7/26/13 - Ten Years

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Jul 26, 2013 8:30:13 AM

and tagged Economics Lessons

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Today is Nora’s and my 10th anniversary. We got married on July 26, 2003. It was a great wedding. To celebrate, last night we went out to No. 9 Park—a very nice restaurant in Boston—and tried the tasting menu, which I highly recommend. We also went to Tiffany’s, despite my protests that I had already bought her a ring. You can imagine how effective the protests were, and, well, she’s earned it. I can honestly say that I love her even more now than when I married her. Thanks for 10 great years, sweetheart, and I look forward to many more.

Part of our conversation last night was about where we were 10 years ago, and how much has changed. It occurred to me as we spoke that this was a conversation we rarely have—one that explicitly looks at longer periods of time, rather than having an incessant focus on the now. Looking over a decade, events that seemed so important at one time become less so, while events that may have seemed insignificant turn out to be major.

Part of success in life—and in investing—it seems to me, is developing a sense of the appropriate time scale of things. When people ask me what I think will happen with the economy or markets, or what I think investment returns will be, the first question I ask them is, “What is your time frame?” The time frame we operate in determines how we should make our decisions and, in many cases, how effective those decisions will be.

Talking with a number of advisors recently, one of the topics that keeps coming up is how many clients are unhappy with the performance of their portfolios this year. The dissatisfaction is not because they are not doing well—they are—but because their portfolios are underperforming the S&P 500 this year. What a great example of short-term thinking! Because stocks are up over the past year and more, we should be in the stock market—and we conveniently forget about the downside risk.

Short-term thinking is not, of course, limited to clients. The people excoriating Ben Bernanke today seem to forget that, five years ago, he was one of the people who helped save the economy. We can argue about the appropriate policies now, but at the time, he held the line. Investment managers claiming stocks are cheap are looking only at recent markets. There are many other examples.

One of the reasons I prefer the cyclically adjusted P/E ratio as a valuation metric for stocks is exactly the fact that it is not timely—that it does pull in information from a decade ago. To insist on using the most current data alone is to implicitly assume that things are so different now that old information is irrelevant. As we have found over and over, this time is not different.

Right now, we are recovering from the Great Recession, and the Fed’s low interest rate and stimulus policies are very controversial. Ten years ago, in 2003, we were recovering from a deep economic slump—the dotcom boom and bust. The Fed was supporting the economy with low interest rates, and employment was slowly recovering. Ten years before that, in 1993, we were recovering from the real estate depression of the late 1980s and early 1990s, and the Fed was supporting the economy. Ten years before that, we were recovering from a terrible Fed-induced recession. Does any of this ring a bell?

Where will we be in another 10 years? Well, I will take a guess and say that we will be recovering from a recession, after a period of substantial growth, and the Fed will be taking policy actions that will be very controversial. Just like they have over the previous 30 years.

One of the advantages of getting older—and there are many—is the development of perspective. Ten years on, my life and my marriage are richer. So, too, is my understanding of how the economy works. As part of considering where we are now, take a look at where we have been—over a period of decades. We continue to recover, and it is not easy, but it is also not all that different from the past. We got through those challenges, and we will get through the current ones.

The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

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