Accuracy in Media

Mellody Hobson, who dispenses financial advice on ABC’S “Good Morning America,” was on the air on July 12, with a group of individuals who had suffered severe losses in their 401(k) plans as a result of the bursting of the stock market bubble. She is president of Ariel Capital Management in Chicago, which manages Ariel Mutual Funds.

Her advice to those who had lost a lot of their retirement nest egg was what one might expect from a manager of a mutual fund?stick with stocks because investing in the stock market has been proven to be the best way of accumulating wealth. Going to, we find that she is giving the same advice that she gave last March. Her advice then and now is that those under the age of 30 should be 100 percent invested in stocks, those in their 40s should be 80 percent in stocks and 20 percent in bonds, those in their 60s should be 70 percent in stocks and even those over 70 should be 50 percent in stocks.

Ms. Hobson says, “Historically, bull markets always follow bear markets. The S&P is down again this year and is threatening a third down year in a row. The last time this happened was in 1939 at the start of World War II. It logically follows that the odds of a fourth losing year are slim.” Ms. Hobson is quite young, and apparently the fact that it took 25 years for the Dow Jones index to reach and surpass its 1929 peak has escaped her attention.

Walter J.Schloss, who at 85 is in the process of liquidating the highly successful investment partnership he has managed for 46 years, takes a different view. Over those 46 years, his partnership has yielded an average of 21 percent compounded gross, mostly in long-term capital gains. The limited partners have earned an annual average of 15.7 percent on their investment. Schloss and Warren Buffett learned about value investing as young employees of Benjamin Graham, the author of “The Intelligent Investor,” the value investor’s Bible which is still in print. They have followed different strategies, Buffett becoming one of the world’s richest men who publicly recognizes Schloss as one of America’s outstanding investors.

Schloss says, “The market has been hit by the bursting of the greatest bubble in history but many stocks are still overvalued.” He points out that as of June 30, the Dow Jones industrials were selling at over 25 times earnings and the S&P industrials were selling at 60 times earnings. He notes that the market value of the Dow Jones industrials is seven times the book value and that for the S&P industrials the market value is 5.5 times the book value. The average yields are 2 percent for the Dow Jones industrials and a miserly 1.4 percent for the S&P industrials.

From 1871 to 1950, average yields on common industrial stocks rarely fell below 4 percent. In the 1950s they averaged 5 percent, but they have trended down since then. For yields to rise to historically normal levels where they are competitive with bonds, stock prices are going to have to fall unless there is a significant increase in productivity and profits across the board. The performance so far this year of Mellody Hobson’s four Ariel funds makes this very clear. As of July 11, the value of the shares of her three stock funds suffered declines ranging from 2.78 percent for the Ariel Fund to 22.8 percent for the Ariel Premier Growth Fund. The Ariel Bond Fund shares were up by 4.41 percent.

Walter Schloss, who stuck with his strategy of finding undervalued stocks while the great bubble was growing, says, “The mania that brought it about was a result of the fading of the memories of the crash of 1929.” As the victims of a market crash pass from the scene and are replaced by younger people who can be persuaded that the stock market is the royal road to riches, it becomes possible for that mania to take over again. That could conceivably take as long as it took the market to regain its 1929 peak.

“Good Morning America” should not have a mutual fund huckster giving market advice. What is needed is someone who is not afraid to say that there are not many bargains in today’s stock market and that until stock yields become more competitive, fixed income securities are the best buys.

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