Pundits Pontificating: Notes from the Schwab 2011 Investment Outlook

Nothing beats heading up to Baltimore on a cold, rainy February day. But the pleasantries of the Charm City would have to wait; an assortment of mutual fund managers and analysts were making prognostications about the 2011 investment environment in an all-day event.

For the most part, the panelists were quite bullish on the U.S. economy and the stock market. They made nods to the ballooning U.S. debt and looming inflation, but they also pointed to growth in business investment, consumer spending, and exports.


It is easy to subscribe to the pessimistic "New Normal" advanced by the wizards at PIMCO: continued high unemployment, sluggish growth, concern about the unsustainable debt of the U.S. and Europe, and the migration of wealth from developed to emerging markets.

But PIMCO was not in attendance and Richard Bernstein was. Bernstein claims that the New Normal is descriptive of the what happened in the last couple of years, and does not describe the future—the U.S. is the most improving economy in the world and its problems are not insurmountable.

Bernstein cited an amazing statistic: over the last three years, the S&P 500 has outperformed an index consisting of stocks from Brazil, Russia, India, and China.

Bernstein and others emphasized the need to take valuation into account. A number of investment managers claimed that stocks in the U.S. are attractively valued whereas stocks in the emerging markets are getting more expensive. Yes, emerging markets have been growing their economy at a nice clip, but they suggest that their stocks have become more richly priced. Valuation is important because investors need to be compensated for the risks they are taking due to an uncertain future.

Bill Miller stressed that not only do we not know the future, but even if it does occur as expected, the repercussions can be quite different than anticipated. Bernstein provided an excellent example. He stated that many of the predictions about the tech revolution have come to fruition—just look at how our lives have changed over the last 10 years. Yet tech stocks have performed poorly, as many of them were extraordinarily over-priced at the time. Over the last 10 years the Dow Jones U.S. Technology Index lost 0.61% per year, while the broader stock market measured by the Wilshire 5000 was up 2.66% per year.

Investors must, therefore, closely watch valuations to insure the potential for adequate compensation for investing in an unpredictable world. Miller declared that over time, if you invest in reasonably priced businesses, you will likely be compensated, especially where others are currently risk averse. (The argument can be made, of course, that Miller did not always practice what he preached.)

In the end, the respected value managers at First Eagle (non-attendees) summed it up beautifully in their most recent annual report. After listing a number of serious problems that the global economy faces, they conclude: "It is tempting to think we understand the macro forces at work and can predict the future with precision but even a cursory examination of history would expose this as flawed. All of these things present risks but we also believe that the ownership of [businesses] will help us preserve real value in this world. The most important lesson to take from events of the past is that sound investing is not about the extrapolation of personal experience but about seeking a margin of safety."


Words of Wisdom

No matter what happens, there is someone who knew it would.
-- Anonymous