Old bull markets don’t produce new ideas. They just produce new ways for investors to hurt themselves with old ideas.
With stocks at record highs and the income on bonds not far from record lows, circumstantial evidence suggests investors are getting restless — if not desperate.
Chasing “yield,” or trying to get higher investment income, is one form of desperation. Last month, $1.6 billion in new money poured into exchange-traded funds holding high-yield corporate bonds, according to FactSet.
Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors, points out that by Sept. 30 a standard measure of the income available on such bonds, based on an index from Bank of America Merrill Lynch, had shrunk by 3.42 percentage points since the end of 2015. Over the same period, the equivalent yield on 10-year U.S. Treasurys has declined by only 0.06 points.
The extra yield that investors should receive to compensate them for the added risk of such bonds, says Mr. Fridson, “has vanished.”
Another aspect of the problem: The longer markets go on producing decent performance at little apparent risk, the more investors come to believe that high returns must be a kind of entitlement.
A recent survey of 750 individual investors by Natixis Global Asset Management found that they “need” returns of 8.9%, after inflation, to reach their financial goals. In the same survey last year, investors said they needed a mere 8.5%. Since 1926, the return on U.S. stocks after inflation has averaged about 7% annually, according to Morningstar.
Such hankering for unrealistic returns can prompt investors to take imprudent risks. Just about any get-rich-quick story can look tempting.
Look at how companies in a variety of industries are associating themselves with the hottest speculation around: bitcoin and other digital currencies that circulate on computer networks, rather than being issued by central banks.
This past week, an obscure Nasdaq-listed company called Bioptix, which had been licensing fertility hormones for cows, horses and pigs, announced that it was getting into the cryptocurrency business and changing its name to Riot Blockchain. The stock nearly doubled over its levels a week earlier.
In a press release, Riot Blockchain said it intends “to become a leading authority and supporter” of digital-currency technology while retaining its other lines of business. Other companies are clambering onto the bitcoin bandwagon.
This reminds market veterans of the dozens of companies that changed their names to include “Internet” or “.com” in 1998 and 1999. They outperformed comparable firms by an average of 53 percentage points in the five days surrounding the announcement of a name change, a study found in 2001.
However, such behavior crested in almost perfect sync with the technology-stock mania itself; when the bubble burst from 2000-02, many of the companies that had changed their names were among those that lost the most money.
Consider, too, Strategic Student & Senior Housing Trust, Inc., a firm in Ladera Ranch, Calif., looking to raise $1.1 billion to buy properties that serve college students and the elderly around the U.S.
Strategic’s prospectus for the offering, filed with the Securities and Exchange Commission on Sept. 26, says the firm will seek to “provide regular cash distributions to our investors” and to sell out, merge with another company or go public within three to five years.
In the meantime, public investors are being asked to pay up to $10.33 for shares that the company has been selling to a select group of private investors for $8.50. Commissions and fees can exceed 10%, depending on the class of shares.
Strategic, which commenced operations only on June 28, is a “blind pool,” meaning that the firm hasn’t yet determined what it will invest the proceeds of the offering in. Investors thus can’t ascertain the quality of the assets their money will buy. Strategic’s prospectus also says: “There is currently no public market for our shares and there may never be one.”
Companies in registration to sell securities to the public typically don’t comment; a spokeswoman said Strategic couldn’t respond to questions.
However, if investors are willing to buy blindly without knowing when or whether they will be able to sell, that would seem to be another symptom of an overheating market.
At times like these, reaching for yield and taking bigger risks might pay off for a few speculators in the short run. Investors, however, should hoard their cash and remember that in the long run it doesn’t pay to chase returns greater than the markets can realistically provide.
Write to Jason Zweig at email@example.com, and follow him on Twitter at @jasonzweigwsj.