Gross, Lynch, Malkiel: Varied Perspectives on Current Market

In interviews with the Washington Post, three top market minds — former Fidelity star manager Peter Lynch, PIMCO’s bond guru Bill Gross, and Princeton professor and author Burton Malkiel — offer some pretty wide-ranging views on the stock market and where we’re headed.

Lynch and Malkiel express a fairly bullish take for long-term investors. Lynch says that the recent market plunge has affected great and good companies as well as mediocre firms. “It’s brought them all down,” he says. “Bargains are all over the place. There are so many attractive stocks out there. But they keep going down.”

Lynch says corporate bonds are attractive now, but stocks are more attractive. “But,” he adds, “you have to have a time horizon further out than three weeks from Wednesday. Even one year, two years is not long enough. I’m very happy and content that five, 10, 15 years from now, corporate profits will be higher and the stock market will be a lot higher.”

One more thought from Lynch: He says you should focus on about 10 stocks, and know them inside and out. “All you need is a few good stocks a decade,” he says, adding that investors should use their knowledge about their own industries to get a leg up on the market.

Malkiel, meanwhile, says that the current situation “is not anything terribly unusual. There have been many, many periods in the past where the stock market has been absolutely terrible for a decade or more. Unless you think that all of the sudden, the whole U.S. economy is going to go into reverse and never going to return, I think the stock market will prove its worth again in the future.”

Malkiel says that doesn’t mean things will turn around soon. But, he adds, “What we do know about the stock market is that, after very long periods of hibernation or decline, it typically produces quite generous returns. If you’ve got a 10- or 20-year horizon, this is probably a very good time to invest in stocks.”

What investors “should certainly not do is give up and sell all their stocks now,” Malkiel says. “Investors are taking money out of equity mutual funds like never before. And they should, I believe, stop doing that because, invariably, investors take their money out near the bottom and put their money in at the top.” Malkiel advises buying a very broad total stock market fund, and a total bond market fund that has safe Treasuries and corporate bonds. And people should have a safe cash reserve for contingencies.

Gross is far less keen on stocks. He says that the deleveraging of a credit build-up that has gone on for five decades, along with massive government intervention and “deglobalization” — nations acting in their own interests — will result in significantly lowered corporate profits. “In five, 10, maybe even 20 years, a generation will be playing by new rules with lowered expectations,” he says. “This isn’t just a one- or two-year thing. It will linger.”

Gross says that income as opposed to capital appreciation will be important. Bonds should be favored over stocks, and the old 60/40 stock/bond ratio recommended for investors “goes by the boards”. Gross says he “gave up on the stock market altogether” about a year ago, and doesn’t own any stocks in his retirement portfolio. (Previously, they made up about 40 percent, he says.) He made a mistake in buying bank stocks a while back, but sold them 12 months ago and is happy about that, he says. Now, he’s in municipal bonds and stable corporate bonds.

It’s worth noting that of the three gurus interviewed in the Post’s article, Gross is the only one who actively manages money. And, as Jay Hancock of the Baltimore Sun notes, Gross “ALWAYS promotes what he owns in PIMCO’s funds, which are bonds,” and Gross “sold [stocks] a year ago, when the Dow was 12,000. That’s not a recommendation to sell now, when it’s 7,200.”

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