Daniel Nestlerode: Getting a Little Smarter About Investing
The most frustrating thing about successful investing is its limited lifecycle. Just when it starts to provide a nice flow of profits, the game changes, necessitating a change in investment strategy. Investing is an endeavor of constant learning. Those who ignore this suffer greatly.
A few years ago, John Bogle touted index investing as the only good way to invest over time. Mr. Bogle was the founder of the Vanguard Group of mutual funds. In 1975 he created the Vanguard 500 Fund that mimics the performance of the Standard & Poor’s 500 Stock Index. During the late 1990s, when the markets were booming, this fund produced a number of successive years of twenty percent annual returns, making investors who stuck with the fund big-time winners.
Those were the heady years of the technology boom when just about everything seemed to be going right in the economy and the stock market. The notion of buying and holding good technology stocks or index funds was the investment strategy of the era. The analysts, market gurus and even the economists of the day maintained that the investment climate had changed with regard to strategy. Technology had changed everything and increased productivity would make everyone wealthy.
Times changed again around February of 2000. The buy and hold crowd and the index investors were licking their wounds wondering how their investment strategy, which had served them so well in the late 1990s, was now causing so much investment pain. To this day, the changes in the economy and investment markets are still inconsistent with the investment strategies of the late 1990s. Buy and hold strategies and index investing are not effective investment strategies in this secular bear market.
The current secular bear market started in February 2000 and except for a brief respite in 2007, has not made any appreciable progress for over 12 years. And if history is a guide to the future, I do not expect any change in this pattern for at least several more years. This is not to say that it is impossible to invest successfully in a secular bear market. What I want you to understand is that the strategy and investment tactics needed now are far different than those that worked in the 1990s when we were in a secular bull market. Further, with the suppression of worldwide interest rates by central banks striving to breathe life into their respective economies at the expense of most investors (especially those who are retired and attempting to live off of their saved capital) there are precious few effective investment alternatives.
These are times of volatility in the stock market, extremely low interest rates in conservative securities like Treasury Bonds, and a gradual withdrawal of investors from participation on Wall Street. It reminds me of the 1970’s, when repeated policy mistakes by the government led to ultra-high inflation and interest rates, very low stock prices (the average stock traded at 4.8 times earnings at the end of 1974, according to Value Line), the rise of tangible investments (gold, silver, precious gems, real estate) and high unemployment. The circumstances are different this time compared to the 1970s, but there are similarities like high and persistent unemployment, valiant and ineffective efforts by the politicians to fix the situation, and an awful investment environment propped up by cheap money.
There is one treacherous difference: we now have an aging demographic that will slow the recovery. Many of us are older and entering our golden years dependent on the social safety networks of Medicare, Medicaid and Social Security and no longer contributing to the economic recovery.
Now is the time to be concerned with the return of your money rather than with the return on your money. Governments need your money and will be designing their policies to get a piece of your nest egg, while offering you precious little in terms of interest rates on secure government paper. Buy and hold investment strategies and index investing are not working now and probably won’t for some time. Not everything is in dire straits, however. We have a vast new supply of inexpensive energy coming on line that will drive a return of manufacturing at much lower costs in America.
We have a budding biotech industry that has a number of blockbuster developments nearing the mass markets. Apple Inc. is driving relentlessly towards even better consumer electronics, iPads, iPhones, iPods and maybe even iTVs. (Note: I am not recommending you buy Apple stock as it is very pricey.) Harvard Business Professor and author Clayton Christensen noted years ago that the best time to invest in new stuff is at the point when new technologies are being widely adopted by the consumer markets.
If you are looking for outstanding investments, look to see what is becoming standard human practice in technology and find out who makes it. The window of opportunity might be short, but it can also be a thrilling ride. Just remember to sell before you start down the other side. Remember: this is not the time to buy and hold interminably.
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- Daniel Nestlerode: Turmoil on Wall Street - Aug. 5, 2012
- Daniel Nestlerode: Why Gold Works as an Investment - June 17, 2012