Why I don’t buy any stocks

Basically, for those who don’t know, a share of stock is a tradable ownership right on a piece of corporate assets after all debts are paid. It is one of “traditional asset types” that you can buy. Many years ago people were able to grow their money by periodically allocating their savings on a stock market. The idea was interesting, it turned average guy into an investor, who gives back to economy some of his capital and earns a reward in form of dividends or capital gains. And it was particularly successful strategy in a time when more and more people got convinced to put their money into stocks, because when demand grows, so grows the market.

There are many people who still believe that this idea still works and you should start stuffing your retirement savings account with a portfolio of stocks of good companies and do this as early as possible to let your capital grow. Well, to some extent this is true, because a stock represents a claim on income producing corporate assets that maintain value if company does well. At the same time, units of currency are subject to inflation that makes assets more expensive, while currency itself depreciates.

In the environment when many governments in developed world are not able to afford any meaningful interest rate for their debt, allocating any capital to bonds (or savings account with a bank) becomes a very risky endeavor with very slim reward. This definitely has been quite a support for stock market.

On the other hand, things are not that rosy with stocks. First of all, interest rates in western world are extremely low now and the only way they can go is up (but they don’t as of now). Once this happens, stocks could get quite a bloodbath, because of two main reasons:

  • Stocks will become less attractive compared to fixed income assets like bonds that are going to pay higher coupon
  • Stock prices will get hit due to revealed misallocations of investments that were taking place when rates were low
  • Corporate debt will become much more of a burden in higher interest rates environment, so nice earnings might get offset by increased outflows to service corporate debt.

I personally think that bonds are not going to become very attractive if interest rates rise mainly because the quality of borrowers will significantly go down in this case. Basically, there is so much debt outstanding, so rising interest rates will make debt service very burdensome, so a new round of money printing will occur to help governments to inflate the debt away. But the second risk of stocks tumbling due to massive misallocation of capital that will not generate any return in a higher interest rate environment is a real concern for me.

Another problem with stocks is current valuations. Well, developed markets are very expensive as of now. S&P is at record highs and while it is true that Russian stocks are relatively cheap, we have our own issues that puts pressure on them.

Since I don’t expect any significant economic growth in mid-term perspective that will compensate risks associated with owning stocks, I don’t buy them. The possible downside is huge, the upside is.. unclear to put it mildly. And predicting a movement of particular stock (not the whole market) is not a sport which I am good at.

Even if I could read all corporate reports, crunch numbers and all the cash flows and everything, I don’t feel like to open a naked long position in any stock. Just because I don’t think any big stock can grow fast enough, and shooting in the dark by putting money in cheap stocks and hoping to make a killing on them is just not for me. I am not a gambler.

Shorting stocks is even worse. First of all, you pay interest to broker and you also pay dividend to compensate broker for lending you a stock. So shorting is by all means a speculation. And it is a short-term speculation. You can’t build your portfolio of all negative positions in stocks and sit in there forever. If you do this, you basically have a limited upside (all shorted stocks go to zero) but very tangible costs of maintaining these positions. To make matters worse, inflation works against your short positions, so… shorting adds one extra level of complexity — getting time right. If you’re wrong about time — your short is no good.

So, I think that the age of all-long stock portfolios for individual savers is simply gone. It will get back when asset prices hit a rock bottom, but don’t hold your breath, you might have to wait a long time before it happens.

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One Response to Why I don’t buy any stocks

  1. Pingback: Why I used to like precious metals, but not anymore | Thought Shop Worldwide Inc.

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