Who cares? In the long run, we will be all dead4 June, 2012, 13:06. Posted by Zarathustra
One China bull has recently got rather annoyed and said I am looking too short-term as a China bear. China will be the largest economy in the world, and the 21st century is about the shift of global power from the West to the East, that China today is like the early 20th century US, etc.
On that note, I am surprised to hear that, because I thought that the markets were mostly interested in events happening within anything between 3 minutes to 3 days. I was even more surprised to hear this nonsense because I am seriously concerned about what are going to happen in the next 3 years, he is actually not concerned at all about the huge macro risks hanging all over the place even within the next 3 months. And yet he is telling me that 10 or more years later, things are going to be fine. To to precise, this bull is actually telling me that Chinese equities will be higher than today in a hundred years time.
So here are some of my predictions for things that could happen eventually.
Firstly, I think, even as a huge China bear, that China will become the largest economy in the world in the future, eventually, provided that there is nothing nasty going to happen (e.g. a war?). This is due to the fact that China has many people, not because each person is producing a lot.
I can also quite confidently predict, even as a huge China bear, that Chinese equities will be higher in the future than today, eventually, provided that there is nothing nasty going to happen (e.g. a war?).
Similarly, for those commodities perma bulls like Jim Rogers, I can also predict that their idea that the world will run out of oil and stuff in the future will certainly be right, eventually, provided that there is nothing bizarre going to happen (e.g. that we no longer consume energy at all, or someone find oil in the moon).
And I can very confidently predict that Facebook will no longer exist, eventually; that record low interest rates in developed world will end, eventually; that US could run trade surplus with China, eventually…
And most importantly, you will die, eventually.
There are many things that, given a sufficiently long horizon, will have a very high probability to be right, eventually. On the whole, the history of stock market suggests that you will indeed be right eventually that stocks will be higher than any given day in the past if you wait long enough. As Russell Napier wrote on his wonderful book about bear market in the US, citing Jeremy Siegel:
all an investor needs do is hold for 17 years, and they will never lose money in the stock market. If you sit it out and ignore market prices, history suggests that in sometime less than 17 years the bear will simply go away, leaving your real purchasing power undamaged.
So in the case of US equities, history suggests that if you hold stocks for more than 17 years, you can be sure that eventually you will make some money.
But within the 17 years of investing horizon, you could experience serious bust that cut your wealth by more than half, or even more. If you ever let your portfolio fall by 50% in any given period, you need your portfolio to increase in value by 100% in the subsequent periods simply to breakeven, and falling by 50% is typically much faster than rising 100%.
Or within the 17 years, you are unlucky enough to hold a large position in a stock that looks like this:
Worse still, you have hold large position in Lehman Brothers or just any financial stocks in the developed market which saw values vanished.
And worse still, you die before waiting for 17 years.
Don’t get me wrong: I care about the long-term. In fact, I am not as pessimistic as one might assume for 10+ years horizon, and I don’t believe that we are entering some sort of dark ages when the society is progressing backward for a millennium. However, what I care most is to get through these 2 or 3 years unscathed, and hopefully profit from it, before even considering what I am going to do as the life-time buying opportunity approaches.
Napier, R (2009). Anatomy of the Bear