Weekend Book Review
“While less sophisticated players may well prefer to kneel and pray that the poor returns on stocks since 2000 will soon somehow be miraculously transformed into a new bull market, serious investors should instead delve into the history books.” These are the words of warning Nicolas Sarkis conveys to his readers as he heralds a “lost era” for equities in the opening chapter of his refreshing appraisal of the investment landscape, Fear and Greed. Sarkis, the founder of investment firm AlphaOne Partners and notable for being the youngest ever Goldman Sachs Associate, sets out to equip readers with the insight necessary to avoid the pitfalls of investing in a “lost era”; indeed, he is well placed to do so, having preserved and increased his clients’ wealth throughout the turbulent years of the financial crisis.
The book can broadly be divided into two parts; the first six chapters deal with specific investments and market themes – equities, de-leveraging, gold, emerging markets, government defaults, and the euro – while the last four address some of the broad sweeping issues that will colour the investment environment for years to come – fearfulness among investors, regulation, fraudsters, and central bankers (perhaps he should have put the last two in the same chapter?). Sarkis is particularly bullish on gold due to the fact that it has a low correlation to equities, making it “a great asset for balancing out risks on equity investments and vice versa”. However, for those looking to diversify into emerging markets he cautions that a renewed downturn would probably see them among the worst performing asset classes, particularly in Asia, where China shows many symptoms of a bubble.
However, what is perhaps the biggest wake-up call for investors comes during the first pages of the book. Long periods of equity underperformance are not as rare as most investors might like to think: the US – often seen as one of the best performing markets – saw three “lost eras” during the 20th century where equity prices fell over a decade or more. Ominously, Sarkis points out that since its last great top in 2000, “Wall Street has not come anywhere near to being as cheap as it was at the end of any previous lost era”. In fact, when the S&P hit its lowest point to date in today’s lost era, back in the dark days of 2009, it traded on a long-term price-to-earnings multiple of 13.3, as opposed to long-term PEs as low as 4.8 to mark the end of previous lost eras.
Despite being a little on the short side (the book runs to just 218 pages), there is plenty of sensible advice in Fear and Greed to keep investors of all levels engaged. This might just be the best book on investment you’ll read this year.
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