By Tom Tull, Retired Chief Investment Officer,
Texas ERS
Having been
in the investment business since the early 1970’s it is interesting to reflect
how times appear to have changed but really haven’t in the scheme of certain things.
In the late
60’s and early 70’s we had the nifty fifty stocks, institutions drove the
market’s fortunes, we were all waiting for the DJIA to break 1000 (Last close
was 42,732 on 1/3/2025) and asset allocation was essentially 80% equities and
20% fixed income.
Investment
concentration was rightly on the U.S. markets rather than the global universe as
the U.S. markets were more transparent and easier to invest in. Also, the typical commission cost to buy a
share of common stock was anywhere from $20 to $50 per share until online
trading became more prevalent with institutional investors becoming more
active. As you know, commissions are
down to a fraction of a cent today.
Financial
engineering via conglomerates, the popularity of equity mutual funds, and later
bond funds, added to the fray in the 1980’s and 1990’s. I essentially entered this business out of
college and believed I had all the answers and just tolerated the older folks
that had been around for awhile.
After being pummeled by the volatility of the U.S. moving off the gold standard in 1971 and the subsequent hike in oil prices by OPEC, wage/price controls and whip inflation now policies of the Nixon administration, I gained some reverence for the acumen of those in the business for some time no matter how much gray hair they had.
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Today the new convention for asset allocation is moving from 80/20 to 60/40 to 30/30/40 with the 40 being alternative investments that are being hardwired for retail consumption. Let the buyer beware, as financial literacy of a number of new investors is lacking despite the best intentions. As they say if you don’t respect your past mistakes you are doomed to repeat them. And as someone also said, the only free lunch on Wall Street is diversification.
Today the U.S. accounts for approximately 26%
of world GDP and its stock market accounts for about 43% of the global total. Based on changing global demographics and
de-globalization, the International markets may come into their own in the
future--again. Times change as do investment priorities based on prospective risk
adjusted rates of return.
Even the
tools of the trade have changed over the years, with research via paper such as
Value Line, Standard & Poor’s and Moody’s, Quotrek devices, Reuters and now
Bloomberg as well as boots on ground with company management visits and the
perusal of 10Q’s and 10K’s.
Today we
have computer analysis, AI and social media. The risk today is the extent of
data scrubbing and fake news. The bottom line is that more time needs to be
devoted to getting out of the office and doing due diligence to improve the
quality of research to make more productive decisions. In turn it is imperative
that each investment considered provides the means to determine its real value
rather than the perception of value.
One last
thought for consideration is the belief that you have to act when there is a
sudden change of events such as a one day market crash of 20% or more such as
the 22.6% stock market crash of Oct. 19, 1987 or October 2007 with declines of
over 50% due primarily to exposure of securities of packaged subprime loans and
credit default swaps.
More often than not, patience pays. Don’t assume that the best course of action
is to react. Do your homework and don’t feel compelled to act for the sake of
acting. In turn, as someone once said,
pigs get fat and hogs get slaughtered.
In other words do not feel compelled to hold a trade too long.
Until we
meet again.
