SKARBECK: Investors' dour mindset costing them money

December 29, 2012

Ken Skarbeck InvestingIf we were to poll U.S. investors on overall sentiment, our guess is the prevailing attitude would be decidedly dour. And frankly, who can blame them?

Every day, they are bombarded with the lack of action from inept politicians who can’t seem to take one positive step toward solving our fiscal crisis. In addition, some investors remain frustrated with the recent election, while others dwell on five years of subpar economic activity, pervasive unemployment and high U.S. debt levels.

Investors also appear to have developed a deep mistrust of Wall Street—a logical response to the habitual acts of ethical misconduct within large investment banks over the past several years. Just this month, UBS retained its place on the mantle of sinister banks when details of the firm’s behavior in the LIBOR scandal were disclosed.

The rap sheet on UBS has been one dastardly deed after another for five years—not that any of the other investment banks have behaved like saints. The gory details of the UBS interest-rate ruse led one Bloomberg commentator to call for the “death penalty.”

Attitudes like these are likely to persist until regulators summon the fortitude to deal with the repeated violations of investors’ trust.

Yet amid the sour mood, no one seems to have noticed that the stock market, as measured by the S&P 500 index, has advanced 15 percent as we approach the close of 2012. And perhaps the reason is that few have earned it. Data compiled by Bloomberg and Morningstar conclude that investors missed out on $200 billion of stock gains as they pulled money out of the market the past four years.

The most inexplicable trend has been the movement of money out of stocks and into bonds. This can only be explained by investors’ mistakenly seeking a perceived safety in the face of negative news and uncertainty. However, this move is bound to disappoint, as yields on bonds are at their lowest in 30 years, pointing to capital losses when interest rates begin to rise.

The dichotomy posed by a rising market in the face of downbeat news is not all that uncommon. Markets often rise in the face of bad news, once investor selling has pushed stock prices down too far, to levels where they begin to rally off their cheap valuations.

Need more proof of that phenomenon? We all know Europe is embroiled in a major financial crisis. But did you know the German stock market has soared 30 percent this year? The French are still restless following their contentious election, but the CAC 40 (France’s stock market index) is up 15 percent year to date. Even lowly Italy, one of the “I’s” in PIIGS (Portugal, Italy, Ireland, Greece and Spain), has risen 8 percent.

No one is disputing the challenges that lie ahead for our country as we continue to heal from the debilitating effects of the credit crisis. Yet perhaps the biggest challenge facing investors is to overcome their own attitudes. As overly pessimistic perceptions continue to shift toward the appealing opportunities available in the stock market, stock prices likely will continue to surprise naysayers on the upside.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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