This is a guest blog originally published on the Abnormal Returns blog, a part of the StockTwits network.
We don’t go much for rank speculation here at Abnormal Returns, but let’s try this one on for size:
The coming decade is going to represent a golden age for stock pickers.*
Let us explain.
Ever since Businessweek magazine put out its now infamous “Death of Equities” cover story in August of 1979 equities have represented the go-to asset class for investors and speculators alike. For the moment let’s leave aside the housing bubble of the mid-2000s for now.
The rise of the self-directed 401(k), the emergence of discount brokers and the proliferation of news/data sources via the Internet all played a role in making investing both cheaper and simpler. With costs coming down it shouldn’t be a surprise more investors chose to direct their own investments.
There were of course blips along the way. The October crash of 1987, the Internet bubble of the late-1990s and early 2000s and most recently the credit/economic crisis of 2007-2009. For the most part investors stayed the course and continued to invest faithfully in the stock market.
The last couple of years has seen investors faith tested like never before. The most recent example being the “flash crash” last week that if nothing else showed the extent to which algorithmic trading has become a driving market force. Some have gone as far as to use the flash crash and the resulting volatility as a reason to get out of the stock market altogether.
The numbers show that volatility is not necessarily related to future equity market performance. (It does seem that market volatility is related to the future dispersion of alpha.**) However if enough people come to believe that they are playing a rigged, volatility-filled, computer-driven game of some sort then this could in fact become a self-fulfilling prophecy. The activity on Thursday could represent a tipping point of some kind.
This volatility seems all the more meddlesome in light of the growing belief that the equity risk premium is likely to be lower in the future than it has been in the…
