This Time Is Different
According to Sir John Marks Templeton, the four most dangerous words for an investor are “this time is different.” Mr. Templeton grew up in Winchester, TN during the roaring 1920s before attending Yale University and graduating in 1934. He was an avid and skilled poker player - earning enough money to help finance his education. Sir John’s probability skills were not wasted on the pure folly of card games as he studied under Benjamin Graham (known as the “father” of value investing) before becoming a CFA Charterholder.
If Ben Graham was the father of value investing, then Sir John may have been known as the father of international investing. He founded the Templeton Growth Fund in 1954 and positioned it to be one of the first mutual funds that invested into Japan and other international markets during the 1960s. His fund returned a compound annual growth rate of 15% over a 38 year period - providing positive real (inflation-adjusted) returns during each 5-year rolling segment.
Part of his approach as a value investor was to “invest at the point of maximum pessimism.” In other words, by NOT following the herd there were some real bargains to be found among the rubble left behind. I think of it as walking in through the back door of a building just as everyone else is running out the front door after someone mistakenly pulled the fire alarm.
One Year Ago
One year ago we were in uncharted waters - with a growing pandemic that seemed to have no geographic, economic, or geriatric boundaries. It was also one year ago that the S&P 500 index (^GSPC) closed the day at $2,237.40 - suffering one of the steepest declines of 33.92% in just 23 trading days. This decline also occurred just after the “fear” index (^VIX) peaked above 80. Many people on commercial TV, commercial radio, mass media, and social media were claiming that the end of the world was near and that global economies would soon collapse.
A Millenial Client
One of my competitors once remarked that they could tell when the stock market bottomed on March 9, 2009 by the number of clients who called his office that day. His call volume was the highest he had seen in many years and it was filled with people worried about their future. Physical fear is important because it keeps us alive and prevents us from following a herd of lemmings off the proverbial cliff. But, it also paralyzes us from reaching our full potential. Think of a rock climber who holds on too tightly and runs out of energy halfway up the face.
Around this time last year, a millennial client called and asked that I drastically reduce the risk in their portfolio. My attempts to “talk them off the ledge” failed and they continued to insist that all of their friends were equally concerned about the market gyrations. This client is very well educated and runs a very successful local business. The only thing they lacked was a long history of investing through the best of times and the worst of times. The perspective gained from repeated failures and victories is an invaluable asset to an investor for long term success.
This client wants to and (still) plans to retire by age 50. I sent them a revised risk tolerance questionnaire and adjusted their portfolio accordingly. Age 50 is the point at which Sir John and another disciple from the Ben Graham school of value investing - Warren Buffett - started to really generate wealth as investors. This is due (in part) to the “miracle” of compounding and also to their accumulated experience with and patience in the market system. One headline I just saw from an MIT forum was written by a Chartered Market Technician (CMT) who says she lost 90% of her capital in the last 6 months. Technicians typically use historical price patterns in an attempt to predict future returns. Contrarian investors (like Ben Graham, Sir John, and Warren Buffett) use the security analysis of stock fundamentals to uncover the overlooked and unloved stars of the future.
My Youngest Son
While on a morning hike, my youngest son and I soaked in the fresh air and enjoyed the bluebird day ahead of us. The weather conditions were probably very similar around this time last year, but the outlook was far from sunny. It is the unknown that generates fear and the known which generates hope. My son is starting to put money away for his retirement that is still beyond our sight of the horizon from our perch atop East Barn Door Hill. We talked a little bit about uncertainty and the changing seasons. There are always variations in the weather patterns, but every winter the snow has accumulated and every summer the snow has melted. It is folly to predict what day we will see the first flake or the first daffodil just as it is silly to try to time the top or bottom of a market cycle.
(Un)Predictable Market Cycles
The S&P 500 closed the day today at 3,910.52. This represents a gain of 74.78% since the low one year ago on March 23. The VIX has also returned back down to Earth with a reading of 20.30%. This level is still well above the lows around 10 we saw in 2007 before the great recession. One of my fellow Tuck graduates working at Fidelity Investments once remarked: “The market goes up. The market goes down. What are you going to do?” Many times it is harder to do nothing when the world is swirling around us than to do “anything” in an attempt to make sense of the chaos.
I once wanted to ask a former boss “what would you do if you were not afraid?” I never had the guts to pop that question in person, but think of times when the market catches the inevitable downdraft to help frame my perspective. Suffering through the pain of market losses before we enjoy the joy of our rewards is not just a right of passage. It (buy and hold) has also been a very good long term investment strategy. If someone tells you that investing is easy, they are either lying - or stupid - or both!
When we look at a long term chart of market values over time, it is easy to see what we should have done over our lifetime. Hindsight is (of course) 20-20 and it is much harder to make a rational decision when the financial world seems to be turning upside down every minute. Pulling ourselves out of the weeds to take a look at our investment opportunities from a 30,000 foot view sheds a much clearer picture of what cards to play in our current hand.
There are a few things to note about the enclosed chart. Over the last 95 years, the asset class that experienced the most risk ended up providing the highest returns. A $1 investment made into small capitalization stocks would not have shown a persistently positive return until 16 years later. I often want to ask my clients “how long can you stand feeling like a complete idiot before you look like an insightful genius?” Perhaps one day I will have the courage to pose the question using exactly those words. This time is different?