Introduction
Most people react to
present investment conditions in terms of the dominant financial conditions
when they first became aware of financial markets and influences. Very few
young people entered the financial community after WWII until the mid to late
1950s. I was part of the second wave when I became an investment trainee
working for supervisors at least thirty years older than myself. These gentlemen were
operating under the canopy of their parents’ experience during the Depression.
They were not prepared for the growth experienced in the late fifties and most
of the 1960s. Thus their investment accounts underperformed and they in turn
were easy to be replaced by a group of young, inexperienced analysts and
portfolio managers.
I was somewhat prepared for this turn of events. In 1957, I had the honor of taking Securities Analysis under Professor David Dodd who co-wrote the book of that title with Ben Graham. The course stressed risk reduction by using financial statements to represent value. I used to argue that expected future growth was important as a way to make money. While I did not know it at the time, Warren Buffett reached a similar conclusion.
I was somewhat prepared for this turn of events. In 1957, I had the honor of taking Securities Analysis under Professor David Dodd who co-wrote the book of that title with Ben Graham. The course stressed risk reduction by using financial statements to represent value. I used to argue that expected future growth was important as a way to make money. While I did not know it at the time, Warren Buffett reached a similar conclusion.
Replacing
an investment committee member
Recently I had two
meetings with some very bright people that were being handcuffed by the current
market conditions. The first was with members of an investment committee which
had an opening. I suggested that it might be wise to add someone who understood
commodities. The idea was rejected as supposedly the commodity thirty year
super cycle was over and commodity prices were now tied to China which was slowing.
This thinking is focused at the beginning of price trends and not what I think
should be the focus, which is the terminal price.
Future
investors
Later that day I met
with undergraduate and graduate members of a university investment club. Some
of these bright people were interested in being employed within the financial
community and/or wanted to learn more about investing. By their questions they were reacting to
their media-driven views of what they thought was happening in Wall Street. I tried to suggest that they focus on the
future; e.g., global shortage of retirement capital and the loss of jobs due to
changes in minimum wages driving technological replacement of human labor.
Classic
bear market thinking
In both cases and along
with the majority of those who follow investments they were demonstrating
classic bear market thinking. Reacting
to past stresses they focus on the current and look for proven results. In today’s time that means placing great
emphasis on statistical value including looking at average price/earnings
ratios for the last ten years, (including C.A.P.E. which was discussed in last week's blog.) One way I attempt to learn where
we are in the cycle of investment thinking is to look at what periods of time
investors are using in their price/earnings calculations. When people are being governed by fear they
use the past earnings of the latest quarter, year, or ten years. We are not today seeing anyone quoting P/Es
or yields based on their estimates of future 5 and 10 year results. Historically when we do see these, the market
is much higher than markets priced on current or past results.
Today’s
investments for tomorrow’s needs
My professional
responsibilities include managing money to pay future tuition and faculty
paychecks, new laboratories and building maintenance and replacement. The money to pay for these things will be
needed many years in the future, so I must look at today’s investments as to
what they will produce in the future.
I must be doing
something right as numerous of the present holdings that I am responsible for
today are yielding 5% or 10% on current dividends on initial purchase
prices. Thus the money can fulfill the
capital generation needs of the beneficiaries entrusted to me.
Speculation
isn’t new
Investing with an eye
to the future is not new. Much of the
European investment into the US and elsewhere was based on the belief that in
aggregate, the investment would generate future capital.
Another investor who
focused in part on future returns was the advisor to a number of US presidents,
and a friend as well as a fellow park-bench sitter with my grandfather, Bernard
Baruch. During the congressional committee
hearings in the 1930s, certain congressmen felt that the Depression was caused by
speculators. They got Mr. Baruch to
identify himself as a speculator, which meant that he was a cause for the collapse. “To the contrary,” he explained the Latin
derivation of the word speculator, “a speculator is one who sees far out (to
the future).”
In last week’s post I
expressed a view that the problem facing the global and US domestic economy was
not primarily the lack of cash or credit which can be seen in surplus, but the
lack of perceived long-term opportunity.
Being a bit of a
contrarian and a disciple of Baruch and Buffett/Munger, I believe now is the
time to be looking for long-term growth opportunities. I believe this is wise for the beneficiaries
of my long-term investment responsibilities even though there are substantial
odds of a major market decline over the next several years. I am much more confident of my long-term
views than my ability to retreat from the market and then reengage. Over the cycle very few have been able to do
that and produce better results than those who intelligently invest throughout
the cycle.
Additional
thought
Each day our personal,
family and corporate real and contingent liabilities grow. The growth in liabilities without an offset
will reduce our net worth.
Question of the week
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