Is Risk Dead?

By James J. Cramer

The new capitalists--those who started trading during this great, four-year, 20%-plus S&P bonanza--may have stumbled on a bit of knowledge we old-timers can't seem to get into our heads. They regard bonds as risky, stocks as safe. Nothing could be more wealth-creating than those Gibraltars, the Net stocks, and nothing more dangerous than that 30-year piece of paper issued by that barely credit-worthy entity, the United States of America.

This credo is at the heart of what scares traditionalists about the market and entices the newer generation. I was schooled at Goldman Sachs--could it be just 15 years ago?--that nothing could be safer, and have less risk, than U.S. Treasuries. They set the safety benchmark against which you could measure everything else, and when I got in the business, that benchmark was a hefty 14%. That return, backed by the full faith and credit of Uncle Sam, was simply too competitive to even consider equities. Stocks had done nothing for a generation; bonds seemed like the only game in town. Imagine.

But something happened to the risk perception of these two competing instruments: they switched. Bonds ceased to yield double digits and then even high single digits. At the same time, huge budget deficits, now seemingly a thing of the past, created an impression that the guarantee of repayment was really more of a touchy-feely promise rather than a bond etched in stone.

Stocks, however, particularly name-brand stocks, have taken on the aura of a high-interest annuity, to the point that "conservative" moneymen like Warren Buffett bank on stocks with 30 and 40 price-to-earnings multiples, like Disney and Coke and Gillette. Being fully invested, once the province only of the biggest bozos and wild-eyed optimists, now seems to be the duty of every red-blooded American, no matter what age or income bracket. Even more amazing, there is a whole new class of equity holders that regards regard Buffet's buy-and-hold strategy as boring--too safe.

These newbies, who have seen the 20- and 30-fold moves of stocks like Amazon and Yahoo, think the danger lies in sitting out these moves in the Pepsis and Mercks. And who is to blame them? Lately I have come to wonder whether the risk-reward parameters I cut my teeth on are as out of date as those of my parents' generation, which saw utilities as safe, conservative growth vehicles that would leave hefty rewards for their children. They didn't. At what point, after how many new fortunes, can we proclaim the old paradigm of stock risk and bond reward as dead as the utilities-as-ultimate-wealth-generator theory? Judging by the feisty performance of the creaky old Dow, not to mention the rockin' nasdaq, shouldn't we call the financial-risk coroner come the millennium?

Over my dead bonds. Call me old fashioned, but after four years of hypergrowth, the likelihood that the S&P can keep up that performance becomes less, not more. You flip a coin four times, and it comes up heads; you cannot conclude that the next flip will yield a head. And even if a fifth head is coming, it doesn't mean there is no risk of a tail--or a tailspin--eventually. I'd be more comfortable if we got to a 10,000 Dow over a longer period of time, during which earnings could catch up to prices. Probabilities have a nasty habit of reasserting themselves when you are most inured to their risk.

Cramer runs a hedge fund and writes for thestreet.com He holds investments in AOL and Yahoo. This column should not be construed as advice to buy or sell stocks.