3 Things 11-7
Thing One The Danger of Certitude Financial reporter, Jason Zweig, made some timely observations and offered some sage advice to investors in a recent Wall Street Journal article. Below are some of the key points: ........ “…One of Wall Street’s favorite sayings is that investors hate uncertainty. What they should hate, instead, is certainty. Just think of all the other things markets have been certain about lately. As recently as late July, market participants were sure that the Federal Reserve, after cranking up interest rates this year, was bound to cut them sharply in 2023. Just about nobody expects that anymore. Last December, Tesla Inc.’s market value rose nearly $200 billion in four days, more than the market value of Ford Motor Co. and General Motors Co. combined, all on the belief that the electric-car maker’s growth couldn’t possibly stall. Tesla is down 36% so far this year, a wipeout nearly twice the size of that year-end rise. In January, in a consensus almost as tight as a chorus line, market strategists were forecasting that stocks would gain between 6% and 11% this year. The S&P 500 has lost nearly 20% so far in 2022… when you pursue the illusion of certainty…you chase the next short-term gain and adrenaline surges through your bloodstream, to imagine that you know what’s coming next. Markets don’t work like that, though. They don’t permit any one of us, no matter how smart or foresighted, to know exactly what will happen. Self-control is a key to investing success, but so is fending off self-delusion.” ....... We’re here to help you exercise some self control in uncertain times.
Thing Two The 60/40 Portfolio Isn't What It Used To Be We recently came across an interesting chart on the performance of the 60/40 stock and bond portfolio over the last hundred years (see below). It suggests that while the (annualized) return for 2022 is at a 100-year low, the annualized return over the last 100 years has been 9%. That notion surprised us as we are also aware that stocks alone over the last 100 years have averaged 10%. So we put the question to a longtime investor and good friend for his perspective. See his thoughts below: .......... “Bonds compete best versus stocks in a declining interest rate environment. That's what we experienced for the past several decades. Cash from income earned on bonds along with the appreciating value of the bonds due to lower rates provided a double whammy to bond returns even though returns didn't equal that from stocks. Now that condition no longer exists. Income from bonds will be offset from the impact of increasing rates over time and certainly not from lower rates continuously. For years long term interest rates declined from a high of 15-20% in the 1970s to today's low single digits, thus giving a. boost to the principal value of bonds (bonds increase in price as interest rates decrease). Inflation fell. Thus bonds did very well but not as good as stocks. Now rates aren't declining and can't more than minimally due to the low interest rates of today. Inflation will also dictate the future course of rates. My guess is that inflation won't go back to anywhere near the double digit rates of the 70s. And rates won't either. So bonds won't punish returns but won't be the real strong adder either as rates will stay range bound in an inflation stable environment (at least compared to the 1970s). Stocks always outperform bonds over time because owners demand greater returns than lenders due to the risk taking. So I try to own small fractions of good companies and let management do the borrowing (leverage) in order to increase shareholder returns. I does take patience and some hand holding along the way. Long term thinking and acting (staying the course) is the key. Having enough cash or liquidity is necessary to the success of a long term stay the course with stocks investor. Regular income earned through one's job makes it easier to save and stay the course through long term, buy and hold investing in quality companies during the inevitable rough spots along the way. Of course, depressions, wars and runaway inflation will change the game and necessitate stock selling and hiding under the bed. That's when cash is king. But normally excess cash is trash.” ............ Now that's all-around good advice with an appropriate allowance for uncertainty. Don't you think?
Thing Three Just A Thought “Being at ease with not knowing is crucial for answers to come to you.” — Eckhart Tolle