Customer Reviews

Stock Cycles: Why Stocks Won't Beat Money Markets Over the Next Twenty Years

5 star:		(7)
4 star:		(2)
3 star:		(1)
2 star:		(3)
1 star:		(0)

 

 

Dr. Alexander has tackled one of the most difficult, ambiguous and controversial topics of economics: long wave cycles and their effects on stock market prices. His text along with the more popular "Irrational Exuberance" by Robert Shiller is a highly cautionary perspective on stock market investments. Both books appeared almost simultaneously with the downturn of the market in January 2000. Both books, for different reasons and by different routes, arrived at the conclusion that that the market was grossly overvalued.

Alexander takes a historical approach by looking at the performance of traditional indicators over many decades or even centuries. He analyzes the statistical probability of trends continuing for one, five, ten and twenty years, and then derives relationships that can be used to predict future behavior. One of the more interesting indices developed by Alexander is the P/R or Price/Resources ratio. The Price term is the traditional index of stock prices. The Resource term represents the sum of "plant, equipment, technical knowledge, employee skills, market, position, etc." that enable the operator to produce a profit. Alexander aggregates and normalizes this value to constant dollars. He then uses the P/R ratio to express whether stocks are over or under valued.

Shiller tends to camouflage his statistics, but makes a much stronger argument for how people think about stock values: When prices are going up, it is easy to get excited about buying; prices rise, excitement rises, and they feed on one another. When prices are going down, people get discouraged, prices fall, people panic and loose faith in the ability of the market to produce future value. While we know and understand this relationship, we get caught up in it all the same.

The second major contribution that Alexander makes to long-term analysis is in tying stock cycles to technology cycles. This section of the text draws heavily on the Kondratiev cycle theory, but it then integrates this analysis into a more contemporary treatment that focuses on innovation and the resulting investment booms. It is easier to discern technology cycles from a historical perspective, and it is probably fair to say that earlier in the industrial revolution, basic changes did not come with the frequency that we are experiencing today. Even so, the telegraph, telephone, telecom and internet investment booms have clearly come one after another to produce the crescendo of investment frenzy that we experienced at the end of the 20th century. That is starting to unwind now, and P/E (or P/R) ratios are beginning to approach, however painfully, something that is closer to a historical norm. What we can't really know is when the aggregate trend will turn around or how the change will manifest itself.

Alexander does not present a pessimistic view. Indeed, if one were to consider potential energy or resource shortages, economic disparity, agricultural or environmental dislocations, there could be much more room for gloom. On the other hand, he has not fully considered the potential positive effects of biotechnology on agriculture, health and the chemical industry (which is a bit surprising considering his background), the efficient allocation of resources that is resulting from greater accessibility of information or the general synergy in technology that is resulting from the interactions of computational, biological, physical and chemical sciences.

"Stock Cycles" is a highly useful book for anyone interested in technical prognostication about the future movements of markets. It will loose some readers with its charts, equations and generally dry style, but it is a serious and meritorious effort to put some sense into what is an otherwise emotion-driven field. Most readers would probably wish that they had read and heeded the advice from both Alexander and Shiller as soon as the texts appeared.

With the glut of books published today on the prospects for the stock market, most of which are nothing more than hype pieces, Mr. Alexander brings together information largely overlooked or mostly undiscovered by the layperson and scholar alike. A truly ground-breaking work, Mr. Alexander presents evidence to construct an exceedingly sound argument for why today's wildly overpriced stock market not only cannot continue its pace of manic gains but why stocks (as measured by the S&P 500) are so richly priced that prices are not likely to exceed by any significant degree 1999-2000 all-time highs for the better part of the next generation.

If you are the typical bubblehead, looking for a stock tip or two to make a quick buck, you will not get from this book a list of stocks that will triple in three months; but it is this kind of market participant, given the behavior of recent years, who needs the information in this book more than most.

For the long-term investor, especially the tens of millions of Baby Boomers retiring (or planning to) en masse in the next several decades, the information contained in this book is indespensible to your financial future.

For professional money managers and academics, save for Professor Brian Berry's "Long-Wave Rhythms" and Robert Shiller's "Irrational Exuberance", there are few books in recent memory that do such an excellent job in presenting follow-on research to the heretofore largely dismissed (wrongly so , I hasten to add) foundational work of the Russian economist Kondratieff and the subsequent analytical research since the 1930s-40s (Schumpeter, et al.) that has come to be known as the Long Wave.

If you are interested in a serious, unbiased, quantitative, and historical examination of the dynamics of long-term stock market cycles, Mr. Alexander has created what I am convinced is the definitive work to date.

The title of the book reveals one of the conclusions which result from an understanding of the longwaves in the economy and in the stock market. Mr. Alexander does an excellent job of examining the longwave and along the way explaining some of its implications, including why the recent explosion in the Nasdaq was to be expected and not an exception. Since the longwave provides the critical context for long term investing, it is an important tool for long term investors in the equity markets.

The analysis and explanatory work in this book deserve 5 stars. However, I awarded 4 stars because of the lack of discussion of the philosophical and policy implications if one assumes the validity of the longwave.

This book is written in clear language that uses actual historical information to better understand the changing investment environment we are in today. The graphs provide clear illustrations of probabilities for investment returns in a way that you don't have to be a statistician to understand. It turns out that we are not the only generation that thought the market boom would last forever, but in fact it is cycling in ways that are understandable if you look at factual data and not hype.

As an investor in today's environment it was definitely in my best interest to understand the implications uncovered in this book. In fact, I read this book just in time to save myself from huge losses in my stock investments!

I wish I read this book five years ago before the bubble broke, I'd have alot more money now if I did. Alas, hindsight is 20/20. However, this is the first book that presents a very logical and thorough view of investment cycles that are clearly present in our economy. Yes, this book is somewhat tedious as another reviewer commented, but the true nature of the opportunities and risks of investing in the stock market are not something that reads like a vapid tabloid story. The lessons available to be learned and applied from "Stock Cycles" come only from studying, interpreting, questioning and back testing large amounts of data produced from the trading of stocks every day of every month of every year for decades and decades. Michael Alexander has done just that resulting in a work available for the layman to the investment professional from which to benefit. Michael Alexander also challenges the investment industry in that it has massaged much of that data to the detriment of the individual investor, ie.: the mutual fund industry and its "buy and hold" mantra it has been preaching since roughly the beginning of the last bull market in 1982. The mutual fund industry makes its money by maintaining a large asset base from which to generate fee revenue. Sure, "buy and hold" works pretty well in a secular bull market, but there have been many times in the past 200 years where there was little if any growth in stocks and the stock market for an extended number of years. And that number of years may be too long for many investor's investing goals to be achieved. Alexander shows that there is large amount of economic evidence indicating that we may be in just the beginning of one of those stagnant, yet unsettled cycles. Though Alexander's conclusion and recommendations on what to do now are vague, I think the overall message of the book is to invest with extreme caution but taking an active approach to investing, take profits if you have them and minimize losses should they occur and to beware Wall Street saying: "It's different this time", 'cause it's not. A must read.

The existence of Long Wave cycles is the most powerful argument as to why "buy and hold" is not always the best investment strategy. Alexander provides an excellent survey of Long Wave research to date, and adds to it his own analytical output to make the existence of Long Waves convincing for the reader.

Finally, the author shows where we are now in the Long Wave, information that is not just of intellectual interest, but also very practical.

Alexander describes his P/R valuation concept to serve as a marker in substitution to P/E, that has (nowadays) jumped to astronomical values, difficulting the overvaluation/undervaluation analysis.

He also describes in this book the concept of Kondratieff Cycles, although he has a posterior book dedicated only to this subject.

The problems with the book:

1) Equations should be typed using an equation editor, that is, the equations are bad typesetted.

2) As a scientist (He holds a Ph.D. degree) he should present the material in a clearer way to facilitate the reprodution of his results. He should include, for example how he choose the parameters of his valuation model (Chapter 4). In the appendix he gives the parameters but it is lacking details supporting his choices and also some parameters. (for example, what the length of the moving average to smooth the economic expansion parameter n ?).

3) Sometimes he uses English when equations are more appropriated (ex: p.96 "inflation rates over successive fifteen year periods were calculated and examined for the 1730-1800 period" How exactly he did the averages? Centered? Trailing? Weighted?)

So that my conclusion is: Very Interesting Research that could be presented in a clearer way.

I belatedly read this dated book to find out how in the year 2000 Alexander arrived at the correct conclusion that the market was headed for a fall. Back in 1999 I also though the market was overheated and headed for a correction just by looking at its divergence from the mean. Alexander's analysis of economic cycles is really interesting and by extrapolating these cycles he arrived at the correct conclusion for the year 2000.

But then he fails to tell the reader what to do about it. I find this most disappointing specially when the title of the book includes "Why Stocks Won't Beat Money Markets Over the Next Twenty Years." Is he recommending putting your money into money market accounts? No, he simply cites what other writer have said. I suppose this book can be very satisfactory to an academician but it only serves as general background for a real investor.

On a lighter note, Alexander seems to think that all investors are female while financial advisers may be male or female. Since "he" is an investor (I presume Michael Alexander is male unless this is a pseudonym), a novice one with five years experience, I wonder why he treats investors as female. The sighting of a single male investor would invalidate the thesis that all investors are female. Of course, this female speak is nothing more that political correctness which is what one would expect from a Harvard Ph.D. I find it grating.

As he detailed in a 4/14/02 posting at the Longwaves forum (thru Colorado State U., beartopia dot com has the link) author Alexander has changed his mind since publishing this book and now feels we are in the fall to plateau and primary recession. Thus, Alexander is of the opinion we have further to drop in the stock market. Reminds me of Elliot Wave theorists who cannot agree among themselves where the current American economy is among the various waves.
This book does a good job of detailing why the stock market boom days are over for many years to come.

If you are investing long term money without reading this book, then you are doing yourself a big disfavor. This book explains so much about economic cycles and how they coincide with stock cycles. I cannot say enough about this book and why I think everyone should read it.