The first time I got a big cut over my left eye, I was in the first or second grade and was attending Ebenezer Avenue Elementary. The second time I got a big cut over my left eye, I was in the third or fourth grade, and early in my Richmond Drive Elementary school days. Both instances involved a lot of blood, a lot of fear, and a lot of stitches. I was scared both times, and each time I worried I’d lost an eye. Now think about the fear my mom had when her sweet little boy came running at her holding his head with blood running down his face… her sweet, little, stupid boy that not only almost lost an eye twice, but basically the same eye, and in the same spot. Fear can quickly turn to anger in cases like that.
Luckily the eye is fine, and I have a very cool two-part scar that has been with me most of my life. It blends easily into my face and doesn’t scare people, but it’s also easy to point out if I want to look tough. It’s adaptable to my needs, and was even much more so when I was a kid. I went to school both times with an eye-patch. Everyone wanted to know what had happened, and for a good week I was the cool kid. I used those wounds to my advantage. My eye hurt when there were chores and homework to be done, but also when there were cookies and candy close by. Of course it didn’t hurt when there were other kids around... I wasn’t scared about having to go get the stitches out or anything.
We are all good at adapting to the circumstances. As I said before in an earlier letter, whatever happens with this virus and how we ultimately deal with it, be it a vaccine or medication or a change in behavior, we will adapt individually and together as a society.
I wanted to quickly offer how I see that you all, our clients, have adapted, as well as a brief description of how we are thinking about adapting at Anderson Griggs Investments.
So what do I see from all of you? I am going to get my assumptions out there, and if you don’t agree and I have the wrong take on things, I want you to reach out and set me straight. I’m guessing the greatest portion of you all have just dug in and are waiting. We had a lot of phone calls in the beginning, but now when our phone rings it is usually salespeople, who seem to be rapidly multiplying. But I am guessing you all have adapted, the same way you have throughout your life thus far. When times were rough, expenses were high, or the cost of borrowing was high, you all cut back. Granted, many of the options for “fun money” are limited now, so your savings rates are probably going up. That behavior is what got you your savings in the first place and prepared you for “rough” times. That behavior will equally serve you successfully today.
If my assumption is wrong, and worry is keeping you from calling or emailing, whether it is about the market, the virus, the future of our country, or our kids at school, then I’ll also reinforce again that we are here in the office and willing to talk about all of that stuff. We can’t fix all of those problems, but we think about them in relation to our investment management obligations, and will share those plans with you.
So how are we adapting? We are setting plans in place to be a little more proactive in reaching out to you all to make sure our understanding of your financial situations are up to date. You can go ahead and prepare how you are going to nicely tell us to leave you alone if nothing has changed, and hurry us on our way, but we want to make sure we are doing our best for each of you and your own individual circumstances.
From a portfolio management perspective we are adapting beliefs and behavior. Our central investment philosophies have not changed. We are not thinking about starting to use triple-leveraged inverse ETFs, emerging market junk bonds, or venture capital. Our conservative approach to investment management, based on knowledge and reality, still guides our decisions, but the capital markets environments have changed in size, scale, and speed. We are upgrading our technology to better address and adapt to the rate of change we are seeing. We still hold to the long-view investment philosophy we’ve spoken about with you all, but opportunities come and go quickly. Many of you may have seen the recent monthly trades reported by Robinhood, the newer free trading app mostly used by younger traders. At 4.3 million average trades per day in June, it beat out the other giants TD Ameritrade, Interactive Brokers, Charles Schwab, and E-Trade. We aren’t looking to become momentum traders, but we must realize that increased volatility can create quick opportunities for the long-term investor, though only if we are ready to act.
Finally, we are continuing to adapt to the historically low interest rates the world finds itself beholden to. If you go back over the years, interest rates are a recurring subject of our monthly letters. Interest rates set the stage for every investment of any type. Rates of return, and the risk levels associated with them, are always considered in terms of how they differ from the risk-free rate of return, which have primarily been US Treasuries. With 10-year treasury rates currently at 0.59%, I recommend identifying the risks much more closely for any fixed income product with yields much higher than that.
To put this statement into perspective, Alphabet (The Google company) just had a $10 billion bond offering. There was $31 billion dollars of demand thrown at the sale, because Alphabet is an extremely strong company that deserves a high investment grade. Of that offering, they had $1 billion of 5-year maturities that paid 0.45% annually. This is the lowest rate seen for that maturity since the previous low Apple sold back in 2014, which paid 1.25%.
Today, whether we are talking about fixed income investment yield or fiscal stimulus, the phrase there is no such thing as a free lunch has never been more pertinent. We will adapt our investment management to this given, through asset allocation and a widening of our search for relative risk-free rate bearing fixed income.
I’ve put a printout of a quote, front and center on my desk, by Treasury Secretary Robert E. Rubin. The quote was part of the commencement ceremony he gave to the graduating class of 1999 at the University of Pennsylvania. It reads:
As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.
When the relentless uncertainties of this challenging world we find ourselves in today start creeping in from every crack and seam, that quote lights a fire under my chair. Uncertainty is never an acceptable excuse for inaction, although sometimes the probabilities dictate we take Jack Bogle’s advice and, “Don’t do something. Just stand there!” Whatever the case, we must act, and we must judge the decisions we make in light of the results, and on how we made them.
I look forward to our future,
Kendall J. Anderson, CFA, Founder
Justin T. Anderson, President