• Financial & Investment Management Group
  • Tuesday, January 06, 2009

Managing Through Times Like These

by Paul Sutherland
Posted October 14, 2008
FIM Group
PDF Version

I love times like these. Give me a market where things are rough and investors are panic selling, and I only see opportunity. Maybe I feel so comfortable because my formative years were during troubled times like these – like an emergency room doctor who prefers working the night shift and facing gunshot and knife wounds rather than working the day shift and dealing with coughs and runny noses.

Tricky Dickie, Vietnam, WIN buttons (Whip Inflation Now), Mexican currency crisis, hyperinflation, rising interest rates, high unemployment, a stock market malaise all coupled with rising and collapsing energy and home prices were hallmarks of 1973 to 1983.

We know 1983 marked the beginning of a great bull market in stocks and bonds that some naïvely still think is intact today.

Why do I enjoy markets like these? Simply because they offer low-risk investment opportunities. I don't like to lose money and hate it when our portfolios are down, but I realize that sometimes that's the way it is. No honest person gets to have great low-risk returns without some downside volatility. But nobody minds upside volatility. Find me a long-term successful business person or professional investor, and they will talk about 2008 and 1987. Business people will tell you about when they had to borrow against their mother's house to make payroll, or the year they had sales tank and the bank wouldn't extend a loan. They will all say that those are normal ups and downs of our economic world and that they profited from those periods.

Linda Brzezinski, who was my first employee in 1979, had the foresight to save copies of all our newsletters over the years, even the ones typed on the old IBM electric typewriter. In the fall of 1987, the markets seemed jittery, so that October I sent a note to clients that included these lines:

The U.S. government has an opportunity in the next few weeks to take some steps that will be positive for the U.S. financial markets. The Gramm-Rudman-Hollings Act Amendment (GRH), the signing of the Arms Limitations Treaty with the Soviet Union, and with Congress' new appropriations bill (hopefully passed in the next few weeks) could create a perceived environment of great opportunity. The G-5 meeting of September 26 could help lower our U.S. trade deficit. All this could move the world psychology to look on U.S. assets favorably.
October 7, 1987

A few weeks later the market crashed (the Dow Jones was down nearly 23% in one day). The newsletter that we sent out afterward contained these very important lines that are still true today:

I think I have learned more about investment markets in the past two weeks than I have in 14 years. The worldwide crash in stock markets, the almost instant paranoia among the press and the freak-out behavior of James Baker, our Secretary of the Treasury, should scare anybody who has their eyes open.

More than ever before the recent uneasiness in the financial markets has catalyzed my belief in always having a diversified portfolio of carefully selected and managed assets. I thank God that we do not use speculative options, futures, leverages, and margin or programmed trading techniques to beat the markets. Many individuals and companies were decimated by such strategies. They were lulled into these strategies by a strong market, lots of hype and because everyone was doing it.

This market volatility has created opportunity for the disciplined, patient investor. Some stocks are down over 50%. Savvy investors are now nibbling away at these bargains, and many companies that are cash-rich are buying back their own shares. Will they profit in a few weeks? A few months? A few years? History shows us they will profit.
October 30, 1987

And then in December 1987, we sent out the following letter (excerpted below – also listed below are some leading stock market average declines):

Dow Jones Industrial Averages   @ 36.1% decrease
Dow Jones Utility Averages   @ 29.3% decrease
S&P 500 Stock Average   @ 33.2% decrease
O.T.C. Composite   @ 29.3% decrease

The U.S. has had eight recessions since the end of World War II, and the stock market has declined in every one of them usually before the recession even started. Following every one of those eight recessions, the stock market has climbed to a new historic high. Naturally, we must be aware of the fact that the stock market could very well fall further, but if history repeats itself, it will surge to a new high well above the highs of a few months ago.
December 10, 1987

One year later I quoted Barron's magazine, which said, "What made 1988 truly great was that is was not 1930!" I think next year, Barron's will be able to dust off that line and say, "What made 2009 truly great was that it was not 1930!" Linda pasted a chart showing the volatility of the market in 1988. (see graph, right)

Then, naturally, we had a few years of relative calm until the Iraq crisis exploded, and we led off our August 1990 newsletter with the table on page 3.

And a few months later we sent out a letter titled, "Gloom ... But Not DOOM," stating:

Psychology is what ultimately drives financial markets up and down, and I find it amazing how quickly people's attitudes about the economy can change. I remember begging clients to buy stocks and long-term bonds back in 1982 and telling them to sell gold when it was over $800 an ounce. It's funny how when the markets are at their highs, everybody wants to buy and when things are low, everybody sells.

The gloom that pervades our markets today is amazing to me – people are panicking out of assets that they bought as "good investments" (nobody buys an investment because it's bad), expecting big profits, income or whatever. Then if the security goes down, it's a "bad investment," even if nothing has changed in regards to the investment. In our accounts that we are able to buy individual stocks in, we have bought some securities that are off from their highs, by over 80% in some cases.
November 2, 1990

Today's market reminds me so much of those wonderful years. We made money and navigated the terrain through the junk bonds, impotent portfolio insurance, indexing manias, silly government policies and even more silly political responses to economic and global events. Did we have losing months and years? Yes we did! Were our clients able to stay retired? Yes! Did our client portfolios grow as we saw the gloom as opportunities to buy and the boom as opportunities to sell, and the change as just plain opportunity? Yes! Today is no different … significant, low-risk opportunities are available.

Country World Stock Markets Before Iraq Crisis August 1990 % change
U.S. 353.4 307 -13.1
Japan 20863.5 23727 -23.1
Germany 2355.9 1875 -20.4
France 439.2 363.7 -17.2
U.K. 1898.7 1604 -15.5
Canada 3541.9 3359 -5.2
Australia 1577.9 1493 -5.4
Hong Kong 3485.8 2871 -17.6
Singapore 2565.5 1128 -27.9
Korea 673.2 603.6 -10.3
Taiwan 5402.6 3333 -38.3
    Average -17.7
      August 24, 1990

Imagine buying GE, Gannet, New York Times or AT&T at prices less than one-half of their former highs with cash dividend yields of over 5%. Well, that is reality today. Imagine being able to buy diversified global energy companies like BP, Royal Dutch Shell or ENI that are selling at around 40% of their former highs and that sport cash dividend yields of 5% to 7%. Yes, that is reality today.

We obviously were early, and I am not happy that the portfolios are down. We started buying energy companies at prices about 20% higher than they sport today. No one can get the timing perfect – but we bought at good prices, and unlike others who are panicking into CDs, we are and have been locking in long-term income from cash dividends and growth for our portfolios. And these are designed to thrive regardless of the future, be it inflation, depression, recession or a boom.

Life will go on, economics will rule, people will engage in economic activities, long-term investments are selling at great prices … what's not to like? Oh yes, we have had some loser investments – Fannie Mae and Freddie Mac – to name two. That's why we diversify. Sometimes we get it wrong. Thankfully, however, we don't speculate with aggressive margins, options, futures, ETFs or indexing strategies. We concentrate on buying good investments at good prices. Thankfully, we are patient and, more important, our clients are patient.

 
FIM Group Login
 

Please Download the latest version of flash