Virtual goods – perhaps up to 20 percent of social gamers will spend real dollars for, say, birthday champagne for a digital piglet (Smart Money, Feb 2010, pg 34). That’s just an example – but at least these folks don’t consider it an investment – but virtual goods also include stocks and bonds, don’t they? In terms of social games, the sale of virtual goods, digital stuff that doesn’t actually exist helps bring in revenue on free games. These games may have an audience of millions of people – perhaps great advertising appeal as well (I’m only interested in the branded content and ad potential).
But another form of virtual goods exists in most people’s lives – investments. Book entries stating that you bought or sold something which you’ve never touched. And the only reason you’ve bought them, presumably is because you thought someone else was going to pay more for them at some point and you would benefit from the difference in price.
Should you jump in now? That was the name of an article from the Fortune December 2008 issue, pg. 26. We know the answer turned out to be no – as the US equities market as a whole sank to further lows in March of 2009. If there was a time to buy and make a quick buck – that was it. The article didn’t offer critical thinking – it was more of a question of gambling. When Fortune updated their list of 2008 stock picks they were -45% vs. -43% for the S&P 500 on their ten picks. When you lose almost 50% on an investment it will take an increase of nearly 100% to break even. And that’s not going to happen for you.
Bonds performed well last year – overall, corporate bonds returned 10 percent in the first 10 months of 2009. Junk bonds were up 51 percent (Smart Money, Feb 2010, pg. 44). Commission fees on bonds can be 1 to 1.5 percent, so you pay a much higher price than stock commissions. Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds. It doesn’t matter if the positive momentum is over in bonds, or if positive momentum occurs in equities – you have to consider your real return which accounts for fees, commission, taxes, and inflation. So a nine percent or ten percent return can quickly get reduced to maybe two percent. Why risk your money for two percent? Inflation itself is the biggest risk without accounting for making any mistakes in the investment markets. When inflation is around six or seven percent or higher as happened in the 1970s you struggle to earn money that has less purchasing power – and conseqently, a few years of high inflation erases a few years of relatively good investment returns.
The average bond fund lost 12 percent in 2008 according to Morningstar.
On pg. 22 of that issue of Smart Money the article Slow Growth Hits Home quotes an economist who is a former UCLA professor saying that investors should expect stock returns equal to dividend returns plus one percent citing the following:
Rich economies aren’t likely to grow faster than 2 percent a year per person after inflation.
Population growth will add about one percentage point to growth.
Earnings-per-share growth should track the rate of economic growth, minus about two percentage points a year to account for dilution from new shares.
The article uses data from 1960 to 2006 stating that returns averaged 6.1 percent a year after inflation, including 3.3 percent a year in dividends. (In another post I’ve discussed that over the longer term in the stock market, such as 139 years, returns were roughly six percent, not including inflation – almost all gains in the stock market over the last 75 years or so have been attributed to inflation). The economist says don’t expect more of the same 6.1 percent returns because conditions that produced past stock market gains aren’t sustainable.
I’m just amazed that the DJIA is above 10,000 – times are certainly worse than most recession periods when the DJIA was closer to 1,000 so to me it seems artificially high.
According to the Urban Institute stock values decreased $13 trillion in 2008, shrinking retirement accounts an average of 40 percent. Smart Money, Feb 2010, pg. 52 states that when the tech bubble burst ten years ago it wiped out $5 trillion in wealth. I would note that I’m not keen on the wording “wiped out” – equity asset values decreased $5 trillion but a portion of that wealth wasn’t lost – it was merely transferred to speculators or investors who were able to exit their positions at higher values. Although it does not represent the average investor experience and certainly it affected even exceptional investors who lost value in their equity positions and gave back some profits from boom times there still are a few folks, lucky or skilled, who benefitted.
Pg. 22 “After the Dow ran up 20 percent from March 2008 – its best four-week performance since 1933…” We kind of had a strong repeat rebound in 2009 after stock market values decreased to new lows from March 2009.
Now think about all the billions of dollars in compensation that go to Wall Street firms – the real money is in selling investments, not gambling haphazardly in the markets. Virtual goods are a good business for sellers – they’re based on a powerful thing called belief, but at the core, fussing with stocks and bonds can seem a lot like buying virtual birthday champagne for a digital piglet.