Beyond The Headlines
When fortunes are made, when fortunes are lost
The worst investment advice I ever received was the recommendation to get out of stocks and buy U.S. Treasury bills at the bottom of the market.
It was a cold winter evening in March 2009, at the deepest point of the most recent financial crisis (though we couldn’t know that then). I was four years into my investment career in New York City. I was invited to an idea dinner at a very pleasant midtown restaurant. It was a group of top-notch investors around the table, most of them a few decades older than me, and the general feeling was that it was time to abandon stocks for T-bills. I heard what the other guests had to say, but that just didn’t sound right to me. Maybe Francois Sicart’s (my then-boss, now mentor and partner) contrarian streak was rubbing off on me already.
That dinner still makes me think of Warren Buffett’s memorable words: “Be fearful when others are greedy, and greedy when others are fearful.” I was about to discover that stocks were on sale at astoundingly low prices for the first time in my professional career. Many wonderful businesses that had seemed out of reach only months earlier would become incredibly affordable.
At about the same time, I attended a breakfast with the CFO of Tiffany’s, the legendary American luxury jewelry brand. We all fit around a tiny table at the top of Rockefeller Center. Outside, the weather was dreadful; a sea of impenetrable clouds shrouded the matchless view in gloom that mirrored the spirits — as well as the business outlook — in the room.
It was a good time to borrow a page from legendary industrialist Floyd Odlum’s playbook. In 1933, amid America’s Great Depression after a 90% drop in the Dow Industrial Average, he said, “I believe there’s a better chance to make money now than ever before.” He’d had the foresight to sell ahead of the 1929 Crash, and then had the courage to turn his capital into a serious fortune later on. (His tale has been retold by James Grant, the editor of Grant’s Interest Rate Observer.)
Floyd Odlum wasn’t the only fortune maker in the 1930s. Back then, John Paul Getty, Joseph Kennedy, and Benjamin Graham, among others, planted the seeds for even bigger fortunes to be made in the following decades. In the bear market of the 1970s, Warren Buffett started to turn Berkshire Hathaway from a failing textile mill into a hugely successful holding company, compounding wealth over the next few decades. Other recession-founded companies include GE (during the panic of 1873), Disney (in the recession of 1923-24), HP (in the Great Depression), and Microsoft (the recession of 1975).
After that March evening, the stock market embarked on a 11-year-long rise. Tiffany recovered, prospered, and is about to be acquired for a big multiple of its 2009 price. The months that followed offered once-in-a-decade buying opportunities for patient investors.
I like a quotation from Will Durant, a prominent American historian: “Most of us spend too much time on the last twenty-four hours and too little on the last six thousand years.” It’s been 10 years since the most recent financial crisis, when the stock market dropped over 55%. It’s been 20 years since the Internet Bubble burst, when the Nasdaq lost a whole 80%. It’s been 45 years since the 1973-74 market crash, and wealth consuming inflation. 90 years since the loss of 90% of the stock market’s value during the Depression.
Each time, many fortunes were lost and never recovered. Each time, the drop was sudden, but the end of it, and the full extent of the damage, often took a while to dissipate. It was dangerous to chase the market to the top, it wasn’t easy to step back in, and it could have been extremely damaging to miss the recovery if one panicked at the bottom.
There is a time to buy, and a time to sell. In the investment profession, we expend immense effort looking for new opportunities, new stocks to buy. We hardly ever give much thought to selling. New investing ideas cycle through to replace old ones, but what if it’s wiser sometimes to step aside altogether?
Until eighteen months ago, we were trimming some of the long-term performers in our portfolio. At the same time, we had trouble identifying appealing new buyable stocks, so we let the cash pile grow. We like to own businesses, but we prefer to buy them opportunistically, when other investors don’t recognize their merit. Then we hold them for the long run, until they are loved and praised again. As Benjamin Graham — who mastered his stock-picking skills in the midst of Great Depression — wrote: “The Intelligent Investor is a realist who sells to optimists and buys from pessimists.” That sums up our approach in bull markets and bear markets alike.
In late 2018, US stocks have experienced a dramatic sell-off, with the S&P 500 dropping 20% top to bottom and the Nasdaq 100 falling 25%. It was a brief correction, cut short by the Federal Reserve’s pep talk. Yet we at Sicart, sitting on ample cash reserves, were prepared to act. We put more money to work in a matter of days than we had in the previous two years. It was one of the smallest windows of opportunity we have ever seen, and we were in a position to exploit it. But we believe that was a taste of things to come.
Joseph Kennedy is said to have liquidated his investments when he started getting stock tips from shoe-shine boys in 1929. Bernard Baruch stepped back from the stock market at about the same time. Warren Buffett shut down his investment partnership and returned capital to investors in 1969, describing the market as a “seemingly barren investment world” where “opportunities for investment (…) virtually disappeared.”
Here’s the status for late 2019: It’s the 11th year of the bull market. We’ve experienced three interest rate cuts, there’s massive quantitative easing underway on top of earlier tax cuts, as well as record deficit spending, all in the name of not letting the stock market do what it’s been trying to do for years now – correct.
In The Little Book of Behavioral Investing, James Montier writes, “The vast majority of professional investors simply don’t try to arbitrage against bubbles because of self-serving bias and myopia. They are benchmarked against an index and fear underperforming that index above all else (aka career risk); thus they don’t have the appetite to stand against bubbles.”
We at Sicart don’t mind standing apart from “the vast majority of professional investors.” We will be putting more money to work when the time is right, but we are more cautious than ever. We don’t know what the end of this fiscal and monetary experiment will look like, or how this long bull market ends, but we do know that we need to be, in Warren Buffet’s words, “fearful when others are greedy, and greedy when others are fearful.”
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.