Investment Wisdom Or Just Grumpy Old Men?

Maybe these exceptional returns have turned us into grumps wishing for the old days when it was easier to manage portfolios.  Easier because there was always a choice to balance a portfolio based on price.  When common stocks were expensive relative to risk free treasury yields, you just sold a little stock and increased the bond holdings at a rate exceeding the rate of inflation.  Then you would wait until common stocks became cheap again.  Of course they always did, sometimes with a bang, other times with a whimper, but you knew you could just wait it out.  Today that option is limited, as current interest rates do not cover inflation, let alone taxes and fees.

Those of us who make our living as analysts or portfolio managers understand the quantitative use of the risk free interest rate in the valuation of common stocks.  The few of us managers who have been around since the early eighties have a first-hand knowledge of the extreme influence short term rates have on investor opinion.  I bring up the early eighties because it was the last time both common stocks and bonds were extremely cheap, yet individual investors failed to take advantage of this extreme.  

Shortly before Paul Volcker, the Chairman of the Federal Reserve at the time, was determined to break the back of inflation, the mutual fund industry created the money market fund. This provided a low risk interest bearing investment with check writing privileges that paid interest earned in the “money market.”  These funds paid, as they do today, a floating rate that increased or decreased relative to short term rates that were for the most part controlled by the Federal Reserve.  When Mr. Volcker increased rates to the extreme, money market funds were paying in excess of 20%. 

During this time, the Dow Jones Industrial Average was below 800, with an earnings yield above 14%.  The thirty year Treasury bond reached 15%, and 10 year FDIC insured CDs were yielding 17%.  You’d think it would have been easy for everyone to take advantage of this great opportunity, but that wasn’t the case.  Most individuals just wanted to open a money market mutual fund. 

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Disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and ...

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