Biggs on Finance, Economics, and the Stock Market: Barton's Market Chronicles from the Morgan Stanley Years

Section 1A: Market History and the Long View

In Search of History and a Word Processor That Works

April 23, 1985

Last week, I said I would write this week about the crucial allocation between stocks and bonds that is on everybody's mind. After spending three hours or so writing on this subject on Sunday, the ultimate word processor nightmare occurred, and, on the print command, my entire text was erased. It's too late to attempt to rewrite this week what was lost so, instead, let me summarize some conclusions.

In making asset allocation decisions, I use both mathematical tools and subjective judgment. Nunzio Tartaglia's Analytical Systems Group has developed a variety of quantitative models for comparing stocks, bonds, and short-term investments, and I use a Present Value Model and the Ford Dividend Discount Model. In addition, straight risk/reward analysis of stocks, bonds, and bills is helpful. Next week, I will report on the status of each of these systems, all of which, incidentally, say that bonds are more attractive than stocks right now.

However, I place more emphasis on judgment considerations, because valuation models are just snapshots of the present's relative value relationships. These models have no predictive powers. Yet, financial asset prices have a lot of the future in them; in other words, they incorporate discounting mechanisms. Valuation models are like X-rays; ...