Wednesday, February 04, 2009

Investment recommendation: buy stocks, sell bonds

Whenever you see anyone on TV or in the press offering free investment advice, three questions should come to your mind:

1) What are they selling?
2) What is their past performance?
3) Why are they giving away free advice?

Firstly, I am not selling anything. I was working for an investment bank but now have enough time on my hands to be able to sit and home and write this blog, without any fear of conflict of interest between myself and my employer.

Secondly, I have not invested my own money in any financial market for months. Since last summer I have been invested in either cash or bonds and most recently, entirely in cash.

Thirdly, I am giving this advice away for free as I have nothing to lose in doing so and everything to gain, in terms of reputation.


There are a number of reasons why now is the best time to buy equities and sell government bonds. Apart from the obvious fact that this is what the current direction of both markets are suggesting (the most common reason why people recommend what they do), there are a number of very compelling reasons for doing so:

- We now know that global equity markets halved in value months before the start of the global recession.
- Global equity markets always rise before the end of a recession
- As global equity markets become more and more attractive, global bond markets will become less and less attractive.
- The strength of every downward trend is always followed by an upward trend that is equally as strong.

The only way is up (in the long-run) for equities...

Government bond yields are unlikely to go much lower

It is important not to underestimate the length and depth of the sell-off in global markets for risk. This has accompanied a process of deleveraging that has recently taken the most visual form: job cuts.

Unemployment is the last resort for any company and almost every company in the world has been forced into taking this decision.

Borrowing money from the government is one option, drawing down inventory is another, but once workers are made redundant either they never come back or new workers require training to do the job. This is a very expensive process which is weighed against the benefit of saving money from not paying wages. This process cannot and will not last forever.


Before any good news arrives on the economy, equity markets will have to rise.

Time is running out before the appetite for risk returns.

The fact that the "safety" of government bonds has disappeared makes risky assets look the most attractive in a decade (and more importantly, than throughout this entire financial crisis).

The question of whether interest rates are low enough and when a strong recovery in equity markets will take place this year is less important for long-term investors. The most important decision is that something is done sooner rather than too late.