IMCA Speaker Rejects Investor Objections to Buying Equities

To make his case, Quinsee devoted the balance of the general session to recapping – and then showing to be without merit – objections that investors commonly raise for not investing in U.S. equities.

The first of these objections, said Quinsee, is that investors are better off investing in bonds than in equities because "there have been no equity returns for a decade."

Judging by a "misery index" of large cap stocks over the past century – the index tracking periods of high returns/low volume trading and low returns/high volume trading – stocks have experienced far more volatility than bonds. Yet stocks have also cumulatively grown 40% in value over the last 10 years, a level on a par with well managed bond funds.

Quinsee added the high volatility that produces investor misery also creates opportunities. Given currently favorable price-earnings ratios, stocks are likely to continue to enjoy this year the recent surge in equity valuations.

Respecting investors who might still be disinclined to buy equities because of the high volatility, Quinsee said the wild market gyrations are not likely to last. He noted that average volatility (0.72%) since 1926 is "dramatically lower" than recent levels. He observed also that volatility in 2012 is already down by 20% compared to the year prior.

"So we're approaching the long-run [volatility] average," said Quinsee. "High volatility is not a permanent state of affairs. What we tell investors is to try not to become a victim of volatility. Don't rush out of stocks when they're declining and rush back in when they're going up. Pick an equity allocation you can live with and try to live with the volatility." 

Responding to a second objection – "It's Too Late to invest because the markets have already gone up" – Quinsee observed that recent stock gains do not suggest the recent upswing is unsustainable. He noted the current bull market run – a cumulative gain in stock valuations of 85% over the 34 months since the last market peak recorded in October 9, 2007 – is modest compared to other bull markets since 1946. And, he noted, stocks are still 25% below the high achieved in 2007.

"If we're to get back to the the 2007 high over the next four years, it will have taken almost nine years to return to the high – twice the length of time of the previous record," said Quinsee. "So even taking a somber view of what's going on in the market, we see that there are still plenty of investment returns to be achieved before we get to a new market high."

A third objection, that equities are not a good bet because the market is so uncertain and because Europe may be headed towards a recession, is unreasonably pessimistic, said Quinsee. The reason: the U.S. economy is now growing – and, indeed, is looking better than many other developed economies.

JP Morgan forecasts a continuing "modest rate" of growth for the US. economy. For equity investors, said Quinsee, he upturn should translate to higher corporate earnings and, thus stock valuation gains.

Quinsee discounted also a fourth investor objection: that high frequency traders do not permit a level playing field because they capture all of the market gains. In fact, he noted, long-term investors continue to derive most of the benefit of market upswings.

"HFTs are not making profits at the expense of everyone else," he said. "We haven't seen IPOs of high frequency trading firms firms. Nor have seen magazine covers of hedge fund firms managed by high frequency traders. The real money is still made by long-term investors."

He observed, too, that HFTs are good for the market because the resulting increase in average daily trading volumes lowers transaction costs for long-term investors; and that upswings in market volatility leads to more high frequency trading, rather than the reverse.

A fourth objection – that investors are better off investing in passively managed and no-load exchanged-traded funds, rather than actively managed funds – is without merit, said Quinsee. He acknowledged that 2011 was a tough year for active managers, less than 20% of whom beat market indexes, half of the normal percentage.

But Quinsee said the benchmarks that asset managers use to judge stocks – price/earnings ratios, price/book ratios and other valuation measures – were less important as a guide to stock movements in 2011 than were macroeconomic events that were pulling down all stocks. Among them: the worsening sovereign debt crisis in Europe, failed budget negotiations in the U.S. and a slowdown in growth in many countries.

Quinsee noted, however, that dividend yields remained a reliable indicator last year of stock performance.

Quinsee rejected yet another objection to investing in U.S. stocks: one premised on the belief that it's better to invest in emerging market equities because gross domestic product of emerging markets is rising than that of the U.S. He said that stock performance is not guided by GDP but rather by company fundamentals. And by this measure, Americans companies are performing better than others around the world.

"America has some of the best companies in the world," said Quinsee. "They tend to be better managed, allocate capital more efficiently and have lower operating costs. They also tend to be more more disciplined in pursing strategic objectives and are more aggressive than many companies in the rest of the world."