The great lesson of the farm crisis was that price and value are rarely the same, and many investors who had bought Midwestern farmland learned that the hard way. George Hass, an Iowa Realty agent in Des Moines, says that speculators drove the best of his state’s farmland up to $4,000 an acre in 1981. Four years later a huge credit crunch chased away buyers and slammed the price down to $1,200. Today, if you’re buying overpriced stock, it’s 1981 all over again.
Like some of the farmers, many of today’s investors are getting into the market for the wrong reason: it looks like the only way to build wealth quickly. Until the recent growl from the bear, there were still a lot of people out there who thought that what goes up, stays up. That’s bad not only for late-arriving investors, but also for serious stock pickers who understand it’s no sin to build wealth slowly. Albert Sindlinger, the highly regarded tracker of investor behavior, figures that over the past five years, 30 million Americans have fled low-paying banks for the same stock market that at much cheaper prices scared them witless. They shifted $600 billion, and many made bad buys. One result: even after the correction, the ratio of prices to earnings for Dow stocks still towers at 25, almost double the 14 or so that bargain hunters like.
At some point, investors may take a whack, much like the farmers who couldn’t keep up the payments on their new land. For the investor who doesn’t Plan to retire for 10 or 20 years, that may not be a problem. The trouble is, many people who are in the market now don’t have that time frame. The Crash of 1987 devastated many investors who lost large stakes just before they were ready to retire.
There’s a case to be made, in fact, that the stock market-and long-term investors-would do very nicely over time if the Dow was realistically priced. Remember that $4,000-an-acre farmland of 1981? Today, real-estate agent Hass says, the same acre sells for $2,700. That’s not based on the wild bets of auction bidders, but on its productive value-what it will grow. Companies are much the same. Picking a stock is tough now because the prices of these shares are partly influenced by the rush into the market not necessarily what the firm is worth based on its performance.
A sharp crash in stocks isn’t a great thing-no one wants to see people near retirement wiped out. Ralph Wanger, manager of Chicago’s high-yielding Acorn Fund, reminds us that any bear market cuts the flow of capital to corporations and makes new businesses harder to finance. Still, this is a zero-sum game and a lower Dow could open up the market for another generation of investors. Those bargain land prices of the mid-1980s let many of today’s young farmers get a start they couldn’t otherwise afford. They bought low.
