It was during this time that I experienced first-hand the truth of Alma Volker’s note; psychology drives investor decisions far more than economics. When Mr. Volker raised interest rates to beat inflation out of our lives, it created one of the greatest opportunities for anyone with a few dollars to invest. You could easily buy a 10 year FDIC Insured CD paying over 15%. AAA Rated Municipal bonds paid over 14% for periods of 20 years or longer. Common stocks were priced at 7 times earnings (an earnings yield of 14%) while paying a 7% dividend yield. Yet few took advantage of this opportunity. After all, common stocks had done nothing but lose money for over a decade. The supposedly safe bonds paying 8% or more just a few years earlier were worth 35% less than when they were purchased. This proved to me that for us mere humans, any rational thought is bent by short term price movements.
Through September of this year most of us were comfortable, as our portfolios were producing a positive rate of return. How quickly that changed as those positive returns rapidly turned into losses. Declines impacted investors around the world. Let’s take a look at the annual returns for a few major world stock markets as provided by Jill Mislinski of Advisor Perspectives for 2018:
If interest rates move higher, costs will increase, profits will suffer, and earnings will decline.
If world trade is reduced because of tariffs and interest rates increasing, there will be no global growth. The world will suffer, and it will surely cause another great recession or dare I say a depression.
If you have another explanation, please fill in the blank:
If___________________________, we will lose all our money.
For years Barron’s has invited a number of influential leaders in the world of professional investment management to participate in a roundtable discussion. Barron’s calls it their “annual investment talkfest and stockpickathon.” The rest of us know this annual gathering as “The Barron’s Roundtable.” This year, one of the new participants was Todd Ahlsten, chief investment officer of Parnassus Investments, and lead manager of the Parnassus Core Equity fund. He shared a story that I felt was worth passing along to you:
My dad was a captain at TWA, where he was a pilot for 32 years. The company went through three Chapter 11 bankruptcy filings; he got laid off twice, and then the airline disappeared. That was my childhood. That’s credit problems. As dire as this conversation is, the U.S. is home to the greatest innovations in the world. Look at Googles and Amazons and Apples and Nvidias. We are still a creditworthy nation with great talent. We have diversity and population growth, and we still have immigration. I get that the numbers don’t look good, but this country has a lot going for it. Our banks are a lot better than some of Europe’s banks. They look better than Japan’s banks, and China’s. I’m going to bet that the diverse people in this room find great companies in which to make money.