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D. Murali

IN SOCCER, saving a goal is to leap where the ball comes hurtling. Just so in hunting and investing. "Every hunter knows that you don't shoot where the duck is, but where the duck is going to be," writes John Mauldin in Bull's Eye Investing, published by Wiley (www.wiley.com), a book on `targeting real returns in a smoke and mirrors market'. What has worked always should work now and in the future, right? No, says the author: "Markets of today, and the forces that drive them, are quite different than those of past decades." The plan is to win from now till the end of the decade, that is, 2004 to 2010, and these years are not going to be like the 1980s or 1990s.

"Which way is the stock market going? Which way are bonds going? Gold? Real estate? Where should I invest?" These are the questions on the minds of millions of investors. "We are currently in just the first few innings of a secular bear market," observes Mauldin.

Secular has nothing to do with communal equation, but long periods of time when stock markets go up or sideways, and long periods when they go down or sideways, depending on whether it is bull or bear phase. "Secular is from the Latin word saeculum, which means a long period of time," explains the author. In a secular bull market investors should focus on investments that offer "relative returns", that is, "stocks and funds that will perform better than the market averages".

In a secular bear market, as of now, "focus on absolute returns". Here's the tip: "Success is all about controlling risk and carefully and methodically compounding your assets."

No gloom-doom book, this, assures the author but cautions: "The recent era of profitable buy-and-hold stock market investing, using index funds and chasing high-growth large-cap stocks, has ended, and will not come our way again for many years. Until then, we need to change our investment habits to adjust with the times."

Over the last about two centuries, traditional analysis suggests there have been seven secular bear markets lasting almost 14 years (each with an average real return of 0.3 per cent) and seven secular bull markets (with a 13.2 per cent return) lasting about 15 years. "The average complete cycle of a combined secular bull and bear market is 28 years."

It's easy to be misled, warns Mauldin. "There is no one-to-one correlation between rising profits and a growing economy and a rising stock market." History is `a tough opponent' and it shows "that we will be in a secular bear market for at least the next 7 to 10 years," with declining P/E ratios, as in the 1970s. After a chapter that gives the analogy of The Matrix movie (to explain a mega foldout chart that plots over 5,000 investment period scenarios), you find a discussion of `financial physics' using inputs from www.CrestmontResearch.com.

It may be old-fashioned, but what matters in today's market is `in-your-pocket earnings'. As Mauldin puts it, "Earnings matter more and more as the bear market cycle drags on."

There is an accounting angle too: "Accounting standards always tighten up in bear markets. Investors become more conservative. They are not willing to project earnings growth far into the future."

Here is an alarming statement: In the biggest companies (such as GM, Ford, and so on with large pension and health care obligations) the real owners may be their workers and retirees and not their shareholders. "The only alternative is a massive restructuring of liabilities." We may see the average retirement age rise because it will cost more to retire.

"For the world economy to grow, developing countries are going to have to look to themselves for growth," even as aging developed countries will cease to be the powerful growth engines they once were.

For them, the author advises: "Consider backing a younger person who has the time and energy to start a business in a foreign country. But be prepared to travel, and even if you are only the investor, learn the local language and customs and be ready to change course quickly."Returning to hunting, towards the end of the book, the author points out that it is no longer deer season.

"It is time to hunt for something else and maybe even to hunt in a different place altogether, with different types of weapons and hunting gear." Research and homework will be rewarded, rather than blind trust, is Mauldin's counsel.

So, where do you think the duck is headed?

BookValue@TheHindu.co.in

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