The Bird in the Hand Society

"In the long run we're all . . . broke?" *

Until recently, the standard for futility was the Cal Tech football team ("we may be small, but we're slow").

Now, however, it's many long-term stock investors. Really long-term.

Pick an investment, and, if you're brave, glimpse at how far prices have been rolled back. The NASDAQ? 2002. General Electric? 1998. Intel? 1996. The Nikkei? 1982. General Motors? 1948.

Don't even ask about Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc.

Even worse, the drop in nominal prices comes before taking account of inflation, and taxes due on capital gains (should there be any). Plus all the volatility investors in these companies endured along the way (toward what end?).

Sleeping -- and Eating -- Poorly**

To take just one, (all too) personal example, the Intel shares I bought in 1995 for $9 per share have appreciated a lousy 25%(!) during the entirety of my 13 year holding period -- a span that includes the vaunted tech stock boom.

Unfortunately, just to have the same purchasing power in today's dollars, Intel's stock would have to be well over $13. So what happens if I sell now? Thanks to "low" (but non-indexed) capital gains taxes, my phantom $3 gain shrinks even more.

Talk about adding insult to injury.

Certainly, anyone who buys an individual stock and later complains that it went down in price is . . . a complainer. But when millions of conservative, buy-and-hold investors deploy their savings across broadly diversified asset groups, only to find that they are worse off long term -- maybe much worse off -- something bigger is at stake.

One Bird -- or Less -- in the Bush?

What that is, ultimately, is a breach in the social contract -- or at least the investor's version of it.

At its heart, that contract is captured by the maxim, "a bird in the hand equals two in the bush."

If instead there's only one bird waiting for you -- or something less than one bird -- what's the point? And if there's no point, why bother to save instead of consume now?

The implications of such a shift in behavior are profound, and likely to have three main consequences.

"Venture Capitalist of Last Resort?"

One. Emphasis on current consumption. Rational investors who conclude that time erodes rather than multiplies their capital are likely to ask for their money back -- and not make any more available.

What will they do with their suddenly expendable nest eggs? Spend them!

If you're going to be broke long-term, anyways, you might as well spend the present living it up! Eat out. Travel. Buy new furniture. Upgrade your wardrobe. In truth, "a bird in the bush" mentality means that you go out and buy whatever you want, now, while you can still afford it. (Heads up, luxury goods short-sellers.)

Two. Even more dependence on government. If you thought Americans saved too little before, just wait until a widespread "spend it now" mentality takes hold. While it may be "good" for the economy temporarily (in a very dark sort of way), the consumption "pop" is one-time only. Once your nest egg is gone, you need the government to take care of you. Good thing it's so flush.

Three. Reduced capital for investment. With companies and consumers alike lining up for government alms, who's left to see to capital formation? Job creation? Innovation?

In addition to "lender of last resort," "insurer of last resort," "commercial paper buyer of last resort," etc., might as well add "investor of last resort," "entrepreneur of last resort, " and "venture capitalist of last resort."

*It was John Maynard Keynes who famously said that "in the long run, we're all dead."
**Investors have traditionally been told that they must choose between "living well" (tolerating more risk) and "sleeping well" (opting for security and lower returns).