more than there is an asset class "Stocks That Begin With A Vowel."
This has not been a good few years for the old, simplistic rules. Call it the Bonfire of the Inanities.
We need some new rules and guidelines.
Starting with a skepticism of any rigid or simplified rules at all. Investing is not like painting by numbers.
And one of the complications that needs to be far better understood is that "risk" is partly a function of price -- so that a seemingly "risky" asset that is very cheap may be a much better bet than an allegedly "safe" asset that is expensive.
Take another look at what happened in Europe last week. Stock markets in places like Spain plunged.
That reaction may not be as logical as it seems. Even if Spanish sovereign bonds default, investors in major companies may -- after a spell of turmoil -- turn out just fine. The shares may actually be less risky than bonds.
Indeed, if the shares are cheap, they may do very well indeed.
Those willing to buck the crowd and take this contrarian investment need to understand what they are buying before, say, just buying the Italian or Spanish stock market indices. These are heavily weighted in financial stocks - and those really are dangerous in a financial crisis. The MSCI Italy Index Fund /quotes/comstock/13*!ewi/quotes/nls/ewi (EWI 16.61, -0.66, -3.80%) , the exchange traded fund, is 41% invested in financials, the MSCI Spain Index Fund /quotes/comstock/13*!ewp/quotes/nls/ewp (EWP 39.14, -1.10, -2.73%) , 44%.
You might do better picking some blue chip non-financial stocks based in those countries. Examples: Telefonica, the Spanish telecoms giant that also has big operations in Latin America, and Eni, the Italian oil and gas combine. Both have American Depository Receipts (ADRs) listed in New York. After last week's stock market plunge Telefonica /quotes/comstock/13*!tef/quotes/nls/tef (TEF 66.59, -1.99, -2.90%) , at $68, has a prospective dividend yield of a remarkable 7.3%, according to FactSet. Eni /quotes/comstock/13*!e/quotes/nls/e (E 43.48, -1.72, -3.81%) has a forward yield of 6.8%. Both look pretty reasonable value, though you need to do your own homework -- and be aware that there will doubtless be turmoil ahead. But at least you are getting well paid for your risks.
In a risky world, that's the closest thing you may find to "safe."
Brett Arends writes for the WSJ.com and is the author of "Storm Proof Your Money," on managing your finances in this era of turmoil.
- zeejay | 1:39 p.m. Today1:39 p.m. Feb. 5, 2010
Jamie Dimon's paycheck may be the biggest blow to Wall Street reform this year.
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