Equity Cult

I had written a note (Traderman goes Deep) on how our actions in the market are determined by our beliefs because our belief system is what gives meaning to any set of data/market action. In a more general sense it is the belief system which gives meaning to the past and determines our actions in the present and the future.

But the question really is how do beliefs develop. Individual belief systems develop through several factors but collective belief systems develop as a result of the recent past that the society goes through. For eg. this belief that equities are a good investment over the long term is just that-a belief. If you see the past history of S&P you will see that the period from 1959-1979 ( a long enough term you will agree) saw S&P return only 2.9% compounded annual return where as the average 10yr US govt yield during that period was 7.5%. I am sure that if we were able to go back in time then we would find that BUY and HOLD for equities or investment in equities was not an entrenched belief in that period. In fact the prevailing belief would have been that it is best to invest in debt and that equities investment should only be done with money that we are willing to lose.

The next 20 years, however, saw an unprecedented boom in US equities with S&P yielding a 14% compounded return while the average 10yr yield was 8%. I am willing to bet that it was only during the second half of this 20 yr period that investment in equities began to take hold among the masses and became an entrenched belief. Michael Lewis' book Liars Poker highlights this when he says that all the new business school graduates wanted to join the debt team. Equities department was considered a poor cousin and relegated to a small portion in a decrepit office.

These last 12 years have seen S&P yielding negative returns. Already one is beginning to see a few people questioning the long term investment in equities theory. By 2019 I am sure this belief in equities would have been debunked. The funny thing is that when the equity cult is officially ditched from our collective belief systems would be precisely the time to get into equities with a long term BUY and HOLD strategy. For eg. the celebrated investor Warren Buffet is great not because his investment strategy is so good. He is great because he used a long term value picking strategy when the prevailing belief system did not support it.

After this long note, I have one short sentence to write. I am short and will continue to remain short until 4840 is taken out by Nifty futures. All in all a day when I should really not have to do much!