Sometimes people ask me if I’m always bullish on stocks. My first reaction is to ask them why they are asking the question. After a moment of silence (checking my first reaction), I often answer “no,” but then I qualify it with a “but I usually am.”
It’s easy to label someone who is always bullish as naïve, Pollyanna, or perhaps selling something. I would submit that I am none of these (unless you count this blog as my selling something – and if you do, please send me the money you owe me for reading it!).
I started working on Wall Street in early the 1980s. My first job was in sales. I did my fair share of “smiling and dialing” trying to convince my clients to listen to my smart ideas. Shortly I was attracted to the more analytical side of the business and became a sell-side analyst. After a few more years, I was hired to actually invest money in the U.S. equity market for a large foreign bank. Sometime in the mid-1980s, I realized that I was a value investor. Of all the investment approaches and styles out there, this one, and only this one, spoke to me. I read all I could about John Neff, Warren Buffett and Chris Brown and considered them role models and superheroes.
The 1980s was a good decade for the stock market, with the S&P 500 providing total annual returns of 12.6%. This is despite two recessions early in the decade. In 1987 we had “The Crash” (which is now called a market “break”). At the time, most “experts” concluded that Wall Street would never be the same after this experience, and that the equity market could never really recover from the shock. Once again, these experts were wrong.
The 1990s were even better than the 1980s. Total annual returns for the S&P 500 were over 15%. This decade also started with an early recession and real estate woes that many thought would be difficult to overcome. Few could have imagined early in the decade the tremendous impact the Internet could have on the stock market. Late in the decade was the first time I ever became cautious on the market. At that time it was very hard for me to understand the valuations being awarded to tech companies with no earnings and a business model that made little sense to me. For the first time in my career, I actually held cash in my personal investment portfolio.
Of course, we all know what happened. The “experts” who had predicted a permanent “paradigm shift” were looking at big losses like everyone else. I found some measure of comfort in my cheap stocks and cash position. As the market fell, I began to become more bullish. I selectively increased my exposure to the market and by early 2003, I was fully invested again. The decade of the 2000s has been widely labeled as the “Lost Decade” for equity investors, given the poor returns of the market. I really don’t feel that way. I can’t disclose the actual numbers, but I know my personal returns for this decade were much better than “the market” and probably close to bond returns. Why is this possible? Well, I don’t buy the stock market. I buy stocks. I actively research them, looking for value and then I actively manage them, selling them when they become expensive and buying them when they look cheap.
Why do I like stocks? I continue to see many great values out there. Stocks look cheap to me now, especially when compared to U.S. Treasury bonds. I suspect that the next 10 years will surprise us (as every decade has since the 1960s). Given the still-high level of pessimism and worry about stocks, I suspect that this surprise will be on the upside. I am confident that a portfolio of actively managed (which doesn’t necessarily mean actively traded) cheap stocks will beat not only “the market” but bond returns (and probably gold returns as well) over the next ten years.