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Portfolio > Economy & Markets > Stocks

The Courage to Invest

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The very first Borders in Ann Arbor, Mich., was officially closed at press time, and further closures of the bankrupt chain are gaining pace. It seems like not so long ago that these large well-stocked bookstores proliferated everywhere, offering quality, selection and price benefits — even coffee and pastries. Sure, critics complained they killed the independent mom-and-pop shop but consumers weren’t complaining. Now it is Amazon that has consumed Borders, as consumers acquire their books online while drinking their Green Mountain coffee at home.

The shuttered storefront has become a symbol of our times, and probably does more to discourage consumers than all the grim macroeconomic news relating to employment, debt and economic stagnation. That is because signs we see or experience ourselves — whether for-sale or for-lease signs that never seem to come down or potholes that never seem to get filled — make a more powerful impression on us than mere data.

Currently, the data borders on apocalyptic. Worries about European financial institutions are particularly frightening because the sovereign debt they own could take them and their economies down, and swap agreements tie their large banks to ours. So the tenor of much of the news remains negative, with eminences such as economist Nouriel Roubini and DoubleLine bond manager Jeffrey Gundlach urging investors to get out of stocks. Short interest is at a two-year high.

Amid the chorus of negativity, it was refreshing to see a recent Wall Street Journal report on a positive forecast from New York University’s Professor Richard Sylla. Not because Sylla is as famous as his NYU colleague Roubini; indeed, few have heard of him. And not because there aren’t others making positive predictions — there’s always someone taking the long side of the bet. And not even because Prof. Sylla accurately predicted in 2000 the coming lost decade in stocks, though that does make what he has to say now all the more interesting. Most impressive is the modesty of this forecast that is not specific about how stocks will fare right now or by year end, but rather discerns long-term patterns over more than 200 years of stock market history.

In effect, Sylla is taking the financial-advisor approach to investing rather than that of the big-shot manager or consultant making specific calls. “There is a lot of excessive short-term thinking about the stock market: ‘What did [Federal Reserve Chairman Ben] Bernanke say today?’” he told the Journal. Sylla says average annual returns of 6.5% over the coming decade would fit the historical pattern he has observed, though he puts the chance of a second decade of equity market malaise, as Japan experienced, at 25%.

The powerful forces of change that did in Borders will likely catch up with Amazon one day. But as Sylla’s forecast hints, the seeds are already in place for the blossoming of the next big thing that will gain consumer allegiance and perhaps trigger a broader economic revival. Since we don’t know when that will be or where it will come from, we have no recourse but to do as advisors have always counseled their clients: Look with hope to the future and have courage. These are the essential preconditions for working, saving and investing.


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