01 Sep 2009 Clipper Fund - Q2 Report ( Portfolio )
Questions about the overall market are the most common we receive. Unfortunately, the only answer we can give to such questions is, “We don’t know.” While hundreds, if not thousands, of people make a living as market and economic forecasters, there is overwhelming evidence that such short-term forecasting is impossible. As John Kenneth Galbraith observed, “The function of economic forecasting is to make astrology look respectable.”

Although the media is now filled with fawning interviews with those strategists who correctly predicted the bear market, these are not the same strategists who were lionized for predicting the bull market. Reputations for astute forecasting tend to be short-lived.

When interest rates are very low, as they are today, bondholders stand to lose on two fronts. Their starting coupons are low and they face the prospect of price erosion should interest rates rise. Such conditions in the past led to 20 and even 30 year periods in which bondholders suffered negative real returns. Thus, if we define risk as the possibility of having a negative real return over a long period of time, then bonds at today’s interest rates are far riskier than stocks. While investors may feel safer in bonds, the toxic combination of low coupons and the likely prospect of higher future inflation means bondholders are likely to be more vulnerable to long-term wealth destruction than stockholders.