Risk Latte - True or False: Over the past thirty years “Even Warren Buffet got lucky.”

True or False: Over the past thirty years “Even Warren Buffet got lucky.”

Rahul Bhattacharya
March 31, 2009

You are given a very simple quiz.

Within the context of the present financial crisis and the past thirty years of stock market investing you need to answer “True” or “False” to the statement: “Even Warren Buffet got lucky.” What would your answer be?

In an Op Ed article in today's South China Morning Post (Hong Kong), Andy Xie, an independent economist and formerly of Morgan Stanley, writes, “The past three decades have been the exception, not the norm, in stock market investing. Even Warren Buffet got lucky.”

Do you believe in this statement? Do you believe what Andy Xie is saying? The single word answer to this question could well explain the economic predicament that we find ourselves in. In fact, the answer, "true" or "false", could well replace any analyst's or any economist's thousand page report on the state of the global economy and how we arrived at this juncture through thirty years of stock market investments, equity culture and all that talk about the Theory of Finance and Investments.

The article's content is certainly dour. Andy contends that the current recession could well last for many years if there is no reform - as opposed to a government sponsored stimulus - initiated in key sectors of the economy. And, of course, the now obvious argument is repeated that inflation remains the biggest threat due the unfolding of one of the greatest bubbles in human history, i.e. the bubble in the U.S. Treasury Bonds.

Interestingly, this is exactly what Warren Buffet has said in his annual letter to the shareholders of Berkshire Hathaway. Buffet has said that the U.S. Treasury Bond bubble of late 2008 will be regarded "as equally extraordinary" as compared to the Internet bubble of the late 1990s and the housing bubble of the early 2000s.

But what if this bubble goes on for a couple of more years? What would be the economic consequences? What if the U.S. stock market and the stock markets of other major economies don't go anywhere for the next couple of years? What if the equity markets of the U.S. and Europe stagnate for a decade, or even for two decades? What happens then?

As Andy has reminded us in this article, as if this needed to be reminded, the last major bear market in the 60s and 70s in the United States lasted for ten years. And Japan's stock market has declined over the last two and half decades. Today it is lower than where it was a quarter century ago. And in South Korea the stock market is below the level where it was twenty years ago.

America and Europe, it seems, have entered a "structural bear market". When would the bull return?

Reference: Bear Wrestling by Andy Xie (South China Morning Post, Hong Kong, page A15)

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