Fear is a powerful motivator, and fear of the unknown is the worst fear of all. Over the last several months the fear of a recession, or worse yet a depression, has been said to have gripped the nation and the world. Yet, most of us are not experiencing the normal fight or flight reactions one normally associates with truly threatening situations, such as the fear associated with a near head-on collision, or as an innocent bystander during an armed robbery. Many soldiers, and some bank tellers, can describe real fear. Our parents or grandparents may have some experiences from the Great Depression that would qualify as truly fearful experiences, but broad economic fear is actually a rarity today, and is generally an individual rather than a collective occurrence. Aside from Katrina, and other catastrophic natural disasters, until recently the national economic status has not been particularly unusual. Even Katrina did not inflict the economic downturn so many predicted it would, despite the provocations by the various Chicken Littles.
U.S. major market indices, the DOW and the S&P, are familiar names to most Americans. Until recently however, few could cite, within 100 points, the level at which the Dow closed today; or within a 1000 points its range from today back eight years; or twenty years. In past years, on any given day there was normally a gain or loss of about 30 or 40 points. In the last several months however, the indices have had extraordinarily large fluctuations, most of which have been to the down side, and the events have often dominated the topics determined newsworthy. These large fluctuations, and the cumulative losses in the markets associated with them, have sparked the attention of even some of the least concerned investors.
Furthermore, anyone with an individual retirement account who failed to take note of the fact that their last quarterly statement likely reflected significantly less value, when compared to the previous quarter’s total value, as well as a year to date value substantially less than the years beginning value, despite the annual contribution made before the April filing deadline, has no real fear because there is no cognition of a threat. None-the less, those who are aware of the seemingly dire economic circumstances are not demonstrating fight or flight behavior, as evidenced by the recent Black Friday sales exceeding last year’s by 3%, a reassuring event despite the gloomy predictions broadcast by the national media. Every year there seems to be predicted an inevitable economic calamity after the Thanksgiving Day feast, and this year, just as in the years passed, the fears were not validated by the facts.
Despite this Black Friday having been much the same as last years, the fact is that the nation’s cumulative wealth over the same time period has decreased trillions of dollars. Yet, people still crowded the malls and shopping centers demonstrating that there may not be anything to fear but fear itself.
Over the past few days articles have been published disparaging fund managers for losses of billions of dollars, as if the fund managers are expected to have special superhuman capabilities enabling them to mitigate losses in the macro-economy to the benefit of their shareholders. The authors of these articles are fear mongers, instigators of gratuitous discontent, and the worst of the worst among the legions of Monday Morning Quarterbacks. They criticize the Alaska Permanent Fund managers for unrealized losses (paper losses) in the billions of dollars, but disregard or fail to mention the fact the Warren Buffet, ‘The Oracle of Omaha’, has also lost billions of dollars. So too has the Harvard Endowment, another highly regarded portfolio managed by some of the best and the brightest managers money can buy. The critics are fast and loose with the word “loss,” while avoiding explanations whether they are “realized” losses, or “unrealized” losses.
Referring to the attached charts of the Dow and S&P 500, the indexes widely used to compare the success or failure of a common stock fund manager, it is clear that the long term trend is consistently to the upside. The chart does not, however, only go up. There are instances that demonstrate adverse economic events, such as the 1970’s when many of us can recall high inflation, high unemployment and long lines at gas stations. Every major dip in the graph, or extended period of a flat line, can be linked to significant historical events, and very few of us are capable of predicting, or even recognizing early into an event, that the situation will be a major decline, and then elect to precipitously liquidate assets to realize capital gains and to minimize unrealized losses. As cited above, even the best money managers failed to grasp the veracity of the problems associated with the sub-prime housing issue, and the calamities associated with it regarding mortgage backed securities, credit default swaps and structured investment vehicles. The fact that the problem is not unique to the United States, but is an international event with global consequences, suggests that a lot of very bright and intelligent people failed to see the problem for what it really was.
Thus, as long as America continues to be the Land of the Free and the Home of the Brave, there is every reason to believe that today’s unrealized losses will again become gains in the years to come. Moreover, this is a buying opportunity if new money is available, and one should consider not waiting until well into next year to contribute to that IRA. Any new money invested today will begin to show gains long before the previously invested capital recovers its losses. Furthermore, the real winners are the 401k and 403b participants. Every pay-day their contributions have bought cheaper shares, thus accumulating many more shares than under normal circumstances. When there is a recovery (historical evidence says one will occur, as does faith in America), those shares will enable a relatively rapid recovery of the portfolio, and eventually, over the long haul, a substantial nest egg for the investor.
Unlike the Harvard Endowment and the Alaska Permanent Fund, (unless an individual is within five years of retirement) an average “buy and hold” investor has an advantage over the Harvard Endowment and the Alaska Permanent Fund. Since Harvard pays college expenses and the Permanent Fund pays annual dividends, these withdrawals can not henceforth be recovered (as is the situation regarding the individual investor); they can only be replaced with new money. Thus, by the nature of their compacts, the Harvard Endowment and the Permanent Fund are often forced to realize losses to pay dividends or expenses, requiring management decisions that are far more important than the soothsayer qualities some journalists and pundits suggest managers should possess.
Unless the governor and the legislature can come up with some new money, the Permanent Fund and its shareholders will simply have to stick it out, plugging away to recovery not unlike it has since its inception nearly thirty years ago; through good times as well as bad times; through the ups and downs. But, over the long term, as history has demonstrated, always up, despite paying annual dividends from its earnings.
It is the job of the fund manager to keep focused on the long term. It is also the manager’s job to placate the critics, and to dispel those who choose to minimize faith in that unique American capitalist experiment that has served us well for so long, and who also assert how easy it is to drive forward using the rear view mirror.