“Economic Laws Cannot Be Depended Upon If We Disregard Psychology…”

“Economic laws cannot be depended upon if we disregard psychology, etc.”

                                                                                             -Alma Volker

Alma Volker scribbled the note, quoted above, in the margin of a 1911 economics textbook, Outlines of Economics, written by Vassar College Professor Herbert Elmer Mills. Later her son, Paul Volker, who has served six presidents over his long career in public service, shared his regret of never discussing economics with his Mom in his recent book Keeping At It. 

This book may be Mr. Volker’s memoir, but to me, it is a stark memory of my own history in the world of investment management. When he recalls those first few years after he assumed the chairmanship of the Board of Governors of the Federal Reserve System, I am drawn back in time to my own first few years in the business. 

It was during this time that I experienced first-hand the truth of Alma Volker’s note; psychology drives investor decisions far more than economics. When Mr. Volker raised interest rates to beat inflation out of our lives, it created one of the greatest opportunities for anyone with a few dollars to invest. You could easily buy a 10 year FDIC Insured CD paying over 15%.  AAA Rated Municipal bonds paid over 14% for periods of 20 years or longer. Common stocks were priced at 7 times earnings (an earnings yield of 14%) while paying a 7% dividend yield. Yet few took advantage of this opportunity. After all, common stocks had done nothing but lose money for over a decade. The supposedly safe bonds paying 8% or more just a few years earlier were worth 35% less than when they were purchased. This proved to me that for us mere humans, any rational thought is bent by short term price movements. 

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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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Gary Anderson 2 years ago Contributor's comment

Nice pep talk. Key is how open we are going forward. Certainly Ahlsten was astute to point out that we still have immigration. But Trump is becoming an isolationist in many ways, including even legal immigration. The method of US success appears to be turned on its head by POTUS, so will we recover from it?