While I am personally not an advocate of active investing, I follow the writing of many active managers. There are a few who have both a wonderful way with the written word and a track record to boot. Bill Miller of Miller Value Partners is one of them. I wanted to both make you aware of his work and point out a few insightful excerpts from his most recent 2Q 2020 Market Letter.
Here are a few pieces of his market letter that stuck out to me that I hope you find insightful and helpful followed by a little commentary from me.
In his marvelous book, Winning the Loser’s Game, Charlie Ellis says that the reason we study market history is to protect our portfolios from ourselves (emphasis mine). This is a very easy lesson to learn, but a very difficult one to observe in practice. Psychologists have documented that for most people a $1 loss is twice a painful as a $1 gain is pleasurable, hence the compulsion to stop the pain when stocks are collapsing by joining the selling and cutting your exposure.
The result of the panic out of stocks in March is that there is now all-time record cash in money market funds, and bond funds have seen huge inflows even as rates hover at levels not seen for thousands of years. In the US, bonds have never been more expensive in US history than in 2020. The S&P 500 yields 3x what the 10-year Treasury does, and dividends grow over time while treasury payouts do not. This is similar, in my opinion, to what happened around the bottom in 2009: People became risk and volatility phobic and most missed the great 10-year bull market. Those investors, though, for the most part did fine post 2009 if they kept their money in bonds because yields fell and bond prices rose. With rates so close to zero in the US, that happy outcome is unlikely to be repeated unless we go into a deflationary depression, which the Federal Reserve, with some help from Congress, is doing its best to make sure does not happen.
The quote I bolded in the first paragraph is, perhaps, the biggest difference I hope to make in the lives of retirees by helping you protect your portfolio from yourself. That isn’t a cheap shot from me so much as it is human nature as Mr. Miller leads on. How we do that isn’t by sharing more data or information with you, but more perspective. My honest hope is that the continued offering of the big-picture perspective as to what is going on might encourage you to stay the course both now and over the years to come.
The second paragraph is something I’ve been writing about for a little while now. See here, here, and here. I cannot see how this ends well and yet Main Street investors are piling in at maybe one of the worst times ever.
Back to Mr. Miller:
My friend Will Danoff, who runs the largest actively managed mutual fund in the US, (fund name removed for compliance purposes), and who has beaten the market over his more than 25 years at its helm, is fond of saying, as regards to investing in stocks, “Are things getting better, or are they getting worse?” Well, they are clearly getting better and that is expected to continue. Goldman Sachs expects annualized economic growth of 25% in Q3 after Q2’s decline, and 2021 growth of 5.8%. If that is correct, then GDP ought to be back to record highs some time in Q2 or Q3 of 2021.
The biggest problem with those who believe the market is disconnected with economic reality because the economic numbers still to come will be dreadful (and they will be) is that those numbers report the past and the market looks forward. The market predicts the economy; the economy does not predict the market. Stocks went down in the first quarter of this year and the first quarter of this year was a quarter of growth. Stock prices typically lead the economy by 4 to 6 months so it is, or ought to be, no surprise they have been headed higher. Why should they not be: Things are getting better not worse, earnings are bottoming and should begin to recover in Q3, the Fed has said they do not expect to raise rates for years, inflation is non-existent, interest rates provide no impediment to higher stock prices, and even valuations are not demanding at around 20x 2021 earnings given levels of inflation and rates.
A major part of successful equity investing – especially during times of heightened uncertainty – is having the proper perspective and that means looking far enough into the future with faith that things will get better. So, I think the very simple question from Mr. Danoff is appropriate, “Are things getting better, or are they getting worse?”
I don’t think you can have too long of a time horizon when we ask ourselves this question as I wrote an article on Market Expectations for the Next 30 Years. Maintaining the proper perspective is what can often encourage us to maintain faith in our retirement plan and portfolio.
Stay the Course,
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This post is not advice. Please see additional disclaimers.