Posts Tagged ‘Full Transcript’
Saturday, August 18th, 2012
CONSUELO MACK: This week on WealthTrack, legendary Financial Thought Leader Charles Ellis and award winning financial advisor Mark Cortazzo show us how to cut sky high investment fees to save money and grow our nest eggs over time. Controlling your investment costs is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WealthTrack guest Charles Ellis, “investment management fees are much higher than you think.”
As Ellis points out the little over 1% of assets paid by most individuals and little less than one-half of 1% paid by institutional investors are “seen as so low that they are almost inconsequential” It turns out they are anything but! As Ellis points out “investors already own those assets so investment management fees should really be based on what investors are getting in the returns that managers produce.” Considered that way, fees are much higher. Pension giant CalPERS, the California Public Employees Retirement System, earned just one percent on its $233 billion dollar investment portfolio in the past fiscal year. If it were to pay the average half a percentage point charge on assets under management, the fee would equal 50% of their return for the entire year!
The financial toll investment fees take on portfolios over the years is stunning. Last year, financial advisor and WealthTrack guest Mark Cortazzo introduced a flat fee portfolio product for individuals with smaller and less complex portfolios than his usual high net worth clients. He compared the ten year costs for two clients, each with a $500,000 portfolio- one paying the not unusual annual fee of 1.5% of assets; to another, a flat fee client paying his $199 a month charge. With all other things being equal, the flat fee portfolio saved more than $80,000 in fees over the ten year period.
This week we are going to examine investment fees and how you can reduce them with Charles Ellis and Mark Cortazzo. Financial Thought Leader Charley Ellis is a world renowned investment consultant to governments, institutions and the financial industry. He has authored or co-authored some 18 books including the investment classic, Winning the Loser’s Game, and more recently, with Princeton economist Burton Malkiel, The Elements of Investing . He is devoting a great deal of his time to helping individuals become better investors. Mark Cortazzo is founder and senior partner of MACRO Consulting Group, a 20 year old financial advisory firm catering to high net worth, and now Main Street, clients. Mark has been recognized as a top advisor by Barron’s, Worth, and Fortune magazines among others. I began the interview by asking Charley Ellis how much higher investment management fees are than we think.
CHARLES ELLIS: It depends on what you’re thinking, but most people, honestly, most people think the fees are roughly one percent. That is low, compared to anything else. You buy and sell a house, one percent commission, you think, “My, God. That’s really low.” It just doesn’t happen that way. And if you look at it that way, fees are low.
CONSUELO MACK: Right. And it’s one percent, based on the assets under management, for instance. So you a $100,000 portfolio, it’s a $1,000 fee. Ah, nothing.
CHARLES ELLIS: Right. The problem with that way of thinking is that it doesn’t reflect any economic reality. For an example, if you’re an investor, you already have the assets, so you’re not getting the assets. You’re getting something else. What are you getting? You’re getting a return on the assets. Okay. So what’s the fee on return? If you take the kind of return people are expecting from now, out over the next 10 or 15 years, you’re paying about a 15% fee. That’s not low. That’s a pretty high fee. That’s twice as much or more than most people, say, would pay for a house sale or transaction. It starts to look like a pretty good profit margin, even for a pharmaceutical company. That’s a lot. But that’s not the right way to look at it, and that’s not the whole story. It’s actually a great deal higher than that.
CONSUELO MACK: So Mark, you run an advisory firm and you have seen what a lot of your competitors are doing as well, and, basically, the one percent of assets under management, as a fee, that’s the standard, right? Some are higher. So what’s your response to Charley’s critique that, in fact, fees are much higher than you think, when you just look at the returns you’re getting?
MARK CORTAZZO: I agree, and I think that the one percent is even wrong. We’ve had a lot of people come to us to review the fees on their portfolios to compare to what we’re doing, and they have a million-dollar account, and we ask them what’s their fee, and they said it’s one percent, because at a million dollars the fee goes to one percent. We looked at the fee schedule, and it was actually two percent for the first $250,000, 1.75 for the next 250, and one-and-a-half for the next $500,000. And when we did the math on a $1.1 million account, they thought they were paying one. They were paying 1.63%. So it’s 60% higher than what they thought was one, which in and of itself might have been a very high cost for a $1.1 million account.
CONSUELO MACK: And is that common practice, do you think, in the industry?
MARK CORTAZZO: The most common fee structure that we see at big brokerage firms and investment advisories is a blended- not back to dollar one- it’s a blended fee, you know, where we think that it’s not obvious to the client what they’re paying.
CHARLES ELLIS: One thing you should pay attention to is if you went to Canada, the fee normal would be something just over two percent, and if you go to all the major countries in Europe, it ranges between that two percent and one percent. And if you go to Japan, it can get even higher. So our fees are low relative to the world norm and behavior.
CONSUELO MACK: And that’s a change, Charley. You have been in the financial business for 50-some-odd years. You started as a very young child. And essentially, it was not always this case. So how did we get here? I mean, how did we get to where one percent is the norm, and even that’s not real?
CHARLES ELLIS: Well, for 50 years I’ve been working with investment management firms, and the basic metric has always been the same. You can increase your fees, and if you do increase your fees, nobody seems to mind, and you can increase your fees again, and nobody seems to mind. Because everybody says you would never comparison shop for price if you needed brain surgery. If your family was faced with a major lawsuit, you wouldn’t concentrate on the price of a lawyer. You’re looking for skill. And if you want to get great skill, you have to be prepared to pay up. And those who traditionally have had the lowest fees for active management have been not particularly skilled and not particularly well represented as to what their capabilities were. So we’re looking for value. We look for– best indication of value in most markets is price. So we are prepared to pay a price in order to get good value. After all, my family is dependent upon it. I’m dependent upon it. I want the best. And if you want the best, you pay up.
CONSUELO MACK: So where is the flaw in that argument now? Because you have said that, in fact, the market has changed now. And so buying the best- whatever the best is- the best has changed. So how has the market changed, in which case, that model doesn’t really work anymore?
CHARLES ELLIS: Well, the main change is there are so many truly wonderful, brilliant, hardworking, well-educated, slaving away at it people trying to beat the market that they’re just too darn many of them for any one of them to be able to do better than the crowd. And if you believe, as I do, in the value of prediction markets, there’s been no prediction market in the world with as many people putting real money into it, and really doing the research, and being free to make any choice they want to make, and working at it all the time. So they’ve got it pretty well right. Not perfect, but so much better than it ever has been before, that it’s very hard for anyone to do better than the crowd. And it’s even harder to figure out who’s it going to be before it happens.
CONSUELO MACK: So you have a different approach at MACRO Consulting, the way you treat different asset classes.
MARK CORTAZZO: As an extension of what Charley was saying, trying to define who’s going to be the best manager, you’re starting to see a lot more model portfolios that are using indexes as their base to invest the portfolios. So my 60-40 mix of index-based funds isn’t going to have a big fundamental difference in performance versus somebody else’s 60-40 mix. We’re buying the same indexes and the same asset classes. The average fee for a $500,000 account, national average, is one-and-a-half percent. We, as well as other discounted firms, are at about half a percent for that $500,000 account, and at a million, that one percent fee, there’s plenty of firms that will manage an index portfolio for a quarter of a percent, and that’s a big difference net in your pocket.
On the low return, one of the things that’s very frustrating for us is, we see people coming to us with fees that are 1.5, 1.75 percent, and they have half their money in fixed income, and the ten-year treasuries at 1.5, 1.45, their fee is more than their yield, so, you know, to Charley’s point, not 15%. It might be 100% of the earnings on half their portfolio is the fee. And so we’ve talked to clients about calling out part of the portfolio, put it in a money market. You know, money market, you can shop it around and get one percent net, FDIC insured, and then have the equity portion managed or, you know, an 805 equity portfolio managed, where you’re reducing your fees, and you’re reducing your risk.
CONSUELO MACK: So Charley, are some of the most influential institutional clients, probably at your behest, starting to question the fee structure? Is there any change occurring?
CHARLES ELLIS: Gently questioning would be about as far as most people take it.
CONSUELO MACK: And why is that?
CHARLES ELLIS: But there is a different way of answering your question, which takes us to the, well, what about active management versus passive management, which is a really important proposition. And if you look at the data, it’s very clear that institutional investors and individual investors, but particularly institutional investors, have been increasing. The number who invest in passive has gone up, and up, and up…
CONSUELO MACK: Yes.
CHARLES ELLIS: …every year. The percentage of their assets individually that goes into passive, goes up and up every year. So two of the major forces are increasing steadily and never reversing. Now, the reason for that is partly fee and partly the imperfectability of active management. So that if you really want to get a reliable result, and you would like to save money in doing it, going to what bothers most of us as individuals quite a great deal, I don’t want to settle for average in anything else, why should I settle for average in this? It turns out that is not average. That is comfortably above average.
This last year, for an example, 80% of actively managed funds underperformed the benchmark they were aiming for. You say, “Well, what happens over a long period of time?” It’s pretty grim again. Roughly, 70% of funds have been underperforming over every decade, and make it 20 years to make it longer. The data is not so good. It goes up towards 80% underperform. That’s a very powerful message, and people are getting it. And even though they’d like to have above-average children, and above-average automobile driving skills, and above-average dancing skills… we’d all like to have everything be above average. The fact of the matter is, if you can have an average flight on an airplane, you’d take it, because an average flight may be a yawner, but that’s just what you want in flying an airplane. And in the same way, if you really want to concentrate on what’s important in investing, you’ll concentrate on what you’re trying to retrieve, how much risk can you take, and what basic kinds of investing will do well, and then implement it through passive investing, either ETFs or index funds.
CONSUELO MACK: Mark, let me ask you about some other fees that we are not aware of. What are some of the most obvious that we should pay attention to?
MARK CORTAZZO: When we build Flat Fee Portfolios, we’re trying to eliminate as many of the conflicts of interest as possible. And you look at many of the asset management programs that are out there. They’re run by companies that are product manufacturers. So they also manage mutual funds. And so, you know, we’ve had examples where someone would come in, and they had 19 different mutual funds in their asset allocation model, and 16 of the 19 funds were a proprietary fund of the group that was doing the asset management. Now, there’s 26,000-plus mutual funds out there. They weren’t the best in 16 of the 19 categories. So they’re making additional soft dollar from the asset management fees. There are 12(b)(1) fees in additional costs that get passed on. And so the asset manager, if they’re receiving any other sources of revenue from that program, their objectivity to pick the best funds is compromised because of revenue. And so, the internal costs are very, very important to us, and when we do an analysis, we actually run that report for our client, and say, “Here’s all the funds. Here’s your expense ratio. And here’s what you’re paying internally in fees a year, in addition to the advisory fee.” And it’s usually a very surprising number to most people.
CONSUELO MACK: So what are the other kinds of red flags or even yellow flags that go up, if you’re an individual investor?
CHARLES ELLIS: Very large generality. The real problem for investment management was, 50 years ago, strictly a profession. It didn’t pay particularly well, but it was interesting work, and you could take some real pride in what you were doing, and you accepted it. It just didn’t happen to pay very well. Over the last 50 years, as fees have been increased, and the assets under management have gone up a great deal, and computerization has made it possible to manage substantially more money, the business pays very well. As a result, the focus on profession has gone down and the focus on business profitability has gone up. So you really ought to be watching is this firm in it for the business side or are they in it for the professional side.
And there are keys to the questions you can ask. What is the average length of employment of the people in your organization? How much do you invest in new people training and developing their skills and capabilities? How much of your time, Mr. Account Representative, do you spend every year in training programs? If you look at the senior people in your organization, how many of them are professional people, how many of them are business people? And by and large, organizations that are widely known and widely regarded for investment management tend to be pretty serious about the professional side.
CONSUELO MACK: How about naming some names? What companies would you say really have set a standard of professionalism that you would feel comfortable referring, an investment management firm or financial advisory firm, that you would feel comfortable referring friends to?
CHARLES ELLIS: I’ll start with Mark’s favorite and mine, Vanguard and DFA, two truly outstanding outfits. We can get into more detail in it, if you want to. T. Rowe Price, outstanding organization. Capital Group, which manages the American Funds- outstanding organization. I know, they’ve had in the last couple of years some imperfection in their results. Don’t worry about it. They are a great organization, and they will figure out what the problems are, and get right back on track, and you can always trust them in the long run. Dodge and Cox is also quite a good firm.
MARK CORTAZZO: I agree with virtually all the names that you listed. We use many of them, you know, in our asset management for our high net worth clients as well as our flat-fee program. But every one of those organizations has areas where they’re particularly strong. And working with an advisory group that’s independent, that’s not getting any money from any of them can help construct an all-star team, where you have each of those management teams do the position that they do best, and instead of having one fund family group managing every asset class within that portfolio, having them do their specialty I think can help…
CHARLES ELLIS: But Mark, that’s what you would say, because your business is to help sort it out and figure it out. You could also say any one of those firms, as a family of different funds, has consistent integrities, consistent discipline, consistent professional commitment, and they’re pretty darn good.
MARK CORTAZZO: Absolutely.
CHARLES ELLIS: So you could go either way.
CONSUELO MACK: Charley, you wanted to make another point. Because, you know, the active versus passive debate, and Mark, I’m going to find out in a minute where you come out on that, and we’ve had this discussion before, Charley, and I think it bears repeating, because you have had 50 years, basically, of analyzing professional managers, and to advise, you know, clients where they should put- big, big clients- where they should put their money, and it’s been a battle for you as well as to, you know, you finally said go passive. So what did you want to say about that topic?
CHARLES ELLIS: Finally, the epiphany. You’d think after 40 years you would get it. I didn’t. Forty-five years, somewhere in there I started to get it and realized. Part of it is by shifting from working with investment managers, to working with clients of investment managers, and watching what gets delivered, and you start paying a little bit more careful attention to it. Big stunning surprise for me was to find out mathematically that most managers underperform the benchmark they’re aiming for. Just happens to be the reality. Mathematically, nobody has been able to figure out who is going to do better in the future. Just can’t be done.
So okay, that’s pretty tough. What’s the third thing? The third thing is those who underperform, underperform by twice as much as those who outperform. So that doesn’t sound like a good deal. Then I’m looking at the numbers. Meeting, after meeting, after meeting, and it finally comes on like a light bulb. That string of numbers that are called fees is pretty big compared to that string of numbers called your extra return. In fact, the fees are huge compared to the incremental or extra return. I believe what the managers ought to be doing is adding investment advice and counseling, because there the value is tremendous, getting in the right direction, getting the basic structure right. That’s really valuable.
CONSUELO MACK: So Mark, active versus passive management, where do you come out in the debate?
MARK CORTAZZO: We also looked at the math. And if you think about this logically for a minute, all of the active managers put together are the market. So if you look at the collective performance of all active managers, their performance is the market. So the only differentiator is going to be their fees. So most index funds, the vast majority, almost 100% of them, underperform their benchmark, but it’s by a very little amount, where the active managers, that divergence can be greater. And for people who don’t want surprises, and, you know, good or bad surprises, I think that buying passive, it’s controlling some of the things you can control. Passive has much higher tax efficiency. You can control that. The fees you can control. You can control where you own, what you own.
So you’re taking a market that feels like it’s out of control, and at least empowering yourself with the ability to adjust the things that you have the ability to adjust. So we have an active model portfolio that we manage for clients that won’t take our advice to go to a passive strategy in our flat-fee model, but we frequently have follow-up conversations with them to see if they’ve learned the lesson. So we think that for model-based portfolios over long periods of time, control the things you can control, and costs, obviously, is one of the big variables.
CONSUELO MACK: So the One Investment for long-term diversified portfolio, and, of course, an investment can be an action that you take, whatever. So what would it be? What’s the one thing that we should do or the one thing we should invest in? Charley Ellis.
CHARLES ELLIS: Well, the best thing every single individual and probably every single institution can do is just sit down quietly and say, what do we really, really, really want to accomplish? What do we really, really want to avoid? And what is the most realistic way of getting where we want to go? That’s probably the best thing anybody can do.
CONSUELO MACK: So very much back to basics.
CHARLES ELLIS: Find out who you are, what are you trying to accomplish, and from there, it’s not all that difficult to get a pretty good answer, and to getting a brilliant answer to the wrong question would cause lots of harm.
CONSUELO MACK: In the context of our fee discussion, minimizing the fees, is there one action we should take to minimize our investment fees?
CHARLES ELLIS: Sure. Everybody, everybody who’s an individual investor should be actively seeking passive management. They can do it with ETFs. They can do it with index funds. And the best known, most widely capable index fund managers are the ones to go with.
CONSUELO MACK: Mark, same questions to you. One Investment, one action we should take for a long-term diversified portfolio.
MARK CORTAZZO: I’m going to go with controlling the things that you can control. And I’ll give you three quick examples. Things like money markets. The average money market is paying four-one-hundredths of a percent. You can shop that around and get FDIC-insured money markets paying over one percent right now. So that’s 25 times the yield. On your safe money, control the thing you can control. Making sure you’re looking at where you own, what you own. So tax-inefficient investments, make sure you own those in the tax-deferred accounts; tax-efficient investments, make sure you own them outside in your taxable accounts.
And the third and most important thing is making sure that you understand what you’re paying in fees, in dollars, as a percentage and relative to your portfolio size. And are you getting a good value for that? You know, it is something that people spend a few minutes to try to save a few percentage on their auto insurance. That’s hundreds of dollars. By taking the time to look at that and having it reviewed by someone, it could be tens-of-thousands of dollars, and maybe even a six-figure difference, even on a more moderate size portfolio over time, because it’s the effect of that compounding that’s being sliced off with those higher fees.
CONSUELO MACK: Mark Cortazzo, it’s so lovely to have you here from MACRO Consulting, and Charley Ellis, from numerous organizations, you know, author or co-author of 18 books, a new one on the way. Just great to have you on WealthTrack, always.
CHARLES ELLIS: It’s a pleasure to be with you.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is the essence of what Charley Ellis and Mark Cortazzo just discussed. It is: know what your investment fees are and take steps to minimize them.
Ask your financial advisor for an itemized list of the dollar amounts you are paying for all of their services, and the fees on each of your investments so you will know exactly what you are paying every year. If they won’t do it, start looking for another advisor. If you manage your own portfolio, analyze the costs yourself or pay another investment professional to do it for you. It can save you a ton of money in the long run. If you have a 401k, you are in luck. All 401k statements are now required to show the actual dollar amounts you are paying in fees.
Speaking of saving a great deal of money, during next week’s fund drive for public television we are re-running our must-see interview with social security guru Mary Beth Franklin on how to maximize your social security benefits. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as streaming video or a podcast no later than Sunday night. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.
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Thursday, March 29th, 2012
Here is the full transcript:
CONSUELO MACK: This week on WealthTrack- how you can win in what one of our guests calls a losers’ game- the stock market- and how can you protect yourself from financial peril? These two wise men of Wall Street have skillfully navigated many financial storms. We revisit the late, great Peter Bernstein, a renowned expert on risk, and Charles Ellis on timeless investment strategies, next on WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Sometimes, to understand the present, you have to revisit the past. That is what we are doing this week. We are re-broadcasting a WealthTrack classic, interviews we did with two of Wall Street’s wisest men: one sadly no longer with us, the other very much alive and contributing.
The year was 2006, two years before the financial crisis hit full force. But storm clouds were gathering for those experienced and attuned enough to notice. One of those was Peter Bernstein, universally considered to be the authority on risk. He was an economist, money manager, seminal financial thinker, historian and author of many books, including the bestseller, Against the Gods: The Remarkable Story of Risk . His twice monthly analysis of the economy and the capital markets, Economics and Portfolio Strategy, was read by investors around the world. Even back in 2006, Bernstein expected relatively low returns from the financial markets in the years ahead. I asked him how we should invest?
PETER BERNSTEIN: As you know, I believe passionately in diversification, so you have a little bit of everything. The United States is kind of a very well worked over as an investment opportunity. So I think one goes abroad. Not only are securities abroad, both bonds and stocks, valued more cheaply than in the U.S. They’re no bargains, but more cheaply in the U.S. But in the emerging market world, in the developing world, exciting things are happening. Countries that were once in the doghouse are on a roll now, largely because they’re selling to us in such huge amounts. But even in Europe, which has been kind of laggard, things are stirring, governments are changing. Nobody notices this, but productivity growth in Europe is as good or better than in the United States. They’re giving it away in the social safety net rather than in growing their businesses. But this is beginning to change. And I think if something happens there, there’s huge opportunities. We see Japan finally coming up out of the doldrums.
So I think the opportunities are outside the U.S. Somebody once said to me, you’re not diversified if you’re comfortable with everything that you own. And we’re always comfortable with what we know. We buy, we live in New York, we buy Con Edison. If we live in California, we buy the California utility. But that means going outside the U.S. is very important. And it’s a big part of the world now. It’s not a little peripheral thing. It’s a major part of the world.
CONSUELO MACK: Now, let me ask you about that, Peter, because I know one of the things that you have advised clients, and you and I have talked about before as well, is the importance of being well diversified, and having a little bit of everything. And as kind of the least risky way to go, and also the best way again, to get the kind of returns that we expect more, that we want from our investments. But, so how should we diversify, though? Because the average U.S. investor has probably, you know, 60, 70, 80% in stocks. We’ve been fed this mantra that stocks provide long term growth, that’s where we should be. You disagree with that. About U.S. stocks at this point. But how do we diversify then? What should we be investing? I mean do so asset allocation for us.
PETER BERNSTEIN: I mean I guess, today I would have no more than half my assets in the U.S. if I was starting fresh.
CONSUELO MACK: In U.S. stocks.
PETER BERNSTEIN: Well, the U.S. stocks, maybe even U.S. stocks and bonds. One can do this quite easily. There are exchange traded funds- all kinds of, almost anything that you want. And exchange traded funds that will offer a whole big piece. For instance you can buy all the stocks in the world outside the U.S., and similarly, you can buy bonds outside the United States. And there’s one for gold. If you do, just go to iShares on the Internet. They have a very easy, easy site to work with, and to look. So I do not think that individuals say, I wonder what French stock I should buy, or what German stock. I wouldn’t dare do that myself. So it should be done in funds. And these are the best ways to do it. It’s worth looking at.
CONSUELO MACK: And talk a little bit about one of the things, again, one of your major themes has been in investing is that dividends matter.
PETER BERNSTEIN: Yes.
CONSUELO MACK: So dividends have mattered historically.
PETER BERNSTEIN: Yes.
CONSUELO MACK: I think the returns, the stock returns from reinvested dividends is, I don’t know, 50%.
PETER BERNSTEIN: Yes, that’s right. That’s right.
CONSUELO MACK: But in this day and age, with stock payouts low, and dividend yields low, do they matter as much, and will they matter as much in the future?
PETER BERNSTEIN: Yes. I think they matter, first, because it is cash in your pocket. And at a time when, who knows what earnings are, there’s been so much hanky panky all the way. Now they’re going to start expensing options, so that it gets a little more complicated. This, at least, you know what it is. And you can make more of a judgment about a stock, the growth rate dividends. But dividends at this point, I think, have two positive features that deserve attention. One is the tax rate is the same as on capital gains, 15%. Not a big number. I mean it’s 85% is yours.
CONSUELO MACK: Right.
PETER BERNSTEIN: And the other is that because the payouts are so low, and because of the tax thing and so forth now, there is pressure for companies to increase their payouts. I think dividends are going to increase faster than earnings. So if you’re in something where you think the earnings growth is there, and the dividends, that it is important. It is an important consideration. Even Microsoft is paying a dividend.
CONSUELO MACK: Yes, they are. They paid a big one as a matter of fact. Let me ask you about that point. Because a lot of analysts, or strategists that one talks to, will tell you that the companies that keep earnings, and don’t pay them out in dividends, you know, they can grow faster, and you know, they’ll give you better growth over the long term. You have found through your research absolutely the opposite.
PETER BERNSTEIN: That’s correct. That the lower the payout, and the bigger the reinvestment, the lower the future earnings growth. There’s nothing like having management a little starved for money. Because then they will only choose the best investments. Best things to do, if they’ve got lots of it. If they’re plowing back most of their earnings, oh, boy, that’s like, in a … I forgot the metaphor. But they can just pick anything. So they will be making less than optimal investments, because they have so much money. That’s how it works. Managements like to have money. They like to be expansive. They like to add the power. And there’s more discipline when there isn’t as much. This is a lot about the whole buyout business of the 1980s was about- corporations accumulating too much cash, and not using it properly. The companies that have to go into debt in order to expand will be much more careful about what they do. Much more selective in what they invest in. That’s very important.
CONSUELO MACK: A couple of more questions. You wrote a book about the history of risk. What you know, when you and I have talked, you were actually, it strikes me that you’re an optimist.
PETER BERNSTEIN: Yeah, I really…
CONSUELO MACK: And why, given the risks that all of us toss and turn about every night, why are you essentially an optimist?
PETER BERNSTEIN: I’m an optimist about the U.S. But I’m an optimist because problems do get solved. Maybe not one day you wake up, and everything is back in order. But it takes an awful lot to crush a system as vital, in many ways as flexible, as the U.S. economy. We went through, in 2000, when the bubble burst. I mean the bottom really dropped out of NASDAQ, and a big drop in the U.S. market, too. And word about bankruptcies, and people were saying that the derivatives were going to pull the whole… nothing bad happened, really. I mean, Enron, all of the scandals, those companies disappeared. We kept right on going. Now this Revco, an enormous, really terrible failure, though it’s a ripple. So there’s a lot of resilience. There’s a lot of youth in this country; a lot of new people coming in, who want to be part of it. Sure I’m an optimist.
CONSUELO MACK: So, one last question. And what is the … for individual investors, for successful, long term investing, what should our philosophy be? I mean what should our mantra be? What should our approach be, to really take advantage of the vitality that you see in the capital markets?
PETER BERNSTEIN: Well, the vitality, I mean vitality you get in the equity markets. I mean there’s no question about it. You must be there. All the scare stories about what might happen and so forth, you should still have some money in the equity markets. This is essential. As I say, I think big things outside the U.S. also. I am- since I don’t like stock picking, and I’m not very good at it- a big believer in funds, rather than in trying to do it yourself. And although- this occurred to me the other day- the mutual fund industry has been criticized, because their returns aren’t good enough, and so on. How much worse, the people who were in mutual funds, may be disappointed with what happened. But if they’d managed that money themselves, I know they would have done worse. So this may not be divine and perfect. But it’s better than doing it yourself. It’s worth the cost.
CONSUELO MACK: Peter Bernstein, thank you so much for your time and your just, brilliance. Thanks for sharing it with us.
PETER BERNSTEIN: Thank you.
CONSUELO MACK: Our second wise man of Wall Street is Charles Ellis. Charley is the founder and former managing partner of the international consulting firm, Greenwich Associates, from which he advised the world’s leading financial firms on strategy for decades. He’s found time to author 15 books, including Winning the Loser’s Game, Fifth Edition: Timeless Strategies for Successful Investing. And he’s also taught at Harvard and Yale’s business schools. He has chaired Yale’s investment committee, which oversees one of the best performing endowments of all time. I talked to Charley about why he thinks Wall Street is a loser’s game for most individuals.
CHARLES ELLIS: Active investing is the Loser’s Game, and the reason I call it Loser’s Game is the outcome is determined not by the winner but by the loser. And I like to use the analogy of tennis. The way some people play tennis. The winners with 120-mile-an-hour serves and brilliant shots at net and terrific placement, they win points. Game I play, we lose points. And who will come out ahead is determined by the person who loses the most points makes the other person the winner. And if you’re in a Loser’s Game, it’s important to know the right ways to play that game.
Give you another illustration. Teenage driving is a Loser’s Game. The kids all think if they’re really good with their steering, if they really take off when the light changes, if they’re clever about finding ways to bob and weave in and around traffic, that’s great. But as the father of a teenage driver, or the mother of a teenage driver, what do you really care about? Only one thing. No serious accidents. No serious accidents, your kid is a great driver. And if it’s my kid that’s driving your daughter, and my kid has no accidents, you’re very glad to have your daughter in my car. Same thing with investing. Active investing is, the outcome is driven by the behavior of the person that winds up, while they’re trying to get it right, trying to win, trying to get ahead, they wind up doing themselves more harm than good, and the net result is they lose relative to the market.
CONSUELO MACK: Why is that? What is it that individual investors do in trying to manage their portfolios that puts them in the Loser’s category? And you know, who are the winners, number one? And define what you mean by winning in the market.
CHARLES ELLIS: Well, to me, winning in the market is truly getting the results you really, really want, that are right for you over the long, long, long term. And I think of investing much more like marriages and most people who are active investors are doing more dating. And I have nothing against dating. But great relationships will be developed only by having a marital commitment and working together to have something of real importance take place. And I think anybody’s been married understands. This is a real difference, and none of us who are married want to go back to dating. Same way of investing. If you will think carefully about what are your real, long-term objectives and find a way to articulate those objectives, you can then find investments that match with what you’re trying to accomplish. And you’ll be relatively happy all the time and over the long term you’ll be very happy.
CONSUELO MACK: So, when I think about objectives, you’re talking about more than just, “I want to make money in the market.” You’re talking about really establishing an investment philosophy and discipline is key and then going out and seeking out the investments that will fulfill those goals.
CHARLES ELLIS: True.
CONSUELO MACK: Is that right?
CHARLES ELLIS: Yes. Most of us, most of us, our first objective is to not lose.
CONSUELO MACK: Actually…
CHARLES ELLIS: What Mark Twain used to call return of the money and then return on the money is the secondary thing.
CONSUELO MACK: So, that should be our first objective, is not to lose, as opposed to win?
CHARLES ELLIS: Yes.
CONSUELO MACK: Which is the way most people go about it. All right.
CHARLES ELLIS: Because we’re human beings, we do a whole bunch of stuff that there’s now in the field of economics being described as behavioral economics, we do crazy things that are not in our best interests. But that’s who we are. So might as well accept that that’s who we are and find a way to live with who we are. Those of us who get nervous when prices are coming down ought to study. You know, when prices are coming down, they’re less costly. You can buy more value for less money. This is actually, although you’re uncomfortable, it’s good news, and those of us who get excited about, “Look, my stock is going up, it’s really going up.” Well, yes, that’s right. But, Charlie, in the long run, if it’s gone way up, what’s the destiny? The destiny is, it’s going to come back to its average, long-term value to price relationship. It probably will come down. So it’s not necessarily good news for you that the stock has gone way up in price if you’re a long-term investor, and I’m only interested in being a long-term investor.
CONSUELO MACK: So, for long-term investors, you are a big proponent of index funds versus actively managed funds.
CHARLES ELLIS: I am.
CONSUELO MACK: Why? Why index funds; why not just go with the market?
CHARLES ELLIS: The data shows over and over and over again that most all active managed funds underperform the index, a sensible index. Now, if you’re a small-cap value manager, active, the right index to compare against is a small-cap value index. Not high-growth, high-priced index. You have to choose your index. But if you choose the right and fair index, 75 to 80% of the active managers over every ten year period underperform, plus- and this is worth keeping in mind- you have higher taxes because the turnover is pretty rapid, and so, you’re getting short-term taxes as well as more frequent long-term taxes. Index funds don’t do much. So they don’t have much taxes, and the combination of low fees, low taxes, and low errors, index funds keep coming up with a better result.
CONSUELO MACK: There are tons of index funds being created as we speak. The exchange-traded funds, which are index funds that trade like stocks, you know, I feel like there’s one being created every day practically. How do you pick the best index fund, number one, and what kind of diversification should you have in your index fund portfolio? Again, thinking as a long-term investor?
CHARLES ELLIS: Well, you’re asking several different questions at the same time. So, I’ll try to–
CONSUELO MACK: Yes. I am. Sorry.
CHARLES ELLIS: –pick it up. Now, first thing in index funds, you want to be with a highly-reputable index fund manager who has specialized in this field, has become proficient at it, because if you’re really good at doing index fund management in your trading activities, you’ll be a little bit less costly than anybody else. Secondly…
CONSUELO MACK: So, names- Vanguard, for instance.
CHARLES ELLIS: Vanguard, with whom I’m associated because I’m a director. I became a director because I so admire the work that they do. It’s not the other way around. But they do a great job. Second would be that the fees are low. It’s really upsetting to me, again, I’m back to Vanguard, they’ve got a low-fee strategy towards life, and their concept of value-delivered service to investors. Low fee of ten basis points. You get to some index funds .Exactly same index fund. Now, ten basis point but 100 basis points. And you’ll never get that money back. And you’re not getting anything for it. You’re just paying up for nothing.
CONSUELO MACK: So, don’t pay them basically and those costs can really add up over time?
CHARLES ELLIS: Over the long, long period, they do add up.
CONSUELO MACK: So, second part of that question: Asset allocation. Very important, right, for long-term investment results?
CHARLES ELLIS: Yes. If you think about your children or grandchildren or the people that you love and care about the most, and you said, “Okay, I could give them the ability to pick stocks really well or I could give them the ability to pick managers really well, or I could give them the ability to know which kinds of stocks to be investing in or whether to go international or go emerging markets or go large cap or go small cap, or I could help them get the asset mix right.” So, okay, those are five different decisions. I could get only one of them. They’re going to get, like, the others will get average experience. Which one would you choose? Absolutely- asset mix. If you get the asset mix right, you’d have to make a major mistake to get anything negative to get a bad result in the whole. Get the asset mix right, most everything else can take care of itself. Get the asset mix wrong. You don’t have a chance.
CONSUELO MACK: How do you get the asset mix right?
CHARLES ELLIS First, understand who you are and understand what the money’s purpose is in your life. If you’re a very wealthy person, you’re probably investing for philanthropic institutions that you’re going to give money to or your grandchildren and their children and their children’s children. Think about it that way, you’ll probably be entirely involved in equity investing. If, on the other hand, you have a modest amount of savings- maybe it’s in your 401k plan, maybe it’s in your own investment account- and it’s probably enough to make it through your life with financial security, then you should be more protective. If, as a human being, you just do like stability, you don’t like the ups and downs of the market, accept who you are and behave accordingly.
CONSUELO MACK: Final question. Actively managed funds, which, you know, many investors follow slavishly. How do you handle the actively managed funds? Do you invest in them at all? Under what circumstances? What percentage of your portfolio should you put with an active portfolio manager?
CHARLES ELLIS: The last question about what percentage. That’s a matter of personal judgment. The fundamental proposition that I would put to you is if you’re going to choose an active manager, choose someone that you’ll stay with for at least 20 years. If you’re going to stay with a manager for 20 years, you’re not going to choose because of their recent performance, you won’t choose because of the stocks they own now. Those will all be replaced. You won’t choose because of the individual fund manager. He or she will be replaced. You will choose character or culture or the value set of the organization. And as you know, and just slip in, I think there’s one such organization. They manage the American Funds. It’s called the Capital Group Companies. And I wrote a book about it because I wanted to understand: why were they so able over every long time period to outperform and compete so successfully? And I believe they understand how to manage professionals in such an effective way that they will achieve very substantial results. So, if you wanted to tease me a little bit, my wife owns the American Funds. And I own the Vanguard Index Funds. And we get along fine.
CONSUELO MACK: And the reason the American Funds- and Capital is the name of the book- that they do manage so successfully, why is it? What is it about them that’s enabled them for 75 years to do so well?
CHARLES ELLIS They start with a very strong conviction. Their purpose, and they recruit for it, and they train for it, and they believe it in deeply; they drink the Kool-Aid, as they say. Their purpose is to serve the individual investor- full stop. It is not to make money for the people who are working there, to make money for the owners. That is not their objective. Their objective is to serve the investor, and, as a result, they do some very interesting things. For an example, when money market funds first came out, they would not introduce one. Why not? Because they were afraid that money market funds came out in the early mid ‘70s, and that was the worst time to move out of stocks and into cash. And they didn’t want to make it easy for people to make that mistake. So, they wouldn’t offer them. Then, as a result, their investors stayed more in equities and get the ride in the best bull market the world has ever seen.
CONSUELO MACK: Charles Ellis, it is a treat and an honor to have you here. Thank you so much.
CHARLES ELLIS Thanks.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: put the power of dividends to work in your portfolio. Over the last eight decades, dividends have accounted for more than 40% of the total return of the stock market. How do you invest in dividend paying stocks? Obviously you can buy companies that have a history of paying and increasing dividends year after year. Standard & Poor’s publishes a list of what they call their Dividend Aristocrats- stocks with a 25-year history of increasing dividends. If you prefer mutual funds, you can buy an equity income fund or an ETF, such as the Morningstar recommended Vanguard Dividend Appreciation ETF- the symbol is VIG. The key to getting maximum returns from any of these investments is by reinvesting the dividends, thereby unleashing the power of compounding over time.
That concludes this edition of WealthTrack. Next week, we’ll be discussing how to maximize your benefits from social security with retirement income guru, Mary Beth Franklin. It turns out that timing is everything. Thanks for watching and make the week ahead a profitable and a productive one.
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Sunday, March 4th, 2012
MIT’s Andrew Lo, “Financial Thought Leader,” and the dean of Adaptive Market Hypothesis, discusses managing your portfolio’s risk in volatile times with Connie Mack.
Here is the full transcript of the interview, courtesy of Wealthtrack.com:
Consuelo Mack WealthTrack – February 24, 2012
CONSUELO MACK: This week on WealthTrack, keep your seatbelts fastened and prepare for turbulence! Financial Thought Leader, alternative investment manager and MIT Professor Andrew Lo says ongoing market volatility requires skillful maneuvers. He’ll tell us which ones to follow next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Investors are dealing with some really difficult choices. The Federal Reserve has kept short term interest rates near zero for three years and has told us it is committed to another three, until late 2014. That means savers are getting zilch- actually less than zilch when you subtract the affects of two percent inflation. So called negative yields don’t pay the mortgage, put food on the table or compound over time because there is nothing to reinvest. The result is that savers and retirees are being forced into riskier investments, that, to paraphrase Mark Twain, don’t guarantee either a return “on” or a return “of” your money.
As you know, many recent WealthTrack guests have been advocating investors return to the stock market and specifically to high quality, dividend paying stocks for capital appreciation and income. Companies are taking note. According to Standard and Poor’s, dividend increases reached $50.2 billion last year. That’s an 89% rise over the $26.5 billion in dividend increases announced in 2010. S&P predicts companies will set a new record for dividend payments this year. Among the reasons: dividend payout rates remain near historically low levels of around 30% of earnings- historically they average 52%, and companies still have robust cash reserves and cash flows. In addition, that much dreaded market volatility of the past four years seems to be abating. The CBOE Market Volatility Index, or VIX, a measure tracking price movements of the S&P 500, has fallen dramatically in recent months. But for how long?
This week’s WealthTrack guest is skeptical of the markets recent docility and believes investors need to be wary, vigilant and more proactive. He is Andrew Lo, a noted Financial Thought Leader, economist, Professor of Finance at the MIT Sloan School of Management, director of MIT’s Laboratory for Financial Engineering and a money manager. He is putting his research to work at AlphaSimplex Group, the investment firm he founded and now chairs, where he and his team run several alternative investment mutual funds under the Natixis ASG name. In his words, they are “designed to help investors achieve greater diversification than traditional stock and bond funds, while actively controlling risk and liquidity.”
I began the interview by asking Professor Lo why he believes market volatility has not disappeared.
ANDREW LO: Well, one of the things about volatility is that it’s triggered by real events. And I think probably the biggest issue hanging over markets today is political instability. It turns out that government has become the biggest source of systemic risk. And until we work out the implications of Dodd-Frank and what’s going on in Europe, I think we’re going to continue having that hanging over the heads of investors.
CONSUELO MACK: So give me a time frame for that, because I don’t have really any particular optimism that we’re going to solve the solutions of Dodd-Frank and government regulation in Europe anytime soon, so this is a multi-year process that you think we’re going to go through?
ANDREW LO: This is definitely a multi-year process. It’s probably going to take between two to five years before we see any real differences. For example, here in the U.S., we’re not going to see much movement on the political scene until after the 2012 elections. And even after that, it’s going to take some time for the new President, whether it’s the incumbent or the challenger, to be able to put in place his or her implementations of various different policies. At that point we’ll see a little bit more clarity, but even then it’s going to take years before the actual implementation of Dodd-Frank becomes clear enough for us to understand.
Even the Volcker Rule is something that is not going to be clear for another two or three years. And in Europe, my guess is that that’s going to be a very slow-burning fuse. Things might come to a head this year, but more than likely they’ll figure out a way to push it off for another year or so. And then we’ll see what happens with Greece, Spain, Portugal and other countries.
CONSUELO MACK: So therefore, get used to market volatility. It’s a way of life for now.
ANDREW LO: I think for now it’s the volatility of volatility that we have to be aware of.
CONSUELO MACK: So talk to me about, what is the volatility of volatility.
ANDREW LO: Well, the idea behind the volatility of volatility is that we’re really on a volatility rollercoaster ride. During periods of time when markets look calm, volatility will be low. The VIX will be at a reasonable range of, say, 15 to 20%. But within a matter of days, after any kind of political change, we may see that volatility going up to 25, 50, 60%. And at 60% volatility, investors are really going to have to be very careful about what’s going on with their portfolios.
CONSUELO MACK: So are there new rules of investing that we need to apply in this new market that we’re seeing?
ANDREW LO: Well, I think there are definitely some new rules. And I would probably focus on three of them. The first new rule is that markets are not stable. That they can change at a drop of a hat. So we have to be more active about managing our risks. So the case in point is volatility. In the past, if you had a 60/40 portfolio- 60% stocks, 40% bonds, you had an idea that you were going to be getting something on the order of overall, ten or 11% volatility for your overall portfolio.
CONSUELO MACK: And let me stop you there. So ten or 20% volatility’s within any given year. that the market would move or your portfolio would move up and down ten or 20%, that was kind of a range that you could depend upon.
ANDREW LO: Exactly. And what we’re seeing now is that even with a 60/40 stock/bond allocation, there are periods of time when your portfolio can have 30/40 percent volatility, which are swings that no investor has signed up for. So the first new rule is that we have to start getting more active about managing our risks and being aware of those risks.
The second new rule is that we all suffer from a disease that I call diversification deficit disorder. That means that we think we’re well diversified with some stock and bond funds, but in fact, we have to be much more proactive about getting diversification across stocks, bonds, currencies, commodities; across different asset classes, across different countries, and over time. So it’s actually harder work now to achieve the same level of diversification that we had before.
And that third new rule is that we have to be aware that while stocks may provide good returns in the long run, that in the long run, we may be dead and we have to make sure the short run doesn’t kill us first. That is that we have to manage our way around these market dislocations. And so it means that we have to pay more attention to our portfolio, we have to spend more time thinking about it. Basically we have to become more educated about our own finances.
CONSUELO MACK: One of the really interesting things, Andy, that you’ve written about and talked about, is the fact that there’s something called the efficient market hypothesis, which is that the markets are efficient. That we’ve been dealing with and have assumed it was going to be the case for the future. And then you’re now talking about something called the adaptive markets hypothesis. What’s the difference between the efficient market hypothesis and the adaptive markets hypothesis?
ANDREW LO: Sure. Well, let me first start by saying that the efficient markets hypothesis has been a very important part of modern finance theory. And it says that prices generally fully reflect al available information. It’s hard to beat the market. And I would say that that hypothesis is still very important, but it’s incomplete. It’s not wrong, but there’s a piece that’s missing. And the piece that’s missing is that, while most of the time, markets do work quite well, and they do reflect most information, and it is hard to beat the market, that every once in a while, markets can be punctuated by periods of dislocation and irrationality. And the important thing to note is that people react to these kinds of market conditions, they adapt.
And so the adaptive markets hypothesis starts with market efficiency as the baseline and asks the question, do investors maintain that baseline all the time? And from looking at the empirical evidence, or the financial crisis, the evidence is pretty clear that, no, they don’t. That when market conditions change abruptly, people react. And they react in fairly predictable ways. When there’s a fire, people will run out of the room. And when there are losses, people will unwind their portfolios and seek safer ground. So the adaptive markets hypothesis focuses on that dynamic. It tries to understand under what conditions are markets efficient, and what other conditions might make people panic and move into other asset classes, thereby changing the traditional risk-reward relationships.
CONSUELO MACK: So right now, are we in a situation where the markets are not acting as we had assumed they would, and they actually have for, let’s say, the last four years; and in fact, so that the adaptations that individual investors are making, that number one, we’re making possibly wrong decisions. And then are there right decisions? What kind of adaptive behavior should we be adopting?
ANDREW LO: Well, I think there’s definitely some change afoot. And the best way to look at it is by taking the great expanse of market history, say from the 1930s to the most recent period, and just looking at our experience with, say, U.S. equities. From the 1940s to the early 2000s, that six-decade period is a period that I call the Great Modulation. And the reason I call it the Great Modulation is because during that period of time, we had a relatively stable financial regulatory system. In fact, today’s regulatory structure for mutual funds was actually built in the wake of the Great Depression, the 1930s and the 1940s. And those regulations haven’t changed a whole lot since then. Over that six-decade period, we had a relative period of calm and very, very healthy growth. So that no matter what ten or 20-year period you pick in that six-decade-long period, you would have done probably equally as well in terms of investing money in equities. I think that that’s changed. Over the last five or ten years, we have had some very significant shifts.
CONSUELO MACK: So that’s where the stocks for the long run thesis, you know, looking back, it worked.
ANDREW LO: Absolutely.
CONSUELO MACK: So your traditional approach of buying large cap or U.S. stocks, and reinvesting your dividends on a yearly basis, that in fact that was a pretty good strategy to adopt. Now what kind of a market are we in, and what’s changed and what should our investment strategy be?
ANDREW LO: Well, so there are a couple of things that have changed, and I think those changes inform how we want to think about changing our investment approach. One thing that’s changed is population. In 1900, the estimate of the world population was about one-and-a-half billion people. The most recent estimates for our current population of the world is about seven billion people. That is a big difference. And if you think about those seven billion people, most of them are going to need to have some type of financing and saving activities throughout their lives. And so that makes markets much more complex, and much more interdependent.
The second thing that’s changed is financial technology. We now have the ability to invest in a variety of assets, but at the same time we also have the ability at the click of a mouse to wipe out half of our retirement savings. That’s a very dangerous set of technologies to give to ordinary investors who may not really understand all of these kinds of risks.
CONSUELO MACK: Even professional investors make big mistakes.
ANDREW LO: It’s complicated, no doubt. And so I think one clear implication is that we actually need to spend more time thinking about our finances, in the same way that we have to spend more time thinking about our health. In the 1950s we didn’t know about cholesterol, we didn’t know about carbs, we didn’t know about a lot of things that we know now. And so now, to be an intelligent consumer, you really have to spend time learning these new concepts.
CONSUELO MACK: So, Andy, from an individual investor’s point of view, how can we more actively manage our portfolio, realistically- what should we be doing?
ANDREW LO: Yes. Well, first of all it’s hard. It requires work. And what investors should not be doing is becoming day traders. That’s not going to be successful. One thing they can do, though, is to spend more time learning about the investments that they do make. In other words, asking questions like, “what kind of risk profile does this particular investment have over the last ten years, five years, three years,” as opposed to asking “what kind of risk profile it has right now.” Because what looks relatively calm and conservative today may have looked very differently in 2008 or 2009, and may look different yet again next year. So start asking questions about how stable the risk is for each of these funds, that’s the first thing.
The second thing to ask about is liquidity. We haven’t really talked much about liquidity for mutual funds, because by definition, they seem to be liquid. You should be able to get in and out of them every day. But as we saw from the last four years, there are certainly mutual funds that are much less liquid than others and could create all sorts of difficulties for redemptions, if and when they all occur at the same time.
Third, there are a variety of financial instruments available to investors today, including ETFs, and other kinds of fancy securities. Before getting too fancy, investors need to spend time trying to really understand the various different kinds of circumstances under which those products will help or hurt their portfolios. So in other words, each investor now has to become a bit of a financial manager. They are managing their portfolios, and ultimately they’re going to be responsible for those decisions.
CONSUELO MACK: Which is a terrible thought. A very scary thought.
ANDREW LO: It’s scary.
CONSUELO MACK: You have a concept, an approach that I think is really fascinating. We’ve done a lot of work on WealthTrack on asset allocation, and if you go to any financial advisor, they’re going to talk to you about asset allocation, and your risk tolerance, et cetera. But you’re saying that we shouldn’t just manage our asset allocation anymore, that we really need to manage our risk allocation. Can you tell me what it means to manage your risk allocation, and what the difference is?
ANDREW LO: Sure. Well, the first point to start with is that investors generally respond to changes in risk. Most investors are happy to take risk. They’re perfectly willing to take risk. They even, I think, understand what risk means. What they aren’t willing to do is to be uncertain about their risks. If you’re going to take a particular kind of risk- ten percent swings in your portfolio over the course of the year- you want to know that that’s by and large what you’re going to see: ten percent swings in your portfolio over the course of a year. If you see 30% swings, that’s not good news. And so the idea behind risk allocation is to reduce the surprises in risk. If you think you’ve signed up for ten percent swings, then you need to be given ten percent swings. And there’s a way to manage your portfolio to make sure that that’s more likely than less. And the way to do that is to start with a particular risk budget.
Say that ten percent figure that we talked about. And say that if ten percent swings are what I’m comfortable with, let’s divide that up into three percent of that for equities, another three percent for fixed income, another two percent for commodities, and so on. And it’s a little bit more complicated because the risks don’t necessarily add up to 100% because of correlations among these various different investments. But with some help from literature online, or from financial advisors, it’s actually pretty easy to work that out so that you put your money in categories where you know you’re going to get a certain amount of risk. And this way, after the fact, the surprises will be far fewer and far less extreme.
CONSUELO MACK: So if I look at all the asset classes that are available to me as an investor to invest in, are there certain risk profiles that I should be adding to a portfolio that might not be in the traditional portfolio? Are there certain assets that are actually going to steady and provide ballast to my portfolio that I really don’t know about?
ANDREW LO: Well, I think there are other assets and certainly other approaches to investing in different asset classes. Stocks and bonds are the most traditional asset classes that most people have in their portfolios, and we’ve seen over the last few years that the volatility of volatility of those asset classes is quite high. It’s very hard to predict where that volatility’s going to go. But if we now increase the universe of assets to additional alternatives- commodities, currencies, interest rates, and investing long as well as short- if you mix all of those into these new multi-alternative asset classes, I think that there’s a better way to make that kind of diversification and to be able to manage the type of risks across these different asset classes.
CONSUELO MACK: So let’s talk about what you’re doing at the Natixis ASG Funds that you’re replacing the traditional asset allocation approach with what you call a new narrative. And that is, it’s how many dollars that you invest in different asset classes, instead of that, it’s how much risk you allocate to different asset classes. So just give us an example of what you’re doing, for instance, with your flagship from the Natixis ASG Global Alternatives Fund, which you’ve established an eight percent volatility. That’s your goal. So how do you achieve that?
ANDREW LO: Well, it’s actually pretty easy. What we do is to use futures contracts, which are very liquid, and we invest in futures across a variety of asset classes; stocks, bonds, currencies and commodities. And we are trying to capture the broad exposures of the entire hedge fund industry. But what we do that’s different from what hedge funds do is that we manage our volatility on a daily basis; where we balance our futures exposures to these various different asset classes so that we’re achieving a relatively steady level of volatility of around eight percent. And so when the underlying instruments that we invest in become much more volatile, as they did during the fourth quarter of 2008 after Lehman went under, we will reduce our exposures to those contracts, and thereby achieve a relatively steady rate of volatility. When that volatility of the underlying instruments comes down to a normal level, we’ll put back that market exposure.
So it’s a lot like cruise control in your car. Your car knows when it’s going uphill, it’ll put on the gas; your car knows when it’s going downhill it’ll put on the brakes. All the while achieving a relatively steady speed of 60 miles an hour. And if eight percent volatility’s what you’re trying to achieve, by using this kind of cruise control mechanism and by doing it on a daily basis, you can actually manage your risks more effectively than if you just rebalanced once a month or once a quarter.
CONSUELO MACK: Basically you’re managing volatility on a daily basis. Individual investors really can’t do that. If I went to a traditional asset allocator, they would tell me, well, you know, what you need to do, Consuelo, is put more TIPS in your portfolio or more treasuries in your portfolio, or more managed futures in your portfolio. Is there any way to manage the volatility that we’re talking about, without actually managing it on a daily basis?
ANDREW LO: Well, I think it’s a matter of degree. So obviously managing it on a daily basis is one extreme. Not looking at your portfolio for a year is another year. Trying to be more sensitive to correlations is one way of managing it. So for example, you mentioned managed futures and TIPS. Those are two asset classes that are not part of the traditional investment portfolio which could actually help in terms of dampening some of those fluctuations and reducing the volatility of volatility. So by being more aware of different investment alternatives, by asking questions about how stable the risks are, by looking at the potential correlations of those risks, it is possible to put together a more robust portfolio than just simply picking stocks and bonds.
CONSUELO MACK: Are there any specific segments or products that are out there that we should have ourselves and our financial advisors look at?
ANDREW LO: The ones that I think might be most useful for an investor are these multi-alternative categories, managed futures, because they provide opportunities that are not easily accessible from the traditional stock/bond perspective. And many of these products are properly risk-controlled, so that they won’t provide the kind of unpleasant surprises that you might find in some traditional mutual fund products and ETFs. So I think that having a broad exposure to a variety of asset classes across different countries, across different securities, is really the best way to go and to spend more time thinking about these opportunities; to work with a financial advisor to get the best advice possible. But in the end, to answer the question, how much risk am I willing to take? What kind of portfolio swings can I withstand? And then to maintain as much of an investment in those types of securities with that level of risk that you can.
CONSUELO MACK: How important is it to pay attention to macro trends, number one? And to react to them, number two, in our portfolios? Do we need to time macro trends, not time the market, but possibly what’s going on in the macro level?
ANDREW LO: Well, I think it’s incredibly important to pay attention to macro trends. How we react to them is also critical, and there I think that most investors need help. I don’t think it’s possible for individual investors to understand, necessarily, how to interpret a European default. We need help from financial advisors, from various institutions, to understand how our reactions may or may not be beneficial to our portfolios. But I do think that it’s important for us to try to react in a sensible way as opposed to simply assuming things will work out in the end. Depending on what one’s horizon is, maybe that is true, but if your horizon is less than 50 years, I’m not sure that things will work out for you, with any degree of confidence. We need to think a little bit about how to change our behavior in the proper way to react to these market conditions.
CONSUELO MACK: And final question is for a long-term diversified portfolio, what is the One Investment or one strategy we should all adapt?
ANDREW LO: Well, I think that right now, the one idea that we should all adopt is to think very carefully about risk, is to manage risk actively. And that means thinking about diversification, thinking about broader asset classes like multi-alternatives or managed futures. Thinking about how our portfolio may change over time and over market conditions, and to do that soon. Not after the disaster hits, when we’re all going to be panicking. But rather do it now, while we’re relatively calm, and when we have some idea of what kind of consequences we can or cannot tolerate.
CONSUELO MACK: We will leave it there, Andrew Lo. Always wonderful to have you on WealthTrack.
ANDREW LO: Thank you, it was a pleasure.
CONSUELO MACK: Thought-provoking, you are an original thinker from AlphaSimplex Group and from MIT, thanks so much for being here.
ANDREW LO: A pleasure, thank you for having me.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point picks up on a major theme of Andrew Lo’s investment approach, which is to manage portfolio risk. So this week’s Action Point is: consider the risk allocation in your portfolio.
Investors have traditionally thought in terms of asset allocation, assuming relatively predictable returns and behavior in stocks and bonds over time. As Lo points out, for a number of reasons, the markets have changed. They have become much more complex, uncertain and volatile, so managing risk has become much more important. Building a portfolio around risk expectations for different asset classes can help you manage and control the risk according to your personal preferences.
Next weekend, as many public television stations start their spring fund raising drives, we will revisit our conversation with Sheryl Garrett and Mark Cortazzo, two top rated financial advisors who are catering to small investors. If you want to see WealthTrack interviews ahead of the pack, subscribers can do so 48 hours in advance. Go to our website, wealthtrack.com to sign up. And that concludes this edition of WealthTrack. Thank you for watching and make the week ahead a profitable and a productive one.
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Sunday, November 27th, 2011
This week, on WealthTrack, Consuelo Mack interviews Sir John Templeton’s successor. At only age 27, Mark Holowesko took over the legendary Templeton funds in 1987, and ran them successfully for over 13 years before striking out on his own at Holowesko Partners.
Holowesko, a Bahamian native, explains how he still applies “the Templeton way” and why he sees fantastic opportunities in today’s markets.
Source: Wealthtrack, November 25, 2011.
Here is the full transcript:
Consuelo Mack WealthTrack – November 25, 2011
CONSUELO MACK: This week on WealthTrack, the legacy of legendary global investment pioneer Sir John Templeton is alive and thriving thanks to the talent of his protégé, Great Investor Mark Holowesko. Olympic sailor, triathlete and successful money manager, Holowesko is finding exceptional value all over the world. A WealthTrack exclusive with Mark Holowesko is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. We have a unique treat for you this week- a television exclusive with a Great Investor, Mark Holowesko. Does the name sound familiar? It might, because way back in 1987, before the famous market crash, legendary global value investor Sir John Templeton picked the then 27 year old Holowesko to run the Templeton Funds for him, a job he performed successfully for 13 years. In 1992, he was the youngest person on Fortune magazine’s list of the best money managers of his generation. In 2000, he got off the non-stop travel treadmill required to run the Templeton Funds and launched Templeton Capital Advisors to serve institutional and high net worth clients. That firm has been renamed Holowesko Partners, which Mark continues to run out of his native Bahamas. The super competitive Holowesko is an avid athlete: cyclist, swimmer and Olympic sailor who was cited by BusinessWeek magazine as one of the “World’s Fittest CEOs.”
As you will see in a moment, Holowesko has absorbed many of the attitudes, disciplines and lessons of his famous mentor with a few tweaks. One lesson he has embraced completely is to keep an open mind and constantly look at the opportunities the market is offering- right now, Holowesko believes the opportunities for investors are fantastic. You heard me correctly. He is finding values he hasn’t seen since the depths of the market lows in 2008 and 2009. We’ll find out where in just a moment.
I began the interview by asking Mark about the major investment lessons he learned working with Sir John.
MARK HOLOWESKO: It was a very simplistic thing. He walked into my office. He put the funds on my desk and he said, “Look, from now on I want you to manage these funds, but write the buy and sell tickets and leave them on my desk so I can see what you’re doing and I’ll sign them and leave them at the trading floor.” And that was at about 11:00 in the morning and at about 11:15 I left to go for an early lunch and a very long run because it was a bit of a shock and a huge responsibility, but a lot of fun.
CONSUELO MACK: So how did you feel at 27 running, it was Templeton Growth, World, and Foreign Funds, right?
MARK HOLOWESKO: And the Templeton Smaller Companies Fund. So actually all the mutual funds that Templeton had at that point at time were all managed in the Bahamas by Sir John until May of ’87 and then I managed all the funds. I had a lot of help in Fort Lauderdale. We had a great staff of analysts in Fort Lauderdale. I was probably a little too young at 27 to truly to understand what was happening and to appreciate the fact that I was taking over the management from such a legend, but there was so much to do and there was so much going on in the world. You know, we had the crash a couple of months later. He was there during the crash which was a big help and a big comfort, and it was also the most excited I’d ever seen him, which was really interesting.
CONSUELO MACK: So tell me about that. Is that one of the points of maximum pessimism that he just loved?
MARK HOLOWESKO: Most definitely. He went on a number of programs right after that crash basically coming out and saying this is a great opportunity. There was a very technical decline and I think that was shown by some of the studies later on. And you know, stock prices were 30% cheaper than they were several days before that or two days before that. So from his perspective it was just a great opportunity to take advantage of the fear in the market and looks for ideas. And we had cash in the fund so we were lucky enough at that point in time- I don’t remember the exact amount of cash in the fund, but we had cash we could put to work so that was very helpful.
CONSUELO MACK: So you just said you had to put for what period of time, every – of course, that was in the days when you wrote out order tickets.
MARK HOLOWESKO: That’s right.
CONSUELO MACK: So you had to put, what, the stack on Sir John’s desk and he would go through them?
MARK HOLOWESKO: Well, there wasn’t really a stack because we only had about a 20% turnover in our portfolios. You know, one of the things that was just a big shock and a surprise when I came to Sir John was he had these positions that had 100% returns or 1,000% returns in the case of telephones in Mexico because they’d been there for so long and, obviously he was right as well. So it wasn’t daily trading activity in the funds because that wasn’t really our style. But the first six months that I put the ideas on his desk he never changed a trade ticket, and then I think about eight or nine months later he said, “Just pass them on to the trading room.” And he could see the trades going through because we had some automation by that time, not a lot. So he oversaw it and he was there. He was helpful in terms of ideas and bouncing things off of. When I saw his enthusiasm in ’87 during the crash, that helped give me some confidence to do things and that was a big help.
CONSUELO MACK: So what are the major investment lessons that you learned working for and with Sir John?
MARK HOLOWESKO: I think the first lesson I learned was to try to understand and really put into mathematical terms what problems were. So one of my first jobs was trying to determine the financial impact of the Bhopal disaster on Union Carbide. And what he wanted me to do was to basically quantify it, you know, which is a very difficult thing to do. It’s sort of like trying to quantify the BP disaster in the Gulf. So I would say trying to understand problems and trying to see whether or not those problems were properly reflected in stock prices. In order to be a contrarian, you have to do what other people aren’t doing. But he wasn’t a contrarian for contrarian’s sake, he tried to understand the issue and why people weren’t doing certain things and whether or not he felt the markets took that into consideration in terms of the valuation.
CONSUELO MACK: So if for instance, a lot of it then was an event driven type of analysis? If there was an event that impacted the price of a stock, then you and Templeton would be activated to look into whether or not this was an opportunity?
MARK HOLOWESKO: Right. A lot of our ideas, I would say a third to a half of all of our ideas came that way. So for example, in ’98 during the Asian crisis, you know, that was an opportunity. That was an event that occurred that pushed stock prices down quite substantially. You know, back then you could buy cash at a discount. And there wasn’t necessarily a catalyst to turn around the problem or the stock price relative to the problem, but the problem drove stock prices down and we tried to react to that as much as we could.
CONSUELO MACK: So aside from events, what are the other things that would make you look at companies to decide whether or not you were interested in them?
MARK HOLOWESKO: Well, a number of things. One of the things that we always tried to do is try to understand what we are paying per unit of whatever the company did. So if it was a timber company, what was the value in the marketplace or the enterprise value, which is the market cap plus the debt of the company, net debt, per acre of timberland? You know, that’s a lot more interesting to us than to look at the book value of a company or the earning stream of a company. So trying to figure out what are you paying for this company per unit of whatever it does and then it gives you a much better sense of is that reasonable. If it’s an asset management company, what are you paying per dollar of asset management? If it’s a soda manufacturer, what are you paying per can of soda they sell? And he had me do a lot of that work when I first came on board just to basically understand, first of all, what it means to buy a company. Not just the market value of the company, but what you’re assuming in terms of liabilities on the balance sheet.
CONSUELO MACK: So let me take you one step back from that, and that is how do you decide to look at a particular company to begin with aside from a disaster? With Sir John and for you now at Holowesko Partners, do you just have a list of companies that you monitor on a regular basis?
MARK HOLOWESKO: No, not really. We do a number of screens. It’s easy to find problems. Problems are very prevalent all over the world so they’re pushing stocks around dramatically. So stocks that come up into our screening because of problems are plentiful. But we do a number of screens on valuation criteria that we’ve used historically whether it’s private market values. And they’re normally associated with a theme. So for example, we think merger and acquisition activity will pick up quite substantially right now or over the next six to twelve months and as a result of that we’ll do a lot of screening for companies that we think might be attractive candidates in that regard.
CONSUELO MACK: And the reason you think that M&A activities are going to pick up in the next several months is why?
MARK HOLOWESKO: Simply because there is too much capacity in the system today, too much physical capacity. Capacity utilization is lower than normal, so companies don’t need to build capacity and the cost of borrowing money relative to the return on assets that you can get if you actually go out and buy a company, that spread is very wide. So mathematically it makes a lot of sense for companies to go out and buy assets rather than to build assets.
CONSUELO MACK: So it’s interesting because there has been a great deal of talk about the fact that companies are sitting on these hoards of cash, and the fact that they aren’t putting this cash to use. So is there going to be some sort of a global catalyst that is going to make companies suddenly start to spend the cash and actually make acquisitions?
MARK HOLOWESKO: There are a number of catalysts that I think will occur. First of all, the cash is building up to such an extent that at some point the firms will become targets themselves. You know, most pharmaceutical companies that we look at today, over the next five years will generate anywhere between 80 to 100% of their market value in cash.
CONSUELO MACK: Wow.
MARK HOLOWESKO: And so obviously five years from now you’re not going to be able to buy Merck or Pfizer or Sanofi at net cash. You know, get cash and then a business for free, in fact. And that won’t stay like that. And I think it’s either going to be acquisitions. They’ll make acquisitions. They’ll make huge stock repurchases. They’ll increase dividends. That’s cash build on a balance sheet. There are only so many things you can do with it. You can let it build and already for a lot of firms it’s 15 or 25% of their market cap. You can buy back stock and that’s very supportive for stock prices. You can increase the dividend. You can get involved in mergers and acquisitions or you can increase your capital expenditures. Because there’s too much capacity basically in the world, the capital expenditure part of that equation is not going to really happen.
CONSUELO MACK: So in your experience is this a very unusual situation where you have corporate balance sheets in such great shape, that are so liquid?
MARK HOLOWESKO: I think there are a couple of things that are very unique about this period. Not only are stocks extremely cheap relative to history and relative to other assets, but the best quality companies are at a discount to the market as well. So typically you have to pay up for quality and today you don’t.
I mean, quality is being given away in many respects. So I think people really underestimate how cheap securities are today. I think they’re as cheap as stocks were back in the early 1980s. And I think in addition to that, the financial position of these companies is fantastic. You know, most of our holdings in the United States, for example, can pay off all of their net debt with 20% of one year’s cash flow.
Those that don’t have, you know, a lot of them already have net cash flow on the balance sheet. The United States is generating about six or seven percent in free cash flow every year relative to the market value stocks, which is a huge amount as well. So there is an enormous amount of free cash flow being built up on these balance sheets. So the companies are as cheap as they were in the ‘80s, but much better quality balance sheets.
CONSUELO MACK: So when I looked at a recent report from Holowesko Partners I think you had 19 stocks that were 46% of your portfolio holdings. Is that a concentration that is something that you learned from Sir John? Is that a concentration that is typical of the way that you run money as well?
MARK HOLOWESKO: We were somewhat mindful of Warren Buffett’s famous phrase that “diversification is protection against ignorance.” At some point you can be too diversified in terms of what you’re doing. We don’t turn over our portfolios a lot. You know, if we like a position we tend to build two to three percent, you know, position it. So we tend to own about 70 names in the portfolio.
CONSUELO MACK: And the average holding period? I mean, what kind of turnover do you have and has it changed since Sir John’s time?
MARK HOLOWESKO: Not really. It hasn’t changed that much. The first name we bought in our fund 11 years ago we still own today.
CONSUELO MACK: Which is what?
MARK HOLOWESKO: Yu Yuen, which is a shoe manufacturer in Hong Kong. And we have about a 20 to 30% turnover in our portfolio generally in the course of a year.
CONSUELO MACK: Some other lessons that you learned from Sir John that you’re applying at Holowesko Partners as well? Are there any other major ones that come to mind?
MARK HOLOWESKO: Well, I think one of the things that most people don’t realize is that Sir John was a big fan of basically changing your investment approach all the time. You know, we maintained a list of stock selection methods at Templeton. As the Director of Research, I was sort of responsible for monitoring that, and he always wanted to have 12 new ways of looking at stocks. Most people think there’s a Templeton formula.
CONSUELO MACK: Formula. There have been books written about it.
MARK HOLOWESKO: And to a certain extent there is a bit of a formula and when you’re selling an institutional product, you have to have some consistency in your products all over the world. We used to do a lot of work relative to future earnings and trying to discount future earnings to today’s stock price and looking at dividend streams over that time period. But basically Sir John said if you’re doing the same thing you did ten years ago, it’s not going to work.
So I would say we’re constantly trying to improve on what we do and I also would say that the market is always offering me something. I think this is something that Sir John was very good at. Sir John’s genius was in his simplicity, really. He was always very good at identifying what was cheap in the market. So at some point in time growth stocks might be cheap, other times value stocks might be cheap.
Today what’s cheap in the market is free cash flow. Free cash flow is abnormally high. And what he tried to teach us is find what’s cheap in the market, what is the market offering you, and then try to understand, well, why is it cheap, what is the rationale behind those prices being so low? So flexibility in the investment approach was very important and changing your investment approach to sort of accommodate with what the market is offering you was very important as well. So I think those sound very simplistic, but once again, that was part of his great genius.
CONSUELO MACK: Are there any general rules of investing that are kind of the Templeton way or have become the Holowesko way?
MARK HOLOWESKO: Well for a long time, Templeton liked to try to find a normalized earnings number over a full business cycle. So many people concentrate on the next quarter or what the company will do this year, but he felt that the more efficient part of the market was farther out. Because people weren’t willing to look that far out or they weren’t comfortable holding securities for that long.
So he felt that the shorter term was much more efficient than the longer terms. So therefore, we should concentrate on a longer term. And for him he felt that a normal business cycle was five years. And so we could figure out what a company could earn on a normal basis, assuming a recession and a contraction over that five year time period and discount that back to today’s stock price. I think that is a popular formula that a lot of people hear about in terms of what we used to do at Templeton.
Look, we used to do things, Consuelo, that were- I used to go home sometimes and tell my wife, “You wouldn’t believe what we did today. It was so simple.” And stocks that were ranked 1-1 by Merrill Lynch or 1-1 by Value Line with the theory that Merrill Lynch was the biggest retail broker in the world back in the ‘80s and Value Line was the biggest institutional seller of ideas and if stocks were most highly ranked on both systems they were going to get a lot of attention. We’d narrow the list down on that basis and then we’d go out and work on those stocks. And it was incredibly simplistic and it was a lot of fun. Sometimes, you know, you’d scratch your head and go home and think, boy, you know, I just can’t believe I got a master’s degree in finance and this is what I’m doing here.” But it was great fun and it worked.
CONSUELO MACK: I know that one of the things you told me is that you expect to be wrong a third of the time.
MARK HOLOWESKO: I hope to be wrong a third of the time, yeah.
CONSUELO MACK: You hope to be wrong only a third of the time. I seem to remember Sir John had a higher number that he expected to be wrong. But at any rate, so therefore, your job, your number one job is manage risk?
MARK HOLOWESKO: By far. That’s true. I mean, I want to know how much money I can lose with every single stock I’m invested in all over the world, as much or more so particularly in this sort of environment, than how much money I can make. So I maintain in my portfolio not a target on the buy names in terms of the upside, but a risk number. You know, if we’re wrong, and a third of the time we’re wrong, how much money can I lose? We challenge our analysts all the time about those numbers. And about a third of the time we’re wrong on those numbers as well. If we think the stock price bottom might be ten and we’re wrong and it goes to eight then we have to sit around the table and talk about why we were wrong. Is this very temporary in terms of where the stock price is?
CONSUELO MACK: So that’s not an automatic sell decision?
MARK HOLOWESKO: Absolutely not. No. I think the most important thing when you’re wrong is to try to understand why you’re wrong and then to try to determine whether or not you’re okay with that. You know, that the longer term thesis for owning the stock is still in place. If a stock goes down and you don’t understand why it’s gone down and don’t understand why you’ve been wrong, then I think it’s really silly to maintain that position.
CONSUELO MACK: Is the market offering you up opportunities that Sir John would be saying “look at this”?
MARK HOLOWESKO: Well, we are 104 % invested and we don’t often become 104% invested on the long side than our typical product. We have more ideas than cash at the moment.
CONSUELO MACK: And when was the last time that happened?
MARK HOLOWESKO: Five or six years ago, I would say.
CONSUELO MACK: And again, when I looked at the portfolio, the most recent one that I was able to see, there were a lot of global names there. You know, like Johnson & Johnson and Kimberly Clarke, as I mentioned, HSBC, U.S. Bank Corp. I mean, there were a number of companies. So what do they all have in common? I mean, what is it that they represent?
MARK HOLOWESKO: Well, you mentioned that stock list of 19 names that you saw. And I’ll give you an idea of what they have in common. First of all, they have phenomenal balance sheets. Most of those companies, once again, have net cash on the balance sheets and those 19 names on average can get rid of their debt with 20% of one year’s cash flow. They yield 3.6% on average which is 160 basis points higher than the ten year treasury. And to give you a sense of how cheap that- that is, if you just assume that those 19 names grew their dividends by the same rate over the next ten years as they did over the last ten years, and then you said, okay, well, how much would those stocks have to fall in order for me to get the same return on those 19 stocks as the ten year treasury?
Those stocks would have to fall 40% because the ten year treasury yields two percent and these stocks yield 3.6 percent. Some of them, like Johnson & Johnson that you mentioned, have been growing their dividends for the last 20 years at almost 14%.
So as a collection, these stocks offer much better yield than you’re going to find anywhere else in the world. These businesses are doing much better than most people anticipated because a large portion of their business is actually outside of the United States. So although the U.S. economy is only growing two to three percent at the most, these businesses are growing at revenues six and seven percent and their growing their earnings higher than that. They’re doing that because a good bulk of their business is overseas and the overseas markets are growing much faster.
You know, I’d say that it’s very easy to find companies that have grown their dividends consistently for 20 years, that are selling at nine or ten times earnings with seven or eight percent free cash flow yields with net cash on their balance sheets that have the ability to grow their business the same way they’ve done.
And in many cases, even if you looked at the past ten years, which was a very difficult period- we’ve had two of the worst recessions in history- and a lot of these firms have done incredibly well over that time period, so it’s not inappropriate to think that they’ll do equally as well over the next ten years. So I just think people are spending so much time thinking about overall risk, about sovereign risk as opposed to company specific risk, and they’re making these asset allocation decisions that’s a risk on, risk off trade that totally ignores company specific valuations and it’s providing opportunities, in my view, that are consistent with the early 1980s.
CONSUELO MACK: We ask each of our guests if there is one investment that we all should own some of in a long term diversified portfolio what would it be, so what would it be?
MARK HOLOWESKO: Well, I’ll say generally common stocks, most people are afraid of common stocks. And I would say specifically here in America, I really think people are going to be surprised at the amount of income that companies produce. There are only four companies in America that have a AAA rating. I think they’re Exxon, Johnson & Johnson, Microsoft, and ADP. And of those four names- there are only four of them- and of those four names, three of them are on what’s called the Dividend Aristocrat List. Companies that have grown their dividends for 20 years.
CONSUELO MACK: So Exxon, Johnson & Johnson, and ADP?
MARK HOLOWESKO: ADP. Those companies, not only do they have AAA ratings, but they’ve also grown their dividends for 20 years consistently every year.
And of those names two of them we own, Johnson & Johnson and Exxon. So I would say people should look at stocks, people should look at income, and I think people should look at security of income with a AAA rating and from my perspective I think those are two of the better names that are in the stock market.
CONSUELO MACK: And Mark, final question, is there anything that you are doing differently than Sir John would have done?
MARK HOLOWESKO: Yes, but I think that’s part of his approach. His approach was to always do things differently.
CONSUELO MACK: Improvise.
MARK HOLOWESKO: So I would say one of the main differences is that- Sir John used to take big currency bets. Obviously, when you invest in stocks all over the world you have a basket of currencies all over the world. He never hedged those currencies back to the dollar, but he would also take a strong view on a currency. I hedge a lot of currencies. I think currency risk today is very strong. I don’t want to assume a lot of that risk.
CONSUELO MACK: And on that note we will end this conversation.
Mark Holowesko, thank you so much. It was such a treat to have you on Wealth Track.
MARK HOLOWESKO: Well, it’s good to see you again.
CONSUELO MACK: And to share Sir John’s wisdom and also your own, which is considerable as well.
So thanks for being here.
MARK HOLOWESKO: Thank you.
CONSUELO MACK: I know Sir John is looking down at Mark Holowesko smiling and saying keep up the good work! At the conclusion of every WealthTrack, we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point picks up on one of Mark and Sir John’s major themes: keep an open mind. The market is constantly changing. No one approach works all of the time. Sir John and Mark Holowesko are always looking at what the market is offering you. Mark’s comment that Sir John’s genius was the simplicity of his approach, always looking for what was cheapest in the markets. On a personal note, Sir John was one of my heroes, not for his financial skills which were phenomenal, but for his richness of spirit and endless capacity to learn and love. A truly remarkable man.
And that concludes this edition of WealthTrack. Next week is a national pledge week on public television, so many stations will not carry WealthTrack during their fund drives, but some will- including our presenting station WLIW-New York. We will revisit a fascinating discussion with Financial Thought Leader Michael Mauboussin, chief investment strategist of Legg Mason Capital Management who will explain why doing less in the markets can actually make you more!
For those of you who want to see our WealthTrack interviews ahead of the pack, including this week’s exclusive interview with Great Investor Mark Holowesko, subscribers can see our program 48 hours in advance as well as timely interviews exclusive to WealthTrack web subscribers. To sign up, go to our website, wealthtrack.com. Thank you for watching and make the week ahead a profitable and a productive one.
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Wednesday, October 26th, 2011
Two of the investment world’s biggest stars! Bill Gross and Mohamed El-Erian, Co-Chief Investment Officers of money management powerhouse PIMCO, sit down together for an exclusive WealthTrack two part series.
Here is the full transcript of Part One:
Consuelo Mack WealthTrack – October 21, 2011
CONSUELO MACK: This week on WealthTrack- when these two speak, the investment world listens. Two of the world’s most influential investors sit down together for a WealthTrack exclusive- PIMCO’s co-chief investment officers, Great Investor Bill Gross and global Thought Leader Mohamed El-Erian together next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Every week on WealthTrack, we try to bring you the best minds in the business to make sense of an increasingly complex and fast changing world. This week we have two of them, who work closely as a team, but rarely if ever appear on television together. They are doing so exclusively on WealthTrack for the next two weeks. One is Bill Gross, the man widely known as the bond king for his stellar management of the world’s largest bond fund, the nearly $250 billion dollar PIMCO Total Return Fund, which has outpaced bond market indices and the vast majority of competitors over the past 5, 10, and 15 year periods. Much to Gross’ chagrin, the fund is seriously lagging the pack this year- more on that later.
The other is Mohamed El-Erian, former head of Harvard’s endowment, 15 year veteran of the International Monetary Fund, once top-ranked emerging markets bond manager, who is now CEO and shares the co-chief investment officer title with Gross at Pacific Investment Management Company, known simply as PIMCO, the firm Gross founded in 1971. Both Gross and El-Erian are legendary for the sheer scope of their activities, insights and influence. Both multitask as money managers, analysts, commentators and advisors to clients, businesses and governments. Each writes and speaks several times a week. Bill now tweets daily, and has over 40,000 followers.
In the last month alone, they have covered topics ranging from the European debt crisis to the value of a college education to the Occupy Wall Street movement. And Bill has written a now widely covered Mea Culpa to clients for his lagging Total Return Fund performance explaining that he didn’t anticipate the “global flight to quality triggered by the European debt crisis and the politically induced deterioration in this country’s growth outlook.” His biggest mistake was not having any U.S. Treasury bonds when the world decided it wanted nothing but. The very competitive Gross went on to say that “there is “no ‘quit’ in me or anyone else on the PIMCO premises. The early morning and even midnight hours have gone up, not down, to match the increasing complexity of the global financial markets.”
I started by asking them to update PIMCO’s now widely quoted and accepted 2009 prediction that the U.S. and the rest of the developed world had entered a “new normal” economic environment of slow growth and sub par investment returns. It turns out they believe recession is now a very real risk.
BILL GROSS: In the United States, perhaps, we’re still at a one to two percent growth rate and that’s for the third quarter. The fourth quarter is problematic going forward based upon a very weak consumer, based upon real wages that haven’t really kept pace certainly with profits and with other growth metrics, and the spending power of consumers being 65 to 70% of the total growth in the United States. And so consumer dependent, but consumer weak. So that means that in the United States we might be inching close to a zero to one percent level going forward. We might be what approaching stall speed and perhaps Mohamed can speak to that concept.
CONSUELO MACK: So Mohamed let me ask you, because speaking of risks, the European debt crisis is a risk that you’ve been writing about now and kind of more and more vehemently in recent months. So how big a risk is the Eurozone crisis to the global economy and markets?
MOHAMED EL-ERIAN: It’s a big risk. I mean, we have to remember the Eurozone is the biggest economic region in the world. It also has a lot of banks, and therefore, if it struggles there will be implications. And what’s ironic about the Eurozone crisis that it didn’t need to get this bad. Bill has a wonderful analogy. You know, you start with an infection in the toe and you don’t diagnose it properly, you don’t treat it properly. The next thing you know your leg is infected. You don’t do anything about that. Next thing you know other parts. And suddenly your vital organs are threatened. So that’s what has happened in Europe.
CONSUELO MACK: So are the vital organs threatened in Europe? I mean, we’re that close to a critical condition?
MOHAMED EL-ERIAN: So what is the market telling us? The market is telling us they’re worried about the banks in the core. They’re worried about French banks. What’s the market telling us? That they’re getting nervous about the credit rating of certain countries like France. Even Germany’s CDS, the credit default swaps, at one point were well above 100, they went up to 120. So the indications are from the market to the Europeans, please get your act together because this infection is spreading and if you’re not careful, it’s also going to affect the rest of the world.
CONSUELO MACK: Now, you’ve talked about that Europe needs a circuit breaker and you haven’t seen a circuit breaker yet. And I have to admit, you know, who would have thought that U.K. Prime Minister David Cameron says that the European leaders need to take a big bazooka approach to this problem. So what kind of a circuit breaker do we need? What’s missing?
MOHAMED EL-ERIAN: So it’s not only Prime Minister Cameron, I mean, even Trichet, the outgoing governor of the European Central Bank, went to the politicians said this is now a systemic crisis. You need two things. First you need a circuit breaker to slow things down, which means that you need firewalls and you need to protect the banking system and the really big countries, which are Spain and Italy.
CONSUELO MACK: So what is a circuit breaker? What kind of financial instrument is that?
MOHAMED EL-ERIAN: So in the case of the banks, you need three things. You need, first, the ECB to provide liquidity which they’re doing. Secondly, you need to put equity in and third, you need to improve the asset side.
CONSUELO MACK: So put equity into the banks?
MOHAMED EL-ERIAN: Into the banks.
CONSUELO MACK: So you want the ECB to buy bank stocks?
MOHAMED EL-ERIAN: No, that would have to come from what’s called the EFSF, which is more a fiscal operation than liquidity. Then you need something else and we’ve talked about it. You need Europe to have its moment of truth. Europe needs to make a political decision. What does it want to look like in five years time? Does it want to look like a fiscal union where Germany is willing to pay for the others or is it a smaller, but stronger Eurozone? That is that decision that it needs to make. It needs to have its moment of truth because unless you tell people you’re going, they’re not going to stick with you. Right? So you need both a circuit breaker and a vision as to where it’s going.
CONSUELO MACK: So you’re asking a lot from the Eurozone. So what is the reality that you two are depending upon to invest in as far as what do you think is the real situation that we’re dealing with as far as Europe solving this crisis? Doing what Mohamed says, Bill. Or the fact the facts on the ground are not what he recommending right now?
BILL GROSS: Well, our sense is that Euroland will solve it, but in solving it that doesn’t necessarily mean that we return to the old normal. It simply means that we don’t spiral downward in terms of a debt deflation or in terms of a big R, such as we had in Lehman Brothers. You know, solving the Euroland crisis is just a big piece of the entire puzzle which is really represented by structural problems that will take a long time to correct and which haven’t been addressed by policy makers, not only in Euroland, but in the United States as well.
CONSUELO MACK: So let me ask you about this because you two have become increasingly vocal on policy issues and on political issues. And Bill I’m going to quote you. In a recent Investment Outlook, you said that “Long term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. If Main Street is unemployed and under-compensated, capital can only travel so far down Prosperity Road.” And your solutions are more government enhanced and expanded unemployment benefits or benefits for the unemployed and also by American policies. So what does this have to do with managing money?
BILL GROSS: Well, it has a lot to do with managing money because the solutions or lack of solutions read down significantly to government yields and to risk speaks, obviously, to equity markets where growth and the potential for growth is discounted. So all of it comes back to a price, so to speak, in terms of financial assets.
CONSUELO MACK: And Mohamed, I’m going to ask you the same question because you two are on the same page and you had a recent editorial in the Huffington Post where you said, “Listen to the Occupy Wall Street movement.” You liked it to the Arab Spring. You say, “It’s part of a worldwide drive for greater social justice and in the U.S. it is about a system that privatized massive gains and socialized huge losses. The result is a growing gap between the haves and have nots in today’s America.” And given what Bill just said as well, why do these issues matter to PIMCO and its clients?
MOHAMED EL-ERIAN: So they matter a great deal. If you bring in an equity investment manager, I suspect he or she would be very frustrated today. They’ll say no matter how hard I work in figuring out what the company’s outlook is like, in differentiating, everything is treated the same. One day is risk on, one day is risk off, and all the work that I do, all my training is not paying off. He or she would be absolutely right. Why? Because today the markets, and therefore a client’s, capital is being influenced to a huge extent by policy makers. It is the macro issues, the policy issues that are governing markets today. Markets hate that. We are much more comfortable looking at bottom up issues as a society, as an industry. But the reality is, you know, we’re now sitting in a back seat of a car that is being driven erratically by policy makers. They’re arguing among each other. They’re not even looking through the windscreen. They’re not telling us where they’re going and somehow we have to stay in that car. So it’s really important to understand. Now, when it comes to policy issues, and Bill always reminds the Investment Committee, it’s very important to distinguish between what is likely to happen and what should happen.
CONSUELO MACK: Yes.
MOHAMED EL-ERIAN: Right? And we spend a lot of time on both. What’s likely to happen; and then what if there is a policy reaction, as there will most likely be, what does that policy reaction look like? So whether we like it or not, we as an industry and we as investment managers who have an oath responsibility towards our clients have to understand the policy making process.
CONSUELO MACK: What do you think is likely to happen with policy, Bill, about what you’re saying is the underemployed and the inequality between the haves and the have nots?
BILL GROSS: Well, the most important fact, I think, to recognize is that policy makers are limited in terms of their options going forward. And we can talk about fiscal policy and that has to do with deficits or reducing deficits.
CONSUELO MACK: Well, start with the Fed, for instance.
BILL GROSS: And it has to do with the Fed on the monetary side. The Fed having limited options going forward- I mean, they’ve brought interest rates basically down to zero and they did several years ago. They’ve gone through QE1, QE2, and now Operation Twist and all of those have basically tried to reduce the cost of interest and expand the discounted value, so to speak, of risk assets. To a certain extent, that’s been successful. But now as we approach zero for many treasury maturities it’s obvious that there are limitations going forward and that the policies themselves have produced some aberrations that are unfriendly to markets and to citizens.
CONSUELO MACK: And you’ve actually been critical of the Fed. “Helicopter Ben,” as you’ve called him, and saying that, in fact, the policies of zero interest rates have helped Wall Street and have helped the banking industry, but have actually really hurt Main Street. I mean, savers are getting the shaft.
BILL GROSS: Exactly.
CONSUELO MACK: But that’s the reality that we’re dealing with as investors, right? I mean, I don’t know what you’re recommending. What are you recommending the Fed do instead?
BILL GROSS: Well, we’re suggesting there’s not much that they can do. I think it would be unrealistic to have them raise interest rates in order to recreate the six percent era of CDs. That would certainly constrict the economy and produce a new recession. But from this point forward, monetary policy and Ben Bernanke, I think, is limited in terms of their option choices, which means that the economy itself is depended upon structural solutions as opposed to fiscal and monetary solutions which have been the old recipe for regenerating an economy.
CONSUELO MACK: So let’s talk about the structural issues, Mohamed. And I know there have been three issues that you two have talked about in your writings. And you call them “structural roadblocks” that are pressuring domestic wages and employment. One is globalization. It’s hollow developed economy labor markets. Technology has outdated entire industries that produce physical, as opposed to cloud oriented goods and services. And aging demographics is favoring savings, as opposed to consumption. Now these strike me as three structural issues that policy– I mean, how can we change globalization, technology, you know, this is the buggy whip manufacturers of old, and the aging demographics? I mean, I wish I could reverse it, but I’m not going to get younger.
MOHAMED EL-ERIAN: I wish it too.
CONSUELO MACK: So what policies can begin to address those structural roadblocks?
MOHAMED EL-ERIAN: So the reason why we came up with this concept of the new normal was to try and signal that the system is not going to reset in a cyclical manner. That there are major structural forces that for a while were hidden, they were masked by a tremendous amount of leverage. And credit and debt entitlement. And once we came to the end of this great age of debt, we would have to address to our structural realities.
CONSUELO MACK: And you two were absolutely right on about warning about this, seeing this wind, these hurricanes coming.
MOHAMED EL-ERIAN: Right. So part of the reaction is to recognize that it’s not just about stimulating demand. It’s about also seeing what you can do on the structural side. So there’s lots we can do. We can do better on the housing. Housing is critical to this country. It impacts how people feel about their wealth because it’s such an important part of wealth. If people are upside down on their mortgages and they can’t refinance, etcetera, they can’t take advantage of the low interest rates. They can’t even move to where it drops off. Second, our labor market- we have a real structural issue in our labor market. We have long term unemployment at record level. We have 25% of the 16 to 19 year olds unemployed. At that age you go from being unemployed to being unemployable. Credit. We have this funny situation where the big companies can get credit, but they don’t need it and the small ones that depend on the banks have no credit. Infrastructure. So we have lots of structural issues that we can address in order to help overcome these bigger issues that we have to accept. Right? And the point PIMCO has been making over and over again since 2009 is don’t depend on a cyclical recovery. It’s not going to happen. This is much harder. It requires much longer work. It requires a certain amount of political commitment because structures take a long time, and let’s diagnose the issue properly. Now, unfortunately, we wasted two years as a society.
CONSUELO MACK: The last two years?
MOHAMED EL-ERIAN: The last two years.
BILL GROSS: You know, this debate between Republicans and Democrats, whether or not it’s beneficial to reduce the deficit and ultimately produce a balanced budget or whether it’s beneficial to expand the deficit, a la Paul Krugman, and inject the government into the solution. It’s a critical debate. Perhaps it will have to wait until 2012, but it’s one in which we think the government’s balance sheet almost by necessity has to be substituted for the private balance sheet because private investors and private corporations are basically unwilling to take a chance. That’s one of the problems of capitalism. When the animal spirits diminish to a certain point that capitalism is unwilling to take risk then, it seems to us, that policy makers, from the standpoint of the public balance sheet, have to be willing to fill that in. And that speaks to the housing market, as Mohamed just suggested. It speaks to infrastructure spending. Let’s ask is the private market really willing to repair our roads, to repair our bridges, etcetera? Probably not unless sufficiently incented. And if not, then it’s the public sector’s responsibility to fill in the gap in a very valid and useful way going forward for the next five or ten years.
CONSUELO MACK: So my reading of the current political climate is that the debate is not going your way and that the debate seems going to be towards deficit debt reduction which is not more spending.
MOHAMED EL-ERIAN: So first, I don’t know which way the debate was going. I hope there was clarity. One of the problems is we seem to be flip-flopping.
CONSUELO MACK: We do.
MOHAMED EL-ERIAN: And not getting anywhere. The investment implications are consequential. And remember, there are two parts of the world that are having that new normal. There’s the Western world, which is stuck with too much debt; and there is the emerging markets that have the ability to take on debt, but not the willingness to take on debt. And investors have to look at this and decide what’s the right thing to do. So when you are investing in the West, in the over-indebted West, the best way for new investments to evolve is if there’s growth. Growth is the perfect way to safely delever. But we’re not going to see growth because of the structural impediments.
CONSUELO MACK: Here? In the developed world we’re not going to see growth?
MOHAMED EL-ERIAN: We’re not going to growth, enough growth to get us out of our debt issues. So as an investor, whether you like it or not, you’re making an assumption of how society is going to deal with its debt issues. And we’re seeing a whole range of responses. In the case of the United Kingdom, they are implementing austerity on a voluntary basis. They have decided to spend less in order to pay off their debt. It has implications for equities. It has implications for debt.
In the case of Greece there’s no doubt, certainly in my mind, that they’re going to default. So as an investor you want to know that that’s how they’re going to respond. The U.S. has taken a very different path and Bill has written a lot about it. It has decided to financially repress us by keeping interest rates very low in order to do what you and Bill were talking about, which is to transfer money and wealth from savers to debtors. Now, as an investment management firm, it’s very important to have a view as to what regime is going to implemented where you invest your money because it has massive implication for the capital structure. So regardless of what should happen, right, the fact that we are in this new normal where growth is not going to be enough, it has massive implications. Similarly in the rest of the world. Suddenly we’re seeing to use the wonk-ish term- countries like Brazil move from being a credit risk to an interest rate risk. So they are changing paradigms and that provides massive opportunities for investors who understand it.
CONSUELO MACK: So they’ve been raising rates, and now there’s a possible, and cutting rates.
MOHAMED EL-ERIAN: To lower rates.
CONSUELO MACK: Right, to lower rates.
MOHAMED EL-ERIAN: So in the past, people would say, wow, if the West sneezes then Brazil is going to end up not only with a cold, but probably in the hospital. That’s not the case today anymore. The balance sheets are so solid, okay, and the flexibility is such that they have many more responses they can implement. So when PIMCO, you know, the reason why we come up with this and the reason why we make a point of trying to analyze them in different parts is because the investment implications are profound.
CONSUELO MACK: Right. So what are your working assumptions, Bill, in the U.S. for starters? What is the working assumption?
BILL GROSS: Well, the working assumption, in terms of growth for the next six to twelve months, is a zero to one percent number. And it could tip based upon what we call stall speed, but it’s basically no growth whatsoever.
CONSUELO MACK: And so, therefore, what kind of assets do well in that kind of an environment?
BILL GROSS: Well, at these levels of prices and these levels of yields actually not very many. You know, certainly risk assets don’t do well in a low growth or a no growth environment. And risk assets being stocks, which depend on growing earnings, or even high yield bonds which depend upon basically the maintenance of profitable cover or profitable spreads. Really, the attractive investments in a no growth or low growth world, it’s a high quality AAA or double A plus treasury. T
The problem with treasuries, however, is that their yields are so low.
Let me give you an example of the frustration of not only PIMCO, but the investor class from this point going forward. If there is going to be no growth, if safe assets are the safe haven, what will they return to the investor? A TIP or an inflation protected security is the best evidence of this. They trade at negative yields. In some cases for a five year TIP, for instance, at a minus 60 basis points. That’s a definitive statement. It means that over the next five years, an investor in a five year TIP will not be able to keep up with purchasing power. It means that, yes, they’ll be compensated for the CPI or for inflation, but in return they’ll sacrifice a minus 60 basis points in the process. So an investor looking to stay up with inflation and to basically just stay even with purchasing power cannot do it in a TIP market. And basically, if there’s no growth they’re taking lots of risk in order to try to do it in the equity market. So it’s a frustration, not just for PIMCO, but for the investor class in which it says, we’ve come down in terms of yield so far that the returns going forward are certainly not the double digits that you’re used to over the past ten or twenty years, but maybe closer to zero, to one, to two percent going forward and that’s a distinct change.
CONSUELO MACK: Next week we will continue our exclusive interview with PIMCO’s dynamic leadership duo. We’ll find out where in the world they are finding better than “new normal” returns, including some specific investment ideas.
At the conclusion of every WealthTrack, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point: learn from Bill Gross’ recent mistake and don’t make big investment bets. Bill’s mission as a professional investor is to beat his benchmarks and his peers, which he has done brilliantly over the last 20 years. But in order to do that, he sometimes makes big market bets, like being entirely out of U.S. treasuries in the second quarter when they became the only game in town. Individuals’ objectives are to build and preserve capital over time- they don’t have to beat the markets or peers. And they are better off being broadly diversified all the time, with disciplined and regular rebalancing.
For those of you who want to see our WealthTrack interviews ahead of the pack, including the second part of our conversation with Bill and Mohamed next week, subscribers can now see our program 48 hours in advance on our website. To sign up, go to wealthtrack.com. Thank you for watching and make the week ahead a profitable and a productive one.
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Thursday, September 29th, 2011
A rare television interview with Morningstar’s Fund Manager of the Decade. Consuelo talks to Fairholme Fund’s Bruce Berkowitz about his large and controversial investments in beaten down financial stocks.
Consuelo Mack WealthTrack – September 16, 2011
CONSUELO MACK: This week on WealthTrack, a Great Investor who has taken a plunge investing in battered financial stocks. In a rare interview, Fairholme Fund’s Bruce Berkowitz, Morningstar’s Fund Manager of the Decade discusses why he sees treasure where others see a trap. Fairholme Fund’s Bruce Berkowitz is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. One of the hallmarks of the Great Investors who have appeared on WealthTrack has been their willingness to go against the crowd, to invest in places others shun. That strategy puts them into uncomfortable, unpopular and frequently unprofitable positions for periods of time, some extended, some not.
This week’s Great Investor guest is no exception. As a matter of fact, he exemplifies the hazards and what he hopes will once again be the vindication of contrarian investing. He is Bruce Berkowitz, founder and chief investment officer of Fairholme Capital Management, whose tag line is “Ignore the crowd.” He manages three mutual funds, including his flagship Fairholme Fund whose outstanding long term track record earned him Morningstar’s first Domestic Equity Fund Manager of the Decade award in 2010. At the end of the last decade, the value fund had delivered average annualized returns of 13.2%, putting it in the top one percent of Morningstar’s large blend category- outdistancing the S&P 500 by 13 percentage points a year and expanding to nearly $20 billion dollars in assets.
Fast forward to today and the fund’s ten year track record is still beating the market, albeit by a much smaller margin, and is in the top one percent of its category, but its dropped to eight percent annualized returns and it is trailing the overall market in the last three and one year periods; plus its assets are now approaching half of what they were.
What’s changed? Over the last couple of years Berkowitz, who has always run a very concentrated stock portfolio, has loaded up on financials- to the tune of more than 75% of the portfolio. The group skyrocketed off the market bottom in 2009, but has been by far the worst performing sector year to date. Among Fairholme’s largest positions are battered names such as American International Group, Bank of America, Citigroup, and yes, the more lightly bruised Berkshire Hathaway, a long time holding.
I began the interview by asking Berkowitz why with all of the legal, regulatory, economic, and market uncertainties surrounding financials he was sticking with them.
BRUCE BERKOWITZ: The negatives are all uncertainty about the future. And what I try and do is focus on the facts of today. So, when you look at the income statements, they’re making huge cash flows, a lot of it being paid for the foolishness of 2007 and 2008, which eventually will burn off and those huge cash flows will show. If you look at the balance sheets of the company, they have– banks, for example, they have the strongest balance sheets that they’ve had probably in a history of their histories. If you look at reserving, it’s stronger than at any time. If you look at the trends, the trends are turning favorable. If you understand the nature of loans and the average life of five to seven years, and your troubles in 2007, 2008, you’ve already had a good– you’ve had a three, four year look at how the loans progressed. You know how they’re going to turn out. Credit cards, other types of loans are much shorter. They’ve already burnt through all that. The case of Bank of America, they have five different businesses, four of which are quite profitable, but there’s this one business, residential mortgages, which are still giving a lot of trouble, and they just took a $20 billion hit in one quarter as their estimate of what all the costs are going to be, including non-cash cost, you know, reduction of goodwill and other intangibles. And people believe that that can keep going like that. It can’t. It’s like insurance reserving. When we change your estimate, you change the number in one quarter for all the past and all your beliefs about the future.
So there’s a lot of fear in the marketplace right now, which I take as a positive because the financials are priced for failure, and that’s how you want to buy them, to be priced for failure, because the pessimism is intense and the market price reflects the pessimism, and then you could pair the market price to what you believe the company will earn in a more normal environment, and let’s say you take that with the funds. I take every one of our companies, and I look through; I take the earnings of the companies and I translate that into what it’s going to be in earnings per share of the Fairholme Fund. And I think that the companies have an earnings power of $4 per share for the Fairholme Fund, and the Fairholme Fund is $27 or whatever it may be per share, and I think, well, what’s that earnings? And what does that mean? And if I’m right, eventually, price follows true earnings, and hopefully, the mania that we’re in right now and the intense madness of the crowd will allow me, allow the fund to buy more, allow me to buy more, to take advantage of a cheaper price, the same way, you know, your favorite food group is on sale at the grocery store. It shouldn’t be much different than that.
CONSUELO MACK: But when you talk about the mania that is surrounding the financial stocks right now, have you ever seen the kind of mania, madness, craziness in any group that you’ve been so focused on before, in your experience as a money manager?
BRUCE BERKOWITZ: In my career, every day is reminiscent of the early ‘90s, with the financial institutions of that time. Wells Fargo was supposed to go bankrupt and there were a couple of investors, I believe that they were Buffett busters. They thought Buffett was going to lose his shirt on Wells Fargo, and I looked at Wells Fargo and I saw that even their bad assets were earning an income, which is the case with banks today. And how can bad be earning an income? So it was an overreaction. You know, our brains are wired for overreaction and momentum, and follow the crowd. So, Fairholme, our tagline is, “Ignore the crowd.” And another one of our lines is, you know, “Count what matters.” So we count the cash.
So when I see companies selling for below liquidation value, for below the cash that they own, that they had in their own bank and in other banks, and I look at the reserves and the strengths and the trends, I keep trying to pick away at them and kill them and chomp them, and what if the recession keeps going, and what if there’s a double dip? And what if house prices continue to go down? And what if they don’t know what they’re doing and they haven’t reserved properly? I mean you ask all those questions and the answer is, they survive. What investors are not focusing on is the inherent earnings power of the institutions. Bank of America, today, in this environment, makes $36 billion a year of pretax, pre-provision, so $36 billion before they have to pay taxes, which they won’t be paying for many years because of the last few years, and before they allocate money to bad loans, reserves, for whatever. So that’s $36 billion a year to add to any problems or issues. I talk to guys who get divorced, they feel like half their money is gone. I say it’s just a delay of game.
CONSUELO MACK: I’m sure they take that advice with a grain of salt. But let me ask you, because the last time I talked to you about your investments in financials, over a year ago, you said that the biggest risk to your position, and you just mentioned it, would be the correlation risk, and that they all don’t do well because of, let’s say, a double dip in the U.S. Now, we have people like Martin Feldstein saying that we’re going into a recession. We have the Chairman of a major bank in Germany saying basically that the European debt crisis essentially represents the equivalent of a Lehman Brothers. How do you assess the correlation risk now?
BRUCE BERKOWITZ: In really tough times, everything’s correlated except for cash, one. Two, everyone’s already assumed that we’re back in a recession. The price reflects it. I mean, literally the banks can shut their doors, stop doing business, run off the business that they have, and make more money than the stock price. So, and that can happen in a recession. And if you think about the human nature, after you– banks made so many bad loans in 2007, 2008; the loans that they’ve made in 2009, 2010, this year, it’s unbelievable. Everyone complains on how tough it is to get a loan because they’ve gone from no documentation to unbelievable documentation. But it’s the nature. And if you stop growing, the financial institution stops growing, the cash comes piling in the front door. So these fears about not having enough capital, aren’t able to– not have the reserves to pay for the past, they’re just, they’re unfounded. And even if times stretch out and get worse, the earnings power, a fundamental earnings power of the institutions, which will allow them to more than just survive.
CONSUELO MACK: There’s been a change in your portfolio mix, again, since I talked to you over a year ago. And one of the biggest changes is that in your asset mix, a year ago you had a sixth of the Fairholme Fund was in cash equivalents. Now it’s down to under two percent.
BRUCE BERKOWITZ: It’s not two percent, but it’s single digits.
CONSUELO MACK: It’s single digits.
BRUCE BERKOWITZ: Yeah, mid-single digits.
CONSUELO MACK: But you also had, I guess, about a sixth was in fixed income securities as well. So, at that time you told me, you know, we have billions of dollars in cash in the Fairholme Fund, ready to take advantage of whatever further stresses may come our way. So what happened to all of that cash, number one, in the last year?
BRUCE BERKOWITZ: Well, we’ve used it for further investments in AIG, and others. And we used it for redemptions.
CONSUELO MACK: You’ve always talked about cash as being your financial valium.
BRUCE BERKOWITZ: Right.
CONSUELO MACK: And that it gives you the kind of flexibility. So you have less financial valium now.
BRUCE BERKOWITZ: Correct. But at some point in a business cycle, one has to get greedy. And the time to get greedy is when everybody’s running for the hills with fear, that usually is a great time to get the greed going. And we’ve become greedy- less cash, more concentrated investments, bigger percentage of investments. Because my definition of skill is knowing when you’re lucky and taking advantage of that luck, and we’re very lucky right now. We have financial institutions that are so cheap I would not, I did not think I would see again in my lifetime, since the early 1990s. They have stronger balance sheets than they’ve ever had.
CONSUELO MACK: When you see stocks that you hold, the Bank of Americas, the Citigroups, the Goldman Sachs, whatever, AIGs that are down, you know, 30, 40%, you know, and I’m just talking about year to date. That, to you, is an opportunity to get greedy. It’s not a reason to flee, sell–
BRUCE BERKOWITZ: Yes, right. No, you don’t want to be in denial so you take out your checklist of the 500 aspects you look at with a company and try and understand, you know, you go through it all again and then you try and understand why the market is behaving the way it is, trying to find out where the differences are between perception and reality. You go through it all again, so you don’t want to go into denial, so you want to recheck all of your work. But at that point, if you can’t kill it, you have to have the courage of your conviction. That’s what you’re getting paid for. This is the time when I really earn my money.
CONSUELO MACK: But one of the things that you told me a year ago, and this is a quote, you know, the worst situation is if you’re backed into a corner and you can’t get out of it, whether for illiquidity reasons, shareholders may need money, we’re talking about redemptions; if you have an investment that is usual, you’re a little early and you are early in the financial stocks, I think …
BRUCE BERKOWITZ: A little early, that’s kind of you.
CONSUELO MACK: And you don’t have the money to buy more or you don’t have the flexibility, that’s a nightmare scenario. Great investors never run out of cash. We always want to have a lot of cash. So, you know, how close are you to your nightmare scenario? That’s my question.
BRUCE BERKOWITZ: About five percent from the nightmare scenario of not having the cash for redemptions. But you change. You look at your positions, you want to be in liquid positions, that high trading, where if you need it to cut some of your positions, you would have the liquidity to do it. And it changes. There are correlations between the size of the portfolio, the value portfolio and the cash you need, and where you believe you are in the cycle. If you think you’re bouncing around the bottom, and you’ve already paid the price for having courage of your convictions, then I don’t think we need to have the cash around that we do and–
CONSUELO MACK: So do you think that we are bouncing around the bottom and that you have paid the price, essentially, for the courage of your convictions? And it takes a lot of courage.
BRUCE BERKOWITZ: Well, if I’m wrong, I don’t deserve to be in business, in this business, because everything I look at tells me that the financial companies that we’ve invested in are extremely cheap, below their book values, below their tangible book values, below their liquidation values. The trends are getting better. The balance sheets are strong. I don’t know what more investors want. There’s a fear of the future, but I don’t understand the math that’s being applied to the forecast of the future. I’ve never been that good at the future, but I do know that that fear is reflected in what you’re paying for a share of Bank of America or Citigroup or whatever.
CONSUELO MACK: So let me ask you about some of your major holdings, because in a letter dated February of 2000, that you recently resent to clients, you said, “Concentrated investing implies less risk of permanent loss as long as you maintain superior knowledge about the companies you own.” So, among the most controversial positions that you own, Bank of America, for instance, which has been very much in the news, what don’t the naysayers understand about Bank of America that you and Warren Buffett do?
BRUCE BERKOWITZ: I think the naysayers just don’t believe what Bank of America is saying. They believe that Bank of America is fibbing about the numbers, about the trends, about the strategy, about the model, about their ability to– I don’t know. It’s asking me to analyze something which doesn’t exist, which is very tough, and that can take on a whole life of its own. But the good news about that is that’s what gives you a price of around $7 a share for a company that could potentially earn $3 a share. Now, there aren’t many times in life you can buy a storied franchise that touches one out of every two people in the United States at two and a half times what you expect their earnings are going to be in a more normal time. Now, I don’t know how it gets better than that.
CONSUELO MACK: So let’s talk about AIG.
BRUCE BERKOWITZ: I mean AIG was roughly treated, where the government took 87%. They didn’t take 87% of other financial institutions.
CONSUELO MACK: And they still own …
BRUCE BERKOWITZ: And owns 77% and they’ll make money and their cost– they’re a little underwater, but AIG’s tangible book value, and if you want to think about tangible book as a liquidation value, especially with an insurance company, it’s less than 50 cents on the dollar, so you’re picking up dollar bills for less than 50 cents. Storied franchise- I mean AIG still has a great name around the world and people may be disgusted with it to some extent. Investors have lost money. But with a one for 20 reverse split, you know, in the old days AIG hit over $100 a share and the equivalent today, it’s trading about $1.25. So it’s 98% plus down. Yes, they’ve had to sell some bits and pieces, but the balance sheet is stronger. The two businesses that caused the issues were relatively small part of the company. They’re closed out.
CONSUELO MACK: And so your sense of AIG’s position today is what?
BRUCE BERKOWITZ: I think it’s much stronger leadership with Bob Benmosche, new leadership at Chartis, a much stronger balance sheet, huge assets, great tangible book value, great equity, huge deferred tax asset, which isn’t even on their books. I mean like Citigroup, this is the case with Bank of America, AIG will not be paying taxes for many years given the previous losses. So, nope, past shareholders have paid the price. They’ll never recover from where they bought stock; new management, company has paid the prices. So there is a 70% overhang and a lot of investors won’t go near the stock until that overhang disappears, waiting for the government to get out, thinking that the government will make a very bad deal. But, you know, you take that to an illogical extreme. Does that mean you wouldn’t buy the stock at 20 or ten? Five? A dollar? You still wait for the government to get out? So at some point, not knowing exactly how the government is going to get out and what’s going to happen to those shares, I have to look at the balance sheet of the company, the earnings power of the company, what I believe the company is capable of earning or growing, and what they’re doing and what they’re selling and put it all together- the good, the bad, the ugly- and then look at the price where the company is trading and make a decision as to whether or not this institution can be permanently killed, which the case is no, and whether or not at that price, there’s a sufficient margin of safety to not loose any money and hopefully make a reasonable return for shareholders.
CONSUELO MACK: One Investment for long-term diversified portfolio that all of us should own some of?
BRUCE BERKOWITZ: It has to be Bank of America.
CONSUELO MACK: It does?
BRUCE BERKOWITZ: Everybody can read all about it in the newspapers everyday on TV. You can read every known conceivable negative known to mankind and press all around the world and blogs and whatever you want to read, the most extreme negatives. But you have to balance the positives, as we have discussed. And if I’m right, Bank of America has a $20 book value. In the next ten years I could see them easily doubling their book to $40 and paying out a very nice dividend yield, so you would eventually have, in my opinion, a double-digit dividend yield, fabulous appreciation in a bank that will be considered an extremely safe investment.
CONSUELO MACK: So Bruce, one other question: last time you were on WealthTrack, again- after winning Morningstar’s Fund Manger of the Decade Award, I might add- I’m going to quote you. You told me that: “What worries me is knowing that it is usually a person’s last investment idea that kills them. As you get bigger you put more into your investments and that last idea, which may be bad, will end up losing more than you’ve made over a decade. That is why, if you look at the fund today, to me…” this was over a year ago …
BRUCE BERKOWITZ: Right.
CONSUELO MACK: “…it looks more conservatively positioned than it’s ever been. We’re two thirds invested in equities today, not a kamikaze strategy.” You are no longer two thirds invested in equities. You’ve got a much higher percentage of equities, a much smaller percentage of cash. So, I mean is this not a kamikaze strategy? I mean what, if the financials fail, or if this strategy does not work out, haven’t you really bet it all, bet the ranch?
BRUCE BERKOWITZ: I think you have to– it’s a question on how you position the argument. If the financials fail, the United States’ financial system has failed, and capitalism as we know it has failed, and we have a lot of bigger issues, and I don’t see that happening. We’re not a leveraged institution. We still have cash. We’re not dependent upon anyone for money. Our biggest risk in terms of that cash would be if shareholders can continue to leave, take money out. If they do, we have significant positions that can be trimmed down on a pro-rata basis so that the remaining shareholders do not get affected. And it’s just a question of time, and we want to try and position the portfolio so the longer it takes, the more the remaining shareholders will prosper.
CONSUELO MACK: And the remaining shareholders include the Berkowitz family, because you are invested heavily in your funds.
BRUCE BERKOWITZ: Right. You can’t be 100 percent positive about anything. That’s– to have a fanatical belief would be a mistake. So, by having all the family money into these positions, it’s a safety check. No one wants to throw out 30 years of hard work, so why would you possibly want to risk that which you may need for that which you don’t need? So it’s a safety check and puts me squarely in the shoes of shareholders, and it allows me to feel the joy and pain of our shareholders. And it’s been six months. In February I was a hero, now I’m a bum. So, we’ll see six months from now. Revenge should be sweet.
CONSUELO MACK: I’m sure you can hardly wait for that revenge.
BRUCE BERKOWITZ: Then I’ll be upset that I didn’t buy more at such low prices and how could I have been so stupid?
CONSUELO MACK: So Bruce Berkowitz, Fairholme Fund, who continues to ignore the crowd, for better or for worse short term at any rate, and hopefully, long term it will turn out to be for the better. Thanks very much for joining us.
BRUCE BERKOWITZ: Thank you.
CONSUELO MACK: The motto, “ignore the crowd” isn’t just for professional value investors like Bruce Berkowitz. It also applies to individual investors in mutual funds, which leads me to this week’s Action Point. It is: stay with your favorite mutual funds during down periods. Third generation value fund investor Chris Davis of the Davis Funds sent me this graphic. It shows that underperformance is inevitable, even from top performing managers. During the last decade, 94% of the top quarter of large cap equity fund managers have fallen into the bottom half of their peers at least once during the decade for a three year period; 63% hit the bottom quarter for three years; and 30% the bottom ten percent. As we have said many times on WealthTrack, there is a reason individual investors consistently underperform the mutual funds they invest in. They buy high, when performance is great, and sell low, when performance is poor.
Next week, we’re going to bring you a rare interview with a Financial Thought Leader and one of Wall Street’s top ranked strategists- Francois Trahan will explain why he believes the old economic models are broken and why safety is the best strategy for investors for the rest of the year.
We also want to let you know about a new opportunity for those of you who watch WealthTrack on TV or on the web. We now offer subscribers the chance to see our program as early as Thursday morning, along with timely interviews exclusive to WealthTrack subscribers. For more information, check out our website, wealthtrack.com. And while you’re there, do us a favor if you haven’t done so already, and many of you have- please fill out our confidential and brief survey for WealthTrack viewers. Thank you for watching and make the week ahead a profitable and a productive one.
Copyright © Consuelo Mack, Wealthtrack.com
Tags: Bruce Berkowitz, Capital Management, Chief Investment Officer, Consuelo Mack, Contrarian Investing, Decade Award, Domestic Equity, Equity Fund, Fairholme Fund, financial stocks, Full Transcript, Gold, Hallmarks, Large Blend, Last Decade, Morningstar, Rare Interview, Tag Line, Television Interview, Vindication, Wealthtrack
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Sunday, September 18th, 2011
Ray Dalio runs the biggest hedge fund (approx. $125-billion) in the universe. And he’s making money this year. A lot of it. So how does he do it?
“If you are playing the role of the casino… that’s where you are going to make money,” Dalio told the Bloomberg Markets 50 Summit on Thursday.
Basically, the hedge fund guru was suggesting that winning portfolios in this market are ones built on all kinds of non-correlated and diversified bets. In effect, if you’ve got the whole casino, rather than just playing a few games, there’s a better chance you are going to win – and you can avoid “Russian roulette scenarios.”
It served Dalio well in early August, as equity markets were plummeting. In a one week period, Dalio’s Bridgewater Associates LP scored gains of more than $3.5 billion, or about 5%, in its flagship hedge fund in a one week period. The gains helped the fund keep its place as one of the top-performers of the year.
23 minute video – email readers will need to come to site to view
Here is the full transcript of this rare interview (use full screen to enlarge):
Finally, Ray Dalio’s Principles if you care to learn from a real master of the universe: DOWNLOAD
Hat tip Reformed Broker.
Tags: Bets, Better Chance, Bloomberg, Bridgewater Associates, Depth Interview, Early August, Flagship, Full Transcript, Hat Tip, Hedge Fund, Investment Outlook, Master Of The Universe, Outlook, Portfolios, Rare Interview, Ray Dalio, Russian Roulette, Scenarios, Top Performers, Video Email, Wsj
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Sunday, June 19th, 2011
Here is the full transcript of this interview with Chuck Royce and Consuelo Mack below. Although this interview was originally aired early this year, there is much to be gleaned from it, as it remains relevant at present.
Consuelo Mack WealthTrack – June 3, 2011
*Originally Aired – February 4, 2011
CONSUELO MACK: This week on WealthTrack, a television exclusive with Great Investor Chuck Royce. This legendary small company stock fund manager explains why small is still beautiful for investors, next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week we have a rare treat for all of you: an exclusive television interview with investment legend, Charles, “Chuck” Royce, whose name is synonymous with small company stocks. This great value investor has specialized in small company stocks since he took over his flagship, Royce Pennsylvania Mutual Fund, 35 years ago. Since then the fund has clocked an average annualized total return of nearly 15%, handily beating the market with less than market volatility. Over the last three decades the Royce and Associates fund family has expanded to 24 micro-cap, small and midcap value funds, 13 of which are managed or co-managed by Royce himself, and three with his assist.
The so-called small cap universe has more than come into its own in the three plus decades since the pioneering Royce recognized its value. There are more than 3,100 U.S. companies identified as micro-cap with market values of up to $500 million; more than 1,100 small-cap with market values between $500 million and $2.5 billion; and more than 600 companies categorized as U.S. mid-cap with stock market values between $2.5 and $15 billion. Then there are the foreign small company stocks. By Royce’s count, this market consists of more than 15,000 companies in the developed world alone. And Royce just launched three new international funds to take advantage of what he believes are exceptional opportunities overseas.
Until very recently, small has been beautiful for investors. Small company stocks have left their larger siblings in the dust. Since the market meltdown, the Russell 2000, considered to be a proxy for American small company stocks, has skyrocketed more than 130% and has outperformed the S&P 500 over the last three, five, and ten year periods. The downside? Small company stocks come with more volatility than their large cap brethren, on both the upside and the downside.
Recently small cap stocks have shown some vulnerability, leading many investors to say that relatively undervalued large caps will finally dominate. Chuck Royce has some definite thoughts about that, but I began by asking him why he decided to focus on small company stocks in the first place and why he has stuck with them ever since.
CHUCK ROYCE: It wasn’t called small caps in those days. It was just sort of an aggressive form of money management, which used small stocks, but there was no such thing as a small stock category or any kind of theoretical thinking around why that was a good idea. It just sort was the more riskier end of the world. That’s what I did and that’s what I had sort of grown up in my research activities.
CONSUELO MACK: So why have you stuck with small-cap as a focus?
CHUCK ROYCE: Well, it turned out it’s a very, very attractive area all the time. It turns out that it’s an evergreen universe with stocks always being introduced into the class. There are IPOs every year, in a good year 300 or 400, in a bad year 100, maybe. There are always spin-offs. There are always large companies following down becoming small companies. So there’s lots of new material. It’s a very big universe. It’s thousands of companies, 6,000- 7,000 companies. It’s several trillion dollars worth of merchandise. So it’s big enough and it’s evergreen.
CONSUELO MACK: There is a perception, and you actually kind of just mentioned it, there is a perception that small-cap is a risky category. How risky is it?
CHUCK ROYCE: Yes. It’s both true and untrue. The category itself is more volatile than large caps. There is no question about it. But a sort of carefully designed way of looking at it can reduce volatility substantially, and I believe with sort of proper understanding you can select portfolios that will perform better than the universe with less volatility. And that’s what we try to do.
CONSUELO MACK: Let’s talk about that because in fact, that is something that you have done very successfully for the last 35 years, is that you have beaten the market with less volatility consistently over the long run. How have you done that? How do you construct your portfolios to accomplish that?
CHUCK ROYCE: It is that old-fashioned word a value approach. I don’t happen to love the word because it’s sort of an overused word. It’s kind of a cliché word. I prefer thinking of us as risk managers and that our idea is to reduce risk in any given stock, and therefore reduce risk in the portfolio, and I truly believe you can do that within this very, very large, much more volatile universe. You can select portfolios that will perform better with less risk.
CONSUELO MACK: Can you give us a for-instance of maybe choices that you have made recently? I mean, there are 500 some odd securities in your flagship Pennsylvania Mutual Fund. So how do you– give me an example.
CHUCK ROYCE: There is probably more to it than just risk reduction. We are always thinking about the risk-return ratio. We are absolute investors, not relative investors, so we are focusing on absolute returns, which would mean simply if we buy something, we expect to make a lot of money, and in dollars, not just relative to an index. So that focus of absolute returns and then ultimately comparing the return to what we think is the risk- we don’t really know- is the system. Now, there’s nothing very unique about that. It’s applying what I would call very standardized logic to this volatile universe.
CONSUELO MACK: But when you look at your record, for instance, and I remember there was a statistic about over five-year rolling averages or something that 80% of the time you delivered better than 10% annualized returns.
CHUCK ROYCE: Yes.
CONSUELO MACK: You might be doing what everyone else is doing.
Tags: 35 Years, Canadian Market, Company Stock, Company Stocks, Consuelo Mack Wealthtrack, Flagship, Full Transcript, Investors, June 3, Last Three Decades, Market Volatility, Micro Cap, Mid Cap, Mutual Fund, Pennsylvania, Small Cap, Stock Fund, Stock Market Values, Television Interview, Universe, Value Investor
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Tuesday, November 16th, 2010
Jeremy Grantham, chief investment strategist of Grantham Mayo Van Otterloo (GMO), recently made a rare television appearance when interviewed by CNBC’s Maria Bartiromo. In this extended interview (29 minutes), Grantham shares his views on markets, the economy and his investment strategy. This is must-view material.
Click here for a full transcript of the interview.
Tags: Chief Investment Strategist, Cnbc, Economy, ETF, Full Transcript, Gmo, Grantham Mayo Van Otterloo, Investment Strategy, Jeremy Grantham, Maria Bartiromo, Shares, Stocks, Television Appearance
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Tuesday, November 3rd, 2009
The Dow’s up, but why are Main Street Americans still reeling from last year’s economic collapse? With Americans still facing rising unemployment, foreclosures, and declining property values, Bill Moyers discusses with renowned economist James Galbraith, professor of economics at the University of Texas, whether we have averted the crisis and how to get help for the middle class.
Click here for the full transcript.
Tags: Advertisement, Bill Moyers, Bill Moyers Pbs, Dow, Economic Collapse, Economic Recovery, Economics, Foreclosures, Full Transcript, James Galbraith, Middle Class, Pbs, Property Values, Renowned Economist, Unemployment, University Of Texas, Youtube
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