ECONOMY

Are stocks best option in long term?

The often-heard argument – even from official lips – that stock market investors armed with patience and holding on to their stocks for the long-haul stand to gain is not always substantiated. According to a special study of the effects of inflation on the Athens Stock Exchange (ASE) general index, carried out by assistant professor at the University of Piraeus Nikolaos Philippas, those that bought shares in 1973 and 1974 not only didn’t see any gains but were unable to recoup the funds invested – at real prices – even during the stock market explosion of 1999. By comparison, those that invested in the ASE in the 1983-1987 period multiplied their capital in a few years’ time and even today, after the collapse of share prices, are in the black. A comparison of the ASE general index overtime at real and current prices (adjusted and non-adjusted for inflation) reveals huge divergences that give two completely different pictures. While the index appears to have been on a continuously upward course after 1970 (at least until 1990), in reality, the high inflation throughout the 1970s eroded all gains. The study examines the period from 1964 to the first half of 2002. After 1990, when the de-escalation of inflation began at an increasingly fast pace, the gap between current and real prices began to narrow, while after 1996 they almost coincided. It appears that the key to high returns from investment in the ASE has to do with the timing and not the patience of investors. Those that entered the market during periods of euphoria may never recoup the true value of the capital invested. Nevertheless, the unpleasant picture of the deflated general index contains its positive side too. Even today, after three years of continuous decline, the deflated index is still at levels similar to those of the early 1990s. This recent steep decline together with the positive developments in the economy in the last years, create rather favorable conditions for those who may decide to buy shares now. According to Philippas, the right timing, diversification and professional management are the keys to successful long-term investments in stocks. The popular argument of the superiority of stocks in the long-term over other forms of investment was based on a study conducted in the USA for the period 1922-1998 and at different phases of the American economy. Philippas argues that it is a mistake to apply conclusions from studies on developed countries to those of developing country markets with considerably different characteristics, such as Greece.