'91-'92 Business. A look back and a look ahead. : Long-Term Investing May Be In Again : 3 Kinds of Market Players May Shepherd the Strategy Through the Decade of the '90s


In the history books--or more likely, the history laser discs--of the next century, chroniclers may remember the early 1990s for the stunning comeback of a once-endangered species: the Long-Term Investor.

The year just ended saw individual investors abandon short-term cash "parking places" and pour money into stocks and bonds at a spectacular rate. Even Wall Street's most bullish analysts were awed by investors' persistent willingness to look beyond the economic and market turmoil of the moment.

And as 1992 opens, the rush to go long seems as intense as ever. The stock market soared to new highs in the closing days of 1991, and heavy demand for 30-year Treasury bonds--the ultimate long-term investment--has pulled the bond's yield down to a five-year low of 7.39% from 7.98% in late November.

There is, of course, no market gauge that tells why the average person buys stocks or bonds, or how long they'll be willing to hold such securities. Certainly, for many individuals the decision to buy in 1991 was more a knee-jerk reaction to falling short-term interest rates--now at their lowest in 27 years--than some conscious choice to be a long-term investor.

Even so, some experts believe that Wall Street has become the beneficiary of powerful and far-reaching changes in investor psychology that will continue to bring a tidal wave of money into stocks and bonds in 1992 and beyond.

More important, that money may be more likely to remain invested despite frightening and inevitable market swings.

The implications of such a shift would be vast. The United States could slowly shed its debtor status and become a giant capital-creation machine, rivaling Japan's model in the 1980s. U.S. entrepreneurs would have access to cheap long-term money with which to start new businesses. Job growth could mushroom over time.

If it happens this way, the credit will go to an unlikely alliance of three groups of investors who may share nothing but a belief in the merits--or at least the grudging necessity--of being a long-term investor in the 1990s. These groups are best described as the realists, the fearful and the hopeful:

* The realists among investors believe that the United States has entered a prolonged period of, at best, slow economic growth.

The massive debt taken on by consumers, businesses and government in the 1980s amounted to "the ultimate leveraged buyout"--the LBO of an entire nation, says Jeffrey Bronchick, portfolio manager at Campbell, Reed, Conner & Birdwell Investment Management in Los Angeles.

The initial stage of an LBO is the fun part--you borrow a huge sum, pay yourself a big upfront dividend and live it up. That was the 1980s in a nutshell.

Now comes the hard part: paying back the debt. As countless companies, government entities and individuals found in 1991, pay-back means working harder for less as you try to cut your debts.

To the realists, the slimming-down and sobering-up period is a virtual guarantee of low U.S. demand for money and minimal consumption of goods for a long time to come. Remember, the debt buildup went on for eight years, from 1982 to 1990. Even if the unwinding takes just four years, we're only halfway there.

The good news is that the unwinding should mean continued low interest rates and low inflation--the two best friends the bond and stock markets ever had. Thus, the realists are pouring money into stocks of strong companies that will prosper even in a slow-growth economy, and into long-term bonds that still pay 7% or more (versus short-term interest rates of 4% or less).

* The fearful investors who jumped into long-term securities last year don't necessarily fear the nation's ultimate ability to come out of this recession. More likely they're afraid for their own futures, because they haven't built up adequate wealth for the key events of later life.

So the fearful are buying stocks and bonds in a virtual frenzy now to make up for their lack of savings in the '80s, or perhaps for a lack of investment diversification outside of their homes and bank certificates of deposit. You can see this group's dollars flowing into stock and bond mutual funds in particular--$207 billion in total purchases through November, a record annual pace--because of the ease of investment and the funds' widespread use as retirement-account vehicles.

The fearful are typically baby boomers, the 76 million Americans ages 27 to 45. Simple demographics guaranteed that at some point in the aging process the boomers would begin to spend less and save more.

That point appears to be now--with retirement for the oldest boomers just 15 or so years away, their homes already filled with nearly everything they could want and their children's unfunded college education staring them in the face.

Are these folks really serious about saving money? When a late-November Gallup survey for mutual fund giant Fidelity Investments asked investors their retirement-savings plans for 1992, 37% said they would put more money away than in 1991, 27% said they'll save the same amount and only 21% plan to save less.

More important, among investors under age 50, 48% said they plan to boost retirement savings in 1992 over 1991. Given the size of the under-50 group, those higher savings should form a huge cache of money looking for a long-term home.

Norman Yu, a Newport Beach investment adviser who manages $110 million, notes that in the late 1960s the typical American household held about 40% of its financial wealth in stocks, a tribute to the go-go market years of the 1950s and 1960s. Today, the typical share of wealth invested in stocks is only about 18%, a direct result of baby boomers' preference for real estate and other tangible assets in the 1970s and 1980s.

As the boomers diversify away from real estate, the stock share has nowhere to go but up, Yu insists. "That's going to cause enormous demand for stocks in the 1990s," he says.

* The hopeful buyers of stocks and bonds today are investors driven by the dramatic turn of world events in the last two years. These buyers can't shake the feeling that a Golden Age of capitalism is dawning worldwide.

With the Soviet Union a memory and communism discredited, the United States remains the only true superpower. While some investors see the shadow of global depression in America's painful recession, the hopeful investors see only a pause on the road to healthy new growth.

And while fearful investors are more likely to ease into stocks via mutual funds, the hopeful investors are the risk takers who have returned to Wall Street to play individual stocks--in perhaps the greatest numbers since the 1960s, according to some estimates. Their return was evident in an explosion of business at discount brokerages such as Charles Schwab & Co. last year. Schwab's revenue jumped 22% to a record $572 million in the first nine months of 1991.

Most significantly, the hopeful investors see many individual American companies emerging in the 1990s in much better shape to compete globally.

Indeed, one striking result of the restructuring of corporate America in the 1980s and the coincident slide in the dollar was that labor compensation per hour rose just 32% between 1982 and 1990, says Abby Cohen, investment strategist at Goldman, Sachs & Co. in New York.

In contrast, labor compensation soared 131% in Japan, 119% in Germany and 56% in Canada, adjusted for international currency fluctuations that are relevant from the point of view of world trade.

There's no denying the underlying message in those numbers, which is that many American workers' standard of living has suffered since 1982. But capitalism's cruel edict in that period was that this nation's competitiveness would be restored one way or another. If you look at U.S. export growth in 1991--up 7% over 1990, through October, while imports were off 1.6%--it's obvious that the fix has begun.

"Our labor costs are now in line with those of every other industrialized country," Cohen says. That adds to the likelihood that inflation has been tamed in America, which in turn adds to the likelihood that interest rates are destined to remain low.

But does this grand confluence of realism, fear and hope translate into a nonstop bull market in stocks and bonds in the 1990s? Not nonstop, by any means. There will be frequent shocks along the way that will change the minds of some investors who thought they were buying for the long haul.

Yet if the experiences of the last two years have taught anything, it is that smart investors shouldn't try to time those shocks by making all-or-nothing bets.

In 1991, for example, the Dow Jones industrial index's entire 20.3% gain for the year occurred over two short periods: From mid-January to mid-February, and the last two weeks of December. If you were in the market for 46 weeks of the year but not those six weeks, you had virtually no chance of making money.

Or say you had poured your life savings into the Japanese stock market on the last day of December, 1989, exactly at that market's peak. You would have lost 41% of your money to date. If, on the other hand, you took your life savings and bought stocks monthly over the past two years, across a broad spectrum of markets, your chances of long-term gains would be far greater.

The point is, why you invest will always be less important than how . To skeptics, the return of the Long-Term Investor suggests only that a naive new generation has come to Wall Street. But others, such as veteran money manager Bob Chesek of the Phoenix Group of mutual funds in Hartford, Conn., see in this investor a mature buyer who simply knows better.

"Historically," says Chesek, "the long-term investor has been the guy who has been right."

The Dow's 1991 Journey The Dow Jones industrial average ended 1991 at 3, 168.83, a gain of 535.17 points or 20.3%, for the year. A fast victory in the Gulf War drove stocks early in the year, but since then the market's fuel has mostly been a continuing drop in interest rates-and hope for an as-yet-elusive economic recovery. Low for Year: 2,470.30 on Jan. 9 January 17: Stocks soar as U.S. begins air war against Iraq. February 1: Fed cuts discount rate from 6.5% to 6% February 28: Bush announces end of Gulf War. March 28: Consumer confidence soars on economic hopes.April 17: Dow rallies briefly over 3,000 but can't hold. April 30: Fed cuts discount rate to 5% Late May: Economic signals suggest solid recovery. Late June: Japanese stock scandal rocks world markets. August 20-23: Stocks plunge, then soar as Soviet coup fails. Sept. 13: Economy falters; Fed cuts discount rate to 5% November 6: Fed cuts discount rate to 4.5% November 15: Dow plunges 120 points on economic fears. Late November: Worries mount about new recession. December 18-31: Market soars to new highs as Fed cuts discount rate to 3.5%Source: Los Angeles Times

Short-Term Investing No Longer Pays. . . Money market mutual fund average 7-day yield Latest figure: 4,53%

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