trickling up

There are many reasons why French academic Thomas Piketty’s 685-page tome, “Capital in the 21st Century,” has vaulted to the top of the Amazon.com best seller list and is being discussed with equal fervor by the world’s top economic policy makers and middle class Americans who wonder why they haven’t gotten a raise in years. The main reason is that it proves, irrefutably and clearly, what we’ve all suspected for some time now —the rich ARE getting richer compared to everyone else, and their wealth isn’t trickling down. In fact, it’s trickling up.

Piketty’s 15 years of painstaking data collection—he poured over centuries worth of tax records in places like France, the U.S., Germany, Japan and the U.K—provides clear proof that in lieu of major events like World Wars or government interventions like the New Deal, the rich take a greater and greater share of the world’s economic pie. That’s because the gains on capital (meaning, investments) outpace those on GDP. Result: people with lots of investments take a bigger chunk of the world’s wealth, relative to everyone else, with every passing year. The only time that really changes is when the rich lose a bundle (as they often do in times of global conflict) or growth gets jump started via rebuilding (as it sometimes does after wars).

This is particularly true in times of slow growth like what we’ve seen over the last few years. I’ve written any number of columns and blogs about how quantitative easing has buoyed the stock market, but not really provided the kind of kick that we needed to boost wage growth in the real economy, because it mostly benefits people who hold stocks–that’s the wealthiest 25 % of us. Meanwhile, consumption and wage growth remain stagnant. And as Piketty’s book makes so uncomfortably clear, it’s likely to get worse before it gets better.

(don't) follow this chart

this chart shows how NOT to invest

[though of course it's much easier to see what to do, after the fact]

[via roy]

lousy returns ahead

The unsettling market plunges of two weeks ago have stopped, at least for now, and stock prices have recovered a bit. So now everyone's getting cautiously bullish again.

Everyone except me. I still think stocks are poised to have a decade or more of lousy returns. Why?

Three simple reasons:

• Stocks are very expensive 
• Corporate profit margins are at record highs
• The Fed is now tightening

To be clear, I don't know what stocks are going to do next. They could go higher from today's already high prices, the way they did from similar levels in the late 1990s. They could crash, the way they did in 2000, 2007, and many other periods in which prices were almost this high. They could stay flat for years, the way they did in the late 1960s and '70s. All I know is that unless "it's different this time" -- the four most expensive words in the English language -- stocks are priced to return only about 2.5 percent per year for the next decade, a far cry from the 10 percent per year long-term average.

I own lots of stocks, though, and I'm not selling them. Why not? Many reasons, including:

• I have a diversified portfolio of stocks, bonds, cash, real estate, which will cushion the blow of a crash

• I am psychologically comfortable with the possibility of a 40 percent-to-50 percent market crash, and I know exactly what I will do if we get one (buy stocks). If you aren't comfortable with the possibility of a crash of this magnitude, you should either get comfortable with it or reduce your stockholdings. Otherwise, you might panic and sell after a crash, which is the worst thing you can do.

• No other asset classes are attractively priced, either. Unfortunately, it looks as though we're set up to have one of the worst decades in history in terms of the performance of financial assets.

-- Henry Blodget

three traits of the rich

The funniest thing I've noticed about rich people is how little their income has to do with their wealth. Mike Tyson earned $300 million during his career and went broke. An orphaned, unmarried administrative assistant died with millions in the bank. A lot of rich people aren't exceptionally talented at what they do. They just have quirks and habits that let them think differently about money than the rest of us.

Here are three I've noticed.

(1) They are (mostly pleasant) sociopaths

I'm convinced that nearly every rich person has the characteristics of a sociopath. Not in a cruel, soulless way. But sociopaths can disregard emotional events that cause normal people to worry and panic. Great investors can do that, too. They can watch stocks fall 50% and shrug their shoulders or see 10 million people lose their jobs and remain unshakably calm.

(2) They care about time periods most can't comprehend

There are four ways to invest:

1. Unsuccessfully
2. Long-term (varying degrees of success)
3. Short term, successful due to luck
4. Short term, successful due to manipulation/fraud

That's the complete list. Nos. 3 and 4 eventually become No. 1.

Long-term investing is the only sane choice. But it's unnatural. We're hardwired to grab immediate gains and avoid immediate threats. That's why we eat donuts and watch CNBC.

In August 1929, John Raskob wrote an article called "Everyone Ought to Be Rich." All you had to do was buy stocks and hold them for a long time, he wrote. Two months later, the market crashed. It fell 88% over the next four years. To this day, people cite Raskob's article as a sign of irrational hype. But was it? Anyone who bought stocks the day it hit the stands increased their wealth sixfold over the next 30 years, adjusted for inflation. Missing this is why everyone ought to be rich, but few are.

(3) They don't give a damn what you think of them

The price of being rich is really simple: You must live below your means.

But living below your means is hard. Most people want to be rich to impress other people. They do this by spending money, which is the surest way to have less of it.

Having the emotional backbone to drive an uglier car than you can afford, live in a smaller house you can afford, eat out less often than you can afford, and wear cheaper clothes than you can afford is rare. In my experience, less than 10% of people can do it in a meaningful way. It's the cost of being rich, and most people have no desire to pay the price.

"A miser grows rich by seeming poor," poet William Shenstone wrote. "An extravagant man grows poor by seeming rich." I don't think it's any more complicated than that.

-- Morgan Housel

S&P 501

When Google effectively splits its stock on Wednesday, S&P Dow Jones Indices will do something unprecedented: It will keep both the old Google shares and the new ones in the S&P 500. That means the S&P 500 will technically have 501 components, though it will still have only 500 companies.

In the past, S&P Dow Jones Indices, the company that runs the S&P 500, has not kept the additional shares that more than 40 S&P 500 companies offer in the index.

In fact, in a February press release, the company announced that it would switch Google from the Class A shares (which will trade under the ticker "GOOGL") to the class C shares (which will trade under the ticker "GOOG," and are likely to be more liquid).

But in a March press release, it revised that decision, and said both the Class A and Class C shares will be included in the S&P 500 (as well as in the S&P 100).