Winners, Losers and, of Course, Warren
Goodbye to 1997, and bring on the new year--as long as we can all get richer again, of course.
Unfortunately, that’s not the way it works in free markets. One investor’s winning bet often means that the person on the other side of the transaction had to lose, if only in a relative sense.
Herewith a look at some of last year’s winners and losers in global financial markets:
* Winner: Investment bankers everywhere. Last year handily broke the previous year’s record for merger activity, with 7,772 announced U.S. corporate deals valued at $654 billion, according to Mergerstat.
Those figures were up from 5,836 and $467 billion in 1996, respectively. As Mergerstat put it, the 1997 U.S. deal total was greater than the gross national product of all but eight countries.
Who knows how many of those deals ultimately will make business sense. But the investment bankers who facilitated the transactions win regardless, raking in spectacular fees. If you happen to live next door to an investment banker, demand that he or she take you to dinner. They can afford it.
* Loser: Fans of gold. The so-called precious metal has historically been a hedge against world turmoil and catastrophes. So how do gold’s fans explain its dive to 12-year lows last year, even as Asia plunged into chaos?
The happy reality is that if you want to hedge your portfolio these days, there are all sorts of better ways to do it than using the same cumbersome metal that the pharaohs were forced to rely on.
* Winner: Buy-and-hold, “index” investing. For the fourth straight year, simply buying and holding a mutual fund that mimicked the blue-chip Standard & Poor’s 500 index provided a better return than the average general stock mutual fund. The S&P; shot up 31% in price for the year, versus a rise of about 22% for the typical stock fund.
Was the S&P;’s performance a fluke, the result of big gains in a handful of major stocks that dominate the index? That’s what many lagging stock mutual fund managers would like you to believe.
But in fact, as of Monday more than half the stocks in the S&P; index were up more than the average stock fund. That suggests that mutual funds’ bigger problem in ‘97, and the previous three years, was lousy stock-picking and/or holding too much cash in a bull market.
* Winner: The mutual fund industry. Most funds have been incapable of delivering market-beating returns, but do you see them cutting management fees as a concession to investors? Of course not. If you happen to live next door to a fund manager, skip the dinner request--demand that he or she finance your kids’ college education. And at a good school.
* Loser: Emerging-stock-market investing. In Asia’s case, let’s call them submerging stock markets. Through Dec. 24, the average Pacific-region stock mutual fund had lost 28% for the year. The funds’ average annual return over the last five years: a whopping 3%.
* Winner: Emerging-stock-market investing. Despite Asia’s meltdown, plenty of other emerging markets worldwide had great years, including Russia, Turkey, Hungary and Panama, all of which posted gains of 60% or better in dollar terms.
Yes, they’re tiny markets. But the lesson here is that this all-capitalist world is full of opportunities even amid chaos--and that there still is plenty of money out there looking for those opportunities.
* Winner: Warren Buffett. Once again the master investor demonstrated why he holds that title--at least if we can believe the widespread rumors that he was heavily buying bonds in late summer, just in time to catch their hot rally as long-term interest rates tumbled.
Incidentally, stock in Buffett’s holding company, Berkshire Hathaway, ended the year at $46,000 a share, up 34.8% from the previous year. Unlike almost every other big investor, Buffett beat the S&P; 500’s return.
* Loser: Investors who avoided U.S. Treasury bonds in 1997 because of fears of Asian dumping. True, Asian investors hold hundreds of billions of dollars in Treasuries, many of them longer-term issues. If they sold those securities en masse to raise cash, they could send U.S. interest rates soaring.
But the Asians either haven’t sold much--or there are plenty of new buyers to take their places. The yield on five-year Treasury notes ended the year at 5.71%, down from 6.38% at the beginning of July, when Thailand’s collapse set off the Asian economic debacle.
