For some days now, financial commentators the world over have been roiled by a commentary written by Bill Gross, founder and co-Chief Investment Officer of PIMCO, the world’s largest bond fund management company. The August edition of his regular commentary starts with the startling pronouncement, “The cult of equity is dying”. Gross, who manages USD 1.8 trillion of bond assets, thinks that the kind of returns that equity markets have seen over the last hundred years were anomaly and cannot be repeated. While Gross's opinion quotes US data, it is applicable generally to all equity investing. He points out that the US stock markets (the S&P 500 actually) have returned an average inflation-adjusted 6.6 per cent over the last 100 years. Over this period, US GDP has grown at a rate of 3.5 per cent. He thinks that this is unsustainable and almost like a Ponzi scheme. As a number of people have pointed out since Gross’s opinion appeared, there’s a difference between the appreciation of stocks and the returns and this kind of pattern is sustainable.
While the data backing the above argument is US-centric, Gross makes some other points that are more universal. One, he thinks that over the next few years high inflation is an inevitability and stock returns are certain to be poor while inflation persists. This certainly appears to be true for India. Broadly, as long as high inflation and high interest rates persist in India, you are unlikely to see good returns from stocks.
However, the operative word there is ‘broadly’. Big picture analyses like Gross’s and the rejoinders it gets always seems to imply that every investor is doomed forever to get only average returns. But the average is just that, an average of the good, the bad and the ugly. As an individual investor, one would do well to focus on avoiding the ugly. That should be enough to put one above the average.