Sunday, February 2, 2014

The Age of Investing


Some people believe that age is a common denominator. The great fallacy of Target Date Funds is that age is a shorthand for the level of investment risk an individual should take. There are many other measures and some more important than others in terms of individuals; e.g., assets including intangibles, liabilities including contingencies, mental and physical health as well as others. All of these factors should be viewed through the filter of one’s gene pool. With that thought in mind I learned separately of the recent birthday celebration of a 108 year old matriarch and the death of my senior cousin at 88. The matriarch is of a large family and is the mother of a smart and aggressive woman I knew as the senior director in terms of service of at least one volatile public company. Because of popular governance approaches there was a move to remove her as a director without any real acknowledgement of her remarkable gene pool, which to my mind is concentrating on form over substance and overlooking her contributions to the younger senior executives on the board. The 20 year spread between the live matriarch and my recently passed cousin suggests to me when I counsel 401(k) plans for current employees and their need for retirement funding I also must consider the uncertainty of the length of their life span, medical conditions and end of life medical expenses. I have great respect for actuaries and their ability to reasonably predict length of life of large masses of people for life insurance purposes, however I am extremely skeptical of their ability to predict any specific person’s date of death. 

My cousin was a lawyer and businessman as well as a long-time investor particularly in above-average yielding stocks which he shared with members of the family and others on a pro bono basis. I have a different model, which is to copy or exceed the life of a certain leading name investment manager who was close in age to the matriarch and was actively trading for himself and others paying a fee until a few days before his death. My somewhat facetious thought is that the pros normally outlive the amateurs.

Time horizon investing

Some of the readers of this post are responsible, at least in part, for investing for extremely young children, grandchildren, or great grandchildren. With that responsibility in mind I would suggest that some attention should be paid to time horizons beyond a century, possibly 120 years. (This comes from the trustee of Caltech who recommended the issuance of 100 year bonds because I could see the need for insurance companies and families for this kind of paper. On a historic basis I like to pay, not to receive, low interest rates.) To sharpen the focus on the future, based on lot of current experience, many young people do not get their first professional job with above-substance pay until age 25 and are forced into uneconomic retirement at 65, and then live to 120. The ratio of work-based earnings for 40 years compared to 80 years living off of savings (theirs, or others) including transfer payments is 3/1. I know of very few investment portfolios that can produce triples with certainty.

Three depressions

I am not about to discuss past or future economic depressions. I just want to focus on three rates of change that are currently way below the actuarial norms. In order of sluggishness to normal change, they are: population growth, savings rate and the dividend yields. Except in Islamic and a few other cultures, fewer children are being born. In part this is due to the recognition of improved medical conditions so fewer children die in childbirth. The use of contraceptive devices, and some additional recognition of economic uncertainties also affect birthrates. On the one hand, fewer children mathematically raise average income per person, reduce the size of consumer markets, and could create a shortage of workers or warriors.

The low savings rate is due to two factors. First, the ability to save is being crunched by expenses rising faster than incomes and second, the interest rates available to many are too low to attract their money into the savings system. One of the reasons I pour over the weekly edition of Barron’s is for its statistical section. In this week there is a monthly table of the dividend yield on the Dow Jones Industrial Average for the last ten years. At the end of January 2014, the yield was 2.14% which was the second lowest (2.01% in January of 2004 was lowest). There were other months that were lower, but most of the time the yields were higher. Obviously, the dividend yield is not in and of itself attractive enough to explain the record price for the DJIA. (The high at the beginning of the month was 16530.94 which compares with the monthly low of 6547.05 in March of 2009 when the yield was 4.31 %.) The explanations for this almost 1000 point increase in the averages are three.

  • First, dividends have increased because earnings have grown.
  • Second, there has been significant repurchases of the shares outstanding for the older companies in the average.
  • Third, the stock market should be future focused discounting what the average dollar of investment sees.

Tying age and data together

For those who attempt to provide long-term solutions for individual or institutional investors the measurement process has shifted to a total reinvested return mentality which is the way my old firm started to report to fund boards, management, investors, and the media. This in turn means that we have all become much more price sensitive. With current historically low yields there is little price protection afforded by yields. If a market is dropping a “normal” down market of 20%, I believe a current yield would have to be close to 10% to cut the decline in half.

The rosy future is dependent on smart youth.

Last week a panel of Caltech trustees met with approximately 100 graduate and undergraduate students out of perhaps a total student body of under 2500 who were interested in exploring entering the financial community with firms like Goldman Sachs recruiting on campus. As one might expect, my fellow trustees (all who are active within the financial sector) were encouraging, I raised issues for them to think about. (I am willing to discuss my view or send my notes to our subscribers.) The key question for some of the Ph.D. students is should they continue with their efforts on developing new products with a seven-to-ten year time horizon for a possible big pay off or go into the financial community for more near-term rewards? I am finding that this is a question that my nephew at Carnegie Mellon is dealing with; he is a bright young man who already has patents registered and is attracting the attention of some leading professors. Somewhat younger, I also have a grandson at Bucknell who is an engineering major and is trying to get the right internship to learn how productive engineering is. As long as the youth of the world are attempting to make things that will help our progress, we have good reason to be positive for long-term investing for the next 100 years.

Filling the age gap

Tonight was the Super Bowl XLVIII. For the first time our National Anthem was sung by a world famous opera singer, Renee Fleming. I am very proud to report that she engaged the New Jersey Symphony Orchestra to accompany her. (Ruth, my wife, is the Co-Chair of the NJSO.) She is addressing the chronic problem of classic musical audiences, that they are aging and orchestras are working very hard to bring in more of the young to invest their time and eventually their hard-earned money in support of classical music. From an investment point of view this can be important. There is a clear relationship between math, science, and therefore investing, and perhaps improving each with an understanding and appreciation of classical music.

I think Ms. Fleming sang wonderfully!
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