Just Can’t Take It Anymore
Dis and Dat | Investment Commentary September 2019
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
Just Can’t Take It Anymore
“NO, we ain’t gonna take it.”
“We’re Not Gonna Take It”, a hit song from the Stay Hungry album by Twisted Sister,
No, we aren’t talking about the outrageous heat in Southeastern Louisiana! But an issue that seems just as ridiculous to us will be discussed in this piece. We will be covering two fallacious investment mindsets in today’s email: 1) “HELP! I am scared to death!” and 2) “Stocks always go up…if you hold growth stocks.” Those two thought patterns can be hazardous to your wealth. In fact, seeing them happen simultaneously baffles me!
One of the top questions we have been receiving recently is, “Do you think there will be a recession?” The honest answer – facetious though it may be -- is “Of course.” Humans’ emotions have cycled up and down for millennia, and that is often reflected in our economies. So unless those tendencies disappear overnight, then we will definitely have a recession.
Realistically speaking, though, we believe questions concerning your withdrawal needs, your allocation toward short and mid-term treasuries, and questions about the companies you own are more important. For now, though, I’ll settle for explaining why those previous questions/mindsets do more harm than good to your investment health.
“You pay a very high price for a rosy consensus.”
Warren Buffett
“Nobody goes there anymore. It’s too crowded.”
Yogi Berra
“Help! I am scared to death!”
The financial crisis caused many investors a lot of financial, mental, and eventually physical pain, and retirees had a front row seat at the movie theatre. There are a lot of people dealing with retirement-related issues not just in the United States but around the world. If you watch the news, it can be a scary time. The chart below shows nearly $16 trillion worth of bonds available for a NEGATIVE interest rate. Yes – you pay to own them. That is not investing; that is anti-investing. Just this past month, at least three major U.S. companies issued 30-year debt for less than 3%. That means these companies are taking advantage investors’ fears; they are using the low interest rates for purchasing back their companies’ stock or other corporate investments. On a similar track, the interest rate on 10-year debt of the United States recently hit 1.5%.
WHAT IN THE WORLD WOULD CAUSE investors to place money for such miniscule or negative returns? Aren’t we supposed to be logical human beings free to choose the best investments available? Free to choose how to allocate our savings? Given the freedom to choose, why would anyone purposely invest at such rates? I believe a handful of factors are at play here.
Pension funds and others sticking to “consensus rules” of the past may be one. They have been taught and continue to teach others that proper investing involves diversification and allocating a certain amount toward bonds, no matter what the interest rate maybe. Many people follow their lead on that thinking because these are some of the smartest people in well-organized investment organizations. (But maybe that’s part of the problem?) In truth, doing what you’ve always done just because you’ve always done it isn’t always the best answer and, in fact, may be stunting or harming your investments. We favor analysis over habit.
Secondly, fear of venturing away from the crowd – especially when “the crowd” comprises renowned professionals in the field. If pension funds are doing it, advisors are touting the need for diversification between bonds and stocks. Then why wouldn’t Mom and Pop, aged 50 and older, buy long-term bonds? Oh, add to it they are strongly advised getting out of debt (the other side of long-term bonds) is the way to go. As I just showed, corporations and governments are going into debt to take advantage of current rates.
Another possible reason for investors buying low/negative-interest rates bonds goes back to that first question with the cheeky answer: fear of recession. Are we so scared of a recession that we would pay people to hold our money? In my opinion, this thinking is flawed. In the recent past when bad things happened, bonds appreciated. But this ain’t 1982 anymore, folks. It’s difficult for interest rates to drop from 17% or so now that they are at 1.5% based on the 10-year treasury. In short, interest rates are so low there’s almost no way for them to get any lower, making them a riskier venture than many have considered.
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Ben Graham
“Stocks always go up...if you hold growth stocks.”
Why are we near all-time highs on the large cap U.S. market indices if everyone is so scared? For a decade now, those market indices have only gone up. The youngest investors have not experienced a full investment cycle; they have experienced growth and momentum winning, continuously winning. When this bull market began, growth and momentum were on the mat. Beaten to a pulp, relatively speaking.
Here’s a definition for you: “Mania.” This phenomenon refers a knee-jerk reaction to hide money in case of a recession. This could go one of two ways: the old-fashioned way of stuffing money under the mattress (or the equivalent with low/negative yielding debt obligations) or putting money in growth stocks such as new tech, digital, and tech-heavy-based index funds. Here is a chart showing the separation between value stocks and growth stocks recently with its historical relationship. Only for the last few years has growth stocks outperformed value stocks. Most of the time, there has been a tight dance together, and the gaps end up getting closed.
“Investing is simple, but not easy.”
Warren Buffett
Don’t get me wrong: Persistent “trends” like this are downright aggravating to the value style of investing. One may ask why don’t we just give up and do what the other advisors/investors/talking heads do? Believe us: We’ve thought about it many, many times. I JUST CAN’T. It does not make sense to me, and so I cannot just do it and follow the crowd.
Even if these viewpoints are not as popular as others, diverging from the crowd in investing can have its benefits. Only time will tell how the story ends, but we know that following the value path may not be an easy one, and that is likely why it’s not popular. For now, we can only wonder when the crowd will start singing, “NO, we’re not gonna take it…anymore.”
If you have any questions, please feel free to contact us.
Talk with you soon,
James Pope
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