Sunday, May 12, 2013

Lifetime Investment Views

In last week's post I mentioned the views of Warren Buffett and Charlie Munger at the annual celebration of  Berkshire Hathaway in Omaha: that one should keep on learning over his/her lifetime,  I would suggest everyday. For me investing is an experienced derived art form, thus I believe that investing should be an everyday practice.  Every single day, whether one does or does not make a transaction and/or hold excess cash is an investment decision day. Everyday brings both new information and experiences of oneself or others that should be digested.

With these thoughts, I am trying to figure out what to say to my eldest grand daughter. She is graduating cum laude from William & Mary, the first chartered university in the US. She has had many investment-oriented advantages in her life including going to school outside of her home country and the fact that her father is the investment strategist for a growing asset allocation fund. Nevertheless I feel compelled to lay out some basic views that will help her to become a successful investor throughout her long and productive life.

To recognize that everyone is a gambler

The decision to get out of bed in the morning is based on a belief that the day will produce more good impacts than bad ones. While we have no enforceable guarantees, our experience is what has happened in the past. So we gamble that this is our fate for today. When we cross a street we gamble that everyone will follow both the laws of the land and physics, otherwise we are at risk of loss of life, injury, and property damage. There are many of examples of us taking gambles everyday. I believe that we cannot avoid gambling.

Every gambler believes that there is at least one more opportunity to win. Because we each take the gamble of getting out of bed and crossing the street, we are all optimistic. Some of us more than others. Chuck Jaffe had an interesting column focusing on the recent high of the Dow Jones Industrial Average. 

In the article he quoted an old friend and client of ours the late and sometimes great growth mutual fund manager, Bill Berger. Bill believed or at least said that in the 2040 period the famous benchmark could reach 116,200. The view was based on a mathematical rule that could produce two occurrences of a triple in thirty-two years. Few today would be that optimistic, but the rules of chance do not absolutely rule it out. It would help to start from a depressed level, which will happen sometime in the future. When that happens it would be wise to remember the words of Seth Klarman, a hedge fund manager with a brilliant long-term record. He has said, "Investing, when it looks the easiest, is at its hardest." The payoff from risk-adverse long-term orientation is just that - long-term measured over one or more cycles of looking stupid.

For my grand daughter and many endowments, they need to understand that they will live through many cycles of alternately looking brilliant and then appearing to be stupid. This could be labeled the curse of future orientation which pivots on the externally determined timing of events as well as a normal load of disappointments.


At any given time there will be problems that need to be understood and put into perspective. For example, let me deal with a couple that got my attention this week. 

Margin debt

According to the Wall Street Journal, the dollar level of margin debt is almost equal to its all time high hit in July, 2007, just before the market peaked out in the fall of '07. I noted the level but I am not unduly concerned because the size of the market has grown and some of the borrowing is for non-security investments not tied to stock market prices. Worth watching, but not worrying, yet.

High yield spreads - the canary in the mine?

John Lonski, chief economist of Moody's Capital Market Research is expressing concerns that the revenues of the companies that have issued high yield bonds is sub-par historically when the spread between the yields on these bonds compared to the yields on similar maturities of US Treasuries is historically small. The yield spread normally is a collective view as to the credit quality of the bonds. This dichotomy with concerns of low relative revenue growth could signify a potential problem. Smart stock investors have learned that the movement of bonds can foreshadow stock price moves. Again, in this case I have noted these elements, but I am not unduly concerned. The high yield bond fund of today is yield driven and not as sophisticated as those in the past. I will be concerned when the yields on US treasuries double from current levels.

For my grand daughter the lessons are first, there are always things intelligent people are worried about. Second, most worries need to be put into historical perspective. Third, be most worried when too many people have no worries. Fourth, like the great investors at Berkshire Hathaway*, as well as good managers like Seth Klamer, use worrying times as buying opportunities and do not be afraid of looking stupid.
*A position in our fund and personal holdings

Please share with me what investment thoughts are you suggesting to your young investors for the long-term.

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