Bret Piatt

Many people complained about Jim Cramer’s call to take five years of money out of the market this past fall because it put additional selling pressure on equities.  Equity prices are much more fickle than the average investor understands.  The “current price” is based on the price of the last trade, not the price of any sort of moving volume average.  This is why when companies make an acquisiton offer they often offer a 30% or more premium on the current price.

The same upward distribution you run into when trying to acquire a company occurs in the other direction when trying to liquidate large positions.  Over the past 40 years the first broad generational equity investing began with the baby boomers and the pension funds created by the post-WWII jobs.  Now those boomers are all hitting retirement age and they want to buy a motorhome, they want to golf, they want to lay on the beach.  Their pensions and 401k/IRAs have to be able to cover the distributions.  In order to do these things they need to sell equities they hold.

Some equities will hold up well, those that pay a large and safe dividend in an industry the pensions and boomers believe will continue to produce results into their retirement years.  The days of tons of people fighting to pay for a 30:1 PE on a growth stock with no dividend in sight are coming to an end.  If money is flowing out, rather than in, equity valuations will come down to other asset classes (i.e. you wouldn’t pay 30x earnings to buy your favorite local bar).

The recent market crash has many of the gen-X and gen-Y folks looking back to see a nearly flat or even down performance on their equity portfolios over the past 10 years.  Even with the real estate “crisis” we’re having now if they would have purchased more real estate in 1999 they would have made a better return in almost every market.

Now with instant access to charts, graphs, and an Internet full of education this generation of investor is going to compare asset classes.  The current bankruptcy filings are teaching people owning common, while it might have a higher upside, is last in line to get anything back.  For the boomers, the corporate bond market was a black box that only their pension touched.  Now anyone can invest in them through a number of bond funds.

While you may never see a 30% growth year on a bond fund, if you owned LEH bonds you got paid something, if you owned common you recieved a nice letter in the mail saying something such as, “if you are a major shareholder over 5.5% please submit this form to get in line after the bond holders are paid off.”  For every common holder outside of the major mutual funds and pensions you aren’t getting anything.

Enough rambling for my first real blog entry… when investing look at more than just equities as an asset class or you may find out that a piggy bank would have served you better as a retirement account.