No Vision, Big Gain
By Daniel Kadlec
If Nostradamus were alive today, his job would be safe, at least from the misguided futurists on Wall Street. Exhibit A is a gutsy little tome penned 10 years ago called A View from the Year 2000. As a device to forecast the '90s, Shearson Lehman Hutton looked back on a decade that hadn't yet happened. The first thing you notice in the report, though, isn't some way-out prediction--it's that the names Shearson and Hutton are about as familiar to investors today as were Dell and Cisco to analysts a decade ago--which is to say, not very.
A lot can change in 10 years, as you know. But now that the millennium is actually upon us, examining these old prophecies can help drive home some fundamentals. Besides, it's fun. So before I get to the lessons, allow me a couple of shots at Wall Street's vision of the '90s, circa 1989.
"Many individuals didn't participate in the stock market's rise, preferring the income streams of CDs," the report predicted of the '90s. That's what you call missing the dominant trend of our time. Half of all Americans came to own stocks in the '90s, an all-time high. Here's another gem: "The explosive coming of age of Japanese consumers, central European producers and Latin American governments lowered U.S. successes to second-tier status," the report reads. Well, whiff again. That scenario may develop in the next 10 years, but it doesn't come close to describing the decade in question.
In fairness to the analysts (most long gone from the firm's surviving entity, Lehman Bros.), had they concocted a decade as fruitful as this one turned out to be, they would have been dismissed as shameless touts. And they did get a few things right, including a national budget surplus and an enduring expansion without much inflation. But most enlightening by far is that the 57 stocks in their portfolio walloped the S&P 500 over 10 years, proving again that patience--not brilliance--is the way to prosper in the stock market.
The Shearson portfolio would have turned $10,000 into $70,341; if invested in the S&P 500, it would have grown to just $49,923, according to the Center for Research in Security Prices at the University of Chicago's graduate school of business. Incredibly, there were more than a few outright losers, including Acuson (-46%), Battle Mountain Gold (-83%), Russell Corp. (-51%) and Toys "R" Us (-29%). Many others were gross laggards (Fluor, International Paper, Kellogg, Reynolds Metals, GM). The analysts messed up by taking Pepsi (+260%) over Coke (+599%), Unilever (+165%) over Gillette (+558%). And a couple of stocks (Waste Management and Compaq) blew up just this year.
Yet such mishaps scarcely matter. Intel, Microsoft, Sun Microsystems, Bristol Myers Squibb, Fannie Mae and Wells Fargo, each up between fivefold and 75-fold, were in the mix, providing exposure to the hottest sectors of the decade: computers, banks and drugs. And that's the big lesson. If you're busy racking up commission and tax costs, always chasing hot stocks or funds, get a life. All you really need is a few good ideas and the patience to be waiting when one pans out. What about the next 10 years? Think Internet infrastructure (it will be built even if every dotcom fails), wireless telecom as the world goes mobile, leisure and medicine as baby boomers age, and small stocks and foreign stocks as a new cycle unfolds. Nostradamus, move over after all. See time.com/personal for more on stock groups. E-mail Dan at kadlec@time.com He's on CNNfn Tuesdays at 12:45 p.m. E.T.