The late 1990’s were a period of “get rich quick” economics, as dot-com billionaires jostled with stock option centi-millionaires for the icons of conspicuous consumption. The 2000’s will be very different; not necessarily a decade of depression, but a decade of Soames Forsyte economics, in which the Forsyte Saga anti-hero’s prudent virtues, sober habits and income-oriented investment style are likely to prove winners.
The Forsytes, for those who haven’t read John Galsworthy’s book or seen the BBC series (there may be many of the latter-it was made 33 years ago, gosh does THAT make me feel old!) were a large late-Victorian London family, whose principal hobby was wealth accumulation. The books, written in the 1920’s, regarded this Forsyte obsession as a bad thing, and principally concern the struggles of various non-Forsytes or collateral Forsytes to achieve spiritual fulfillment when surrounded by such materialism. Soames Forsyte, the central character in the series, is a young lawyer who eventually accumulates a substantial fortune through sustained hard work and wise investment, but blights the spirits of two wives and a daughter while doing so.
We have perhaps moved on from the Forsytes’ marital difficulties, which were of course made hideously worse by Victorian inhibitions about sex, but I’m not sure we have advanced economically beyond their attitudes to money, which were very sound.
Forsytes looked at investment very differently to modern investors; their primary aim was to get a good yield on their money, without particular reference to capital gains. Living as they did in a gold standard economy, they had no great worries about inflation, so a fixed yield on a top quality bond gave them an income that was secure for the medium and long term. What investments Forsytes bought depended on their risk preferences; at one extreme “Uncle Timothy” invested only in Consols, yielding 3 percent in 1886. Timothy looked clever in 1899, when Consols were standing at a substantial premium to par, but less so by the time of his 101st birthday in 1920, by which time Consols were selling at a discount and inflation had begun to eat away at the value of his principal.
Most Forsytes were less conservative than Timothy; they were generally successful businessmen or lawyers in their own right, and believed in their ability to pick an investment. Their typical “hurdle rate” for an investment was 6 percent, although they moaned somewhat that their father, fifty years earlier, had been able to achieve yields of 10 percent from rental house property.
Forsytes did not ignore capital gains altogether, but they achieved them by buying bargains. In general, their bargains were not shares, which were bought primarily for the dividend yield (since accounting standards at that time were in any case not adequate to calculate a price-earnings ratio, even had the Forsytes wanted to.) Instead, Forsytes bought house and industrial/retail property, bonds temporarily standing at a discount and art objects, in all cases attempting to buy what was temporarily undervalued by the market rather than what was in fashion. Diversification, both between asset classes and within each asset class, was desired, although individual Forsytes would tend to specialize in particular types of asset for the bulk of their portfolio. The urge to buy cheap extended to articles of what we would consider consumption rather than investment; in general, Forsytes took great pleasure in buying for less than their :”competitors” and occasionally in selling objects for more than they had paid for them.
Forsyte investors, therefore, expected to achieve capital gains from time to time when one of their investments became more fashionable, and were gratified when they did, but they bought for the long term not for short term gain, and with an eye to maximizing income while preserving rather than enhancing capital.
As consumers, Forsytes were careful to live within their income, and bought little if anything on credit; even their own homes were financed primarily in cash, although sometimes a mortgage of up to 10 years might be taken for part (generally less than half) of the purchase price. Consumption was undertaken primarily as a form of display, to demonstrate to the rest of the family and its associates how “warm” (wealthy) the individual Forsyte was. Taking as they did a long term view of wealth accumulation, and paying very little taxes, they regarded saving from income as a virtue, and planned to leave substantial estates to their heirs.
The Forsyte world was of course a very different one to today’s and in certain respects, such as clothing and sexual morality, there is no question of it returning. In investment, however, a swing away from 1990’s patterns and towards those of the Forsytes is both desirable and likely.
As I have written previously, as the stock market fails, year after year, to break through the highs of early 2000, and indeed declines further towards its historical valuation levels, it is likely that capital gains will assume a less important role in investors’ outlook, and that dividend yields will make a comeback. Stock options, also, will become a less important factor in executive compensation as a depressed stock market will make such options less attractive. Further, it is likely that inflation will remain low, at least by the standards of the 1970’s and 1980’s, so that a fixed interest rate or dividend yield will appear more attractive relative to the possibility of a capital gain. Indeed, once the stock market has declined towards its historical valuation levels, it is likely that, for an individual company, a payout of a substantial share of its earnings in dividends to stockholders will once again become a major support of the stock price. In the United States, this change would require a change in tax law, which currently massively discriminates against dividends and in favor of capital gains; in other countries, such as Britain, there is already little or no such discrimination. All these changes will steer investors towards a Forsyte worldview.
There is however a more important long term factor pushing investors towards a Forsyte approach, and that is demographic. As is well known, the U.S. social security system will begin to run a deficit around 2015, and will become fully exhausted around 2038. In continental Europe and Japan, this problem is more acute, because retirement ages are often earlier and the “birth dearth” whereby younger generations are smaller than the generation now around 40-55, is more pronounced. In the past, employed investors looked after their pension needs through “defined benefit” pension schemes, but these have largely been abandoned, since, except in times of rapid inflation or spiraling asset prices, they are ruinously expensive to the corporation offering them, and discriminate heavily against job mobility. Since a huge increase in social security contributions is very unlikely to be politically palatable, it is thus likely that investors will increasingly be forced to save for their own retirements, either through 401(k) and similar pension plans, or directly.
However, once it has sunk into the investor classes that the 1990’s style 18-20 percent per annum returns on equity investments are gone forever, their approach to retirement saving will have to become very much more conservative, both in terms of investment selection (they will tend to avoid currently fashionable equity sectors) and of investment amount-they will be forced to save around 10 percent of their disposable income, rather than their current savings rate of 1 percent or even negative. Saving as much as this, they will tend to focus on the long term and, like the Forsytes, be heavily oriented towards building net worth.
An older population, saving a higher percentage of its income, and directing it towards long term return, is a population that is investing (and indeed consuming) like the Forsytes. Wing collars and Victorian sexual morality may have gone forever, but the Forsyte outlook and investment style is due to make a comeback.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.