From time to time, I like to look back at some of the articles Iâ€™ve written previously to see how their messages fare with the benefit of hindsight. The following article appeared early in 2005 and, I believe, remains viable for anyone who may have missed it then.
Perhaps one of the most telling measures about those who give advice in the financial media is how seldom they revisit and report the proven quality of their past advice. We may have no idea that the person recommending how we should invest may actually have a terrible track record!
But since the â€œsalesmanâ€ is willing to say almost anything that promotes the stock market, he still gets heard. Wouldnâ€™t we love someone like Cramer to tell us daily how well his charitable trust portfolio is doing vs. a benchmark like the S&P 500? If his portfolio was really successful and still flying, I think weâ€™d never hear the end of it!
Advice givers should be held accountable for their past recommendations, and Iâ€™m no exception! With that thought in mind, consider the message of this earlier article.
How would you like investing successfully if all you had to do was make one buying decision every 10 years? You could simply forget about the markets until the next decade. Do you think itâ€™s possible? If it were, would you consider doing it?
I would. And I am doing it now! Interested?
Yes, you should be. And while I know of no one who has done consistently well with this strategy, I believe that chasing the idea could be the best decision any investor makes.
Hereâ€™s how it works. With the obvious benefit of hindsight, letâ€™s say our intrepid investor â€œJackâ€ invested at the start of the 1970s in areas that would do well in uncertain economic times with higher-than-normal inflation. This buy-and-hold investor bought energy and mining stocks and held them quietly while other stock market investors awaited the end of the bear market that began in the early 1960s. Yes, that bear market did end, but not until the early 80s!
At the start of the 1980s, our model investor could have cashed in his winners in the hard asset categories and moved the entire amount into what was, by then, already a five-year bull market in Japanâ€™s stock market (shown by the move higher in the Nikkei index). Many of Jackâ€™s peers may have thought he had already missed the best part of that marketâ€™s move up from about 7,500 in 1975, as the Nikkei was then crossing the 10,000 level. But its rise to nearly 39,000 was still 10 years away!
Fearing such heights and the valuations at the start of the 1990s, Jack then decamped from the Japanese market. He once again invested in the U.S. market, a move that many probably considered too late in the rise of the S&P 500. The domestic bull market in stocks was heading into its eighth year at the beginning of 1990 — but still had another 10 years and 1,100 points to run.
Our investor Jack, who bought into the middle of three bull markets, did miss the entire upward movement. But he took comfort in knowing that each of the upward secular trends was well established — with valuations still in fair territory — and showing good possibilities that movements to higher levels were yet to follow.
And all this good timing meant, of course, that our model investor avoided losses in markets or asset classes that became relatively expensive or where fundamentals had deteriorated, since â€œsmart moneyâ€ had been capitalizing on these bull market trends. But Jack did not find a consistently rising market every week, every month or every year during his 10-year investment periods. We all know that no meaningful bull market has ever produced a solid, straight line to higher levels. The S&Pâ€™s nasty bear market in 1987, which saw that Index drop about 40% in October and included Black Mondayâ€™s 22% plummet, occurred about a third of the way into one of the greatest bull markets of modern times.
Overall, our model investor would have enjoyed a 30-year involvement in secular bull markets, never anguishing over missing the first three to five years of each move higher. He was content to buy when each move had been strongly confirmed.
This investor would have been among the most successful of all time, had he made the right decisions, one at a time, and staying with each for 10 years. Of course, with the benefit of hindsight, weâ€™d all be successful–beyond imagination. But since each of these secular bull markets was already well established, perhaps the markets themselves were telling investors something valuable. Might there have been perfectly good fundamental reasons to explore each of the asset classes involved?
And where might our model investor Jack be looking now? Which secular trends, begun at the start of the current decade, are now firmly established with the possibility of years yet to run? Well, since the best performing asset classes of the past decade are never the best for the one following, we can probably rule out domestic stocks, canâ€™t we? That would mean holding virtually no domestic stocks, a strategy I have advocated in this column for as long as I have been writing it.
And, hopefully, the investments I have seen as bullish are just what our model investor has clamped onto. And he can confirm their moves upward, as he has always done in the past. He will investigate what has been doing well and where valuations argue for a continued move higher.
I believe that asset classes that do well when the dollar falls in value are where Jack should be looking. Gold, international bonds, emerging market stocks and energy are now filling my client accounts. And no, I worry not a whit about traditional asset allocation warnings about portfolios like mine — empty of the asset classes that such models dictate holding through all market cycles.
If the domestic stock market, as shown in the S&P 500, sells at a historic premium, why own any of it? And with domestic bonds, like 10-year Treasuries yielding 4% in an environment of rising prices, why own any of them?
Yes, Iâ€™ve been talking about Jackâ€™s one-decision investing moves, while Iâ€™ve actually included several different asset classes in my actual portfolios. Hey, Iâ€™m not so good that I can pick the â€œoneâ€ that will outperform all others! Besides, I think that all my picks could become big winners before this decade is over. And a little diversification never killed anyone.
If the idea of making one investment choice, or just a small batch of them, works so well, youâ€™re likely to hear the promoters talking it up soon, right? Ah…nope. That would destroy trading profits for the big brokers who send all those hawkers and carnival barkers to the CNBC studios each day, to sell whatever they want sold.
And you wonder why the brokers hate indexing so much and keep talking about the current â€˜â€™stock pickersâ€™ marketâ€? What works for Jack–and you and me–and what works for them are usually not the same. And they hope you never hear about our model investor.
Have a great week, Bob
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.