Can i really afford to gamble on the stock market?

27/09/2011

Well, you are not alone in asking yourself this question, especially if the trading results of top investment banks are anything to go buy.

Yes, the big banks are forecasting more bad news for their third quarter performance. (http://www.nytimes.com/2011/09/14/business/wall-street-banks-bracing-for-drop-in-trading-revenue.html )

In what was taken as a bell-weather for the industry JP Morgan Chase, warned that Q3 2011 trading revenue was likely to fall around 10% from a year ago. And investment banking income is expected to fall by 33% from a year earlier!

The important point to note here is that trading revenue is revenue derived from trading initiated by the “bank’s clients” and that the investment banking income described above, is from bank fees earned from stock placements and debt offerings, typically offered to the “bank’s clients”.

And this is not a trend limited to this quarter; this decline in trading activity and revenue has occurred in virtually every quarter since the financial crisis.

In short, this means that the mass-market of investors have lost faith in gambling on the casino stock market and are simply not participating.

The convergence of European debt crises, US political policy gridlock which nearly led to a US default and questions raised over the uncertainty of continued growth in Asia, have all caused extreme volatility in the financial markets over the last month and is exacerbating the trend.

Forget the stock market – invest in timber!

Here are just a few reasons why:

• While it is very difficult for a large company to grow its earnings by 6% - 8% per year, a tree naturally grows 6% - 8% a year without even thinking about it!

• While it is very difficult for a company to increase the price of its goods by 6% a year, the price of timber has risen 6% a year over the last century! In inflationary terms over the last century – this is 3% over the rate of inflation.

• An extra 1.5% return a year could be extracted just through professional forestry management – and I’m not even talking about genetic engineering.

• The growth of trees is totally uncorrelated to the fluctuations of the stock market; and supply constraints of wood such as teak and agar mean that the price can actually rise when the global economic outlook is uncertain.

• Timber has actually beaten the stock market since 1960 (as far back as the data goes)

I will be updating the blog next month to talk more about why investment in timber is necessary to diversify your portfolio but crucially protect yourself from inflation.

Giles