In one of our meetings, Justin asked a question of me. He said, “Why is it that the only investment managers telling people to be careful are old timers like you? Jeremy Grantham of GMO, whose seven year forecast is negative in all asset classes other than emerging markets. Howard Marks, whose most recent memo “There They Go Again…Again” strongly suggests people be cautious in their investing today. John Hussman, who has been screaming at the top of his lungs about the “overvalued, overbought, overbullish” markets. Seth Klarman who, at least from what we hear, is sending money back to his investors due to an absence of good opportunities. And finally Warren Buffett, the most recognized value manager in the world, whose Berkshire Hathaway is holding billions, not because he wants to sit on the cash, but because like Klarman, he is struggling to find options available at a reasonable price to purchase.
I thought about it for a while and said, “Well, it could be that of those you mentioned, we all tend to be contrarian value investors who believe that successful long-term investing requires buying at a low price. Or it could simply be that we are all just a bunch of grumpy old men!”
All of us have had run-ins with a grumpy old man. He may be the guy you never want to run into at lunch, because to him the whole world is screwed up. He tells you the economy is terrible, the government is bankrupt, no one can find a job, everyone is in debt, and the future for our kids and grandkids is dismal. I will admit that I try hard not to assume my role as a grump, though at times I do find myself slipping. When I do, both Justin and Libby are quick to remind me of my deficiency.
Yes, all of us old time investment managers making a case for conservative investing may just be grumpy, but today, I am going to assume that we are not. I will assume that we have learned from decades of experience managing portfolios for others. All of these “old men” have lived through an exceptional period of time for long-term conservative investors. According to Goldman Sachs, a traditional 60/40 portfolio, (60% invested in the S&P 500 index stocks and 40% invested in 10-year US Treasuries) generated a 7.1% inflation-adjusted return since 1985, compared with 4.8% over the last century.
Maybe these exceptional returns have turned us into grumps wishing for the old days when it was easier to manage portfolios. Easier because there was always a choice to balance a portfolio based on price. When common stocks were expensive relative to risk free treasury yields, you just sold a little stock and increased the bond holdings at a rate exceeding the rate of inflation. Then you would wait until common stocks became cheap again. Of course they always did, sometimes with a bang, other times with a whimper, but you knew you could just wait it out. Today that option is limited, as current interest rates do not cover inflation, let alone taxes and fees.