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Portfolio Insights by Brett Arends Archives | Email alerts
Nov. 15, 2011, 12:01 a.m. EST
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” Millions of people still put their faith in the stock market.
Even after the events of the past dozen years people still hold trillions of dollars in equities and equity mutual funds in their personal accounts and 401(k) plans.
They believe, as they've repeatedly been told, that "free" and public markets offer the best long-term deal for themselves and for the economy as a whole. They are told that the stock market is "efficient," always setting the "right" prices for securities and always squeezing the best performance out of the economy. Our country, including our government, relies to a remarkable degree on the idea that if you let stocks trade publicly they will "find their level" and we will all gain. Even the Supreme Court has cited the verdict of the stock market in support of decisions.
But is that right? Or is it all a big lie?
Warren Buffett said Berkshire Hathaway took a $10.7 billion stake in IBM this year, a major shift for the billionaire investor, who has famously avoided technology stocks, Erik Holm reports on Markets Hub. Photo: Stephanie Sinclair/ VII for The Wall Street Journal.
Into my hands last week fell a confidential document that makes me wonder, once again.
It is the latest analysis of the private-equity industry by Cambridge Associates, a highly regarded investment advisory firm. Private-equity firms jealously guard their performance figures from the public and, to a lesser extent, from competitors. The person who gave me the document begged me not to disclose him as a source.
Why is the document so explosive?
Because it shows what a terrible deal the public stock markets have really been for ordinary investors. And it does that by showing how much better investors have done in the hands of small groups of private-equity managers.
The numbers, reported as of June 30, are simply staggering.
Over any decent stretch, private equity has trounced the Standard & Poor's 500 index /quotes/zigman/3870025 SPX +0.60% .
If you'd invested $100,000 in the Standard & Poor's 500 index 25 years ago, and stuck it out through all the turmoil that followed, you would have made about $800,000 in profits in return for all your trouble.
Sound good? Try this. If you'd invested in a typical basket of private-equity funds you'd have made $2.1 million. No kidding.
The gap in recent years has been even more startling.
Over the past, grim decade, that same investment in the S&P would have earned you $30,000 in profits. Meanwhile, private-equity investors have earned $180,000. Six times as much.
Even over the last five years, a disaster for the U.S. economy and for investors in the U.S. stock market, private equity has posted returns of 10% a year.
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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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