Monthly Archives: October 2012

Old Guys Rock

From time to time I will say something that my teenage son thinks is kind of cool.  On those rare occasions, he will sometimes say with a slight chuckle, “old guys rock,” which is about as close to a compliment us old guys can expect from the teenage generation.  Obviously “old” is a subjective concept.  My wise father-in-law would often say, “old is twenty years older than you are.”  Although I am older than I used to be, much of my thoughts and behavior “feel” younger than my actual age.  I still play Ultimate Frisbee each weekend and still enjoy playing a video game now and then.  Maybe a lot of this “old” thing is a learned behavior…

This week I had the privilege of hearing Dan Fuss, one of the most respected bond portfolio managers in the business, give a presentation to a group of professional investors.  Dan, who by my father-in-law’s definition is “old” relative to me, started in the business in 1958 and probably has forgotten more about bonds and the markets than most people know.  Dan’s comments are always entertaining, enlightening and useful.  This time was no exception.

Market Watch featured a summary of his comments from a presentation in May of this year that does a pretty good job of highlighting Dan’s views.  It is a worthy read:

Most economists and market strategists agree that the U.S. has a number of big problems – massive entitlement spending (which only grows as our population ages), government debt, an economy growing below potential, and so on.  Most commentary from these experts is gloomy; they struggle to offer workable solutions that do not require draconian measures that seem highly unlikely (cutting Social Security payments, limiting access to health care, across the board government spending cuts, etc.).  It’s easy to conclude that these troubles are chronic and insurmountable.  This conclusion may be part of the reason for the miasma many people feel now about our nation.

Dan too is very clear-eyed about these problems and did not offer any quick and easy solutions.  Yet, he did suggest something that I had never before considered that could help matters in a big way.   It involves old people.

One key element to the prosperity our nation experienced in the late 1990s (no, it wasn’t tax increases…) was a dramatic increase in the percentage of the population in the workforce.  Putting more people in the workforce has a tremendous impact on government revenue – much greater than raising taxes on any portion of the working population.  Dan suggests that this could happen again in the U.S., and the demographic that could help out would be – wait for it – old people!

This is already happening in Japan.  The effective retirement age in Japan has risen to 69 years (up from 60) over the last few decades.  Dan told of his experience with a museum tour guide in Tokyo.  This fellow had been retired for 15 years, and he decided to go back to work in his late 70s at the museum.  It wasn’t because he had to work, but he wanted to.  With medical and technological advances continuing at a rapid pace, it is easy to imagine a world where more “older” people will be able to perform many of the jobs that now are going unfilled.  Our current effective retirement age is 67 (already above the “typical” retirement age), and it seems reasonable that this could rise over time.

Clearly this is not a sure thing and may not be any kind of panacea.  Yet, most of the analysis I see about our nation’s big problems struggles to explain why tax revenues will rise (apart from increasing taxes, which is also rarely a sure thing). Dan has identified one possible way to see higher tax revenues.

In my view, there is a bit of irony here – the generation that is causing our structural entitlement/health care cost problems (the baby boomers) may ultimately become the solution to them.  Until then be sure to get enough sleep, eat lots of fiber, exercise, take your vitamins and get ready for a more active retirement than you might have planned…

Investing Gangnam Style

One of the surprising things about this world is that you never can predict what people will like.  Case in point – the global cultural phenomenon known as “Gangnam Style.”  This song’s music video, released by the South Korean rapper known as Psy, has become an internet juggernaut, logging over 400 million views.  Not since the “Macarena” has a pop song taken the world by storm like this.  Even now, the song is climbing up the U.S. Billboard singles chart, probably headed towards number 1.

The chart above shows the daily YouTube traffic of this video.  It’s interesting to see that the initial interest was quite high (500k) relative to most stuff on YouTube.  The fact that this was just a modest beginning relative to where it would go is nothing less than amazing.  Last month “Gangnam Style” was recognized by Guinness World Records as the most “liked” video in YouTube history.

I couldn’t help but think that if “Gangnam Style” chart depicted a stock’s price movement that I would want to own it!  In many ways, it would be the perfect investment.  Kind of flat at first, allowing investors to accumulate a full position.  Then moving up steadily at a somewhat modest pace, and then accelerating near the end to the chart.  Unless “Gangnam Style” was a great long-term investment (name another one-hit wonder that was), the point of acceleration near the end of this chart might be a good time sell.  In other words, buy early before everyone knows about it, and then sell when everyone loves it.  This is a simple formula and not every stock will conform to it, but it really lies at the heart of value investing.

The above chart shows the S&P 500 index since the latest bull market began back in 2009.  The market has risen over 100% since the its lows and each correction (despite what the media and other “gurus” were telling investors at those times) was actually a buying opportunity.  Looking at this chart, some people might be tempted to sell to lock in profits now.  Unlike one-hit wonders, the stock market is a good long-term investment.  The trajectory of the U.S. stock market over time has always been upward.  The only long periods of time when the market stalled occurred after massive bull markets and irrational overvaluation (1929 and 1999).

Our current bull market was unique in my experience in that retail investors were largely absent during its entire course so far.  Retail investors have sold something like $130 billion of stocks over the last five years and cash and bond holdings are near record levels.  Never has any bull market so unloved by retail investors.

I think this is what Bill Gross meant when he said that “the cult of equities is dead.”  I don’t think he was making a comment on the market, but on retail investor mentality.  Because it was hard to make money in stock last decade (the so-called “lost decade”), many have concluded that stocks are a bad investment.  They have given up.  The “cult of equity” to which Mr. Gross refers may be the idea that stocks would always be the best investment to own, no matter what.  The 10 years following the market’s peak in 2000 has done much to destroy this notion.

Yet, investment opportunities still abound.  Earlier this year we found, via one of our quantitative screens, a small company that looked undervalued.  We did a bunch of analysis and concluded we should buy it.  We did. It went down a bunch right afterwards.  We revisited our research, ran a few more numbers, and concluded that we still liked it. We bought some more.  The stock is now up over 100% from its July lows.  The stock market is up 100% in 3.5 years; but one stock is up 100% in 3 months.  This is why we don’t’ “buy the market.” And this is why we don’t try to time the market.  There are always some stocks out there worthy of our attention that are being ignored by the market that could be great investments.

A year from now we may be wondering what ever happen to that guy who made that catchy song and highly-entertaining video.   But I know that one year from now I will still be looking for and finding attractive individual stocks to enrich all investors in my sphere of influence.  But until then, “Oppa Gangnam Style!”