Last quarter I wrote an article based on how I would respond to the oft asked question, “What do you think about this market”? I realize that today I am writing on the one-year anniversary of my dad’s passing on, and I’ve been thinking about him quite a bit lately. So, I thought maybe I’d go back to the source of my market interest and wisdom (?) – my dad. After all, I think his last words were, “how’d the market do today?” So, I wonder how he might answer this question if I could ask him today? In fact, I wouldn’t be surprised if he isn’t still following the market wherever he is.
“Oh, I don’t know Jack.”
It seems that over the years, I have asked my dad what he thinks and this is usually his first response. While it doesn’t seem really helpful at first blush, I think it is important to know that a man who has followed the markets closely as a trader and investor for some 70 (!) years admits to not knowing what might happen in the near-term. I know this part has rubbed off on me. While I like to make some conjectures (guesses), my real answer is that I don’t know either. And, as I wrote in my last column, as a long-term investor, I don’t care about the short term either.
Yet, I do think he might have some thoughts in different areas of the current investment landscape.
While many people view the relatively uninterrupted rise in the market since the panic lows of March 2020 as a sign of bubbles forming, I think his main observation would be that “this is a powerful bull market”. He always liked being invested in “powerful bull markets” and wouldn’t want to run to the exits too prematurely. In fact, he might point to the lack of any durable decline in the overall indexes while pointing out the seemingly ongoing rotation of different sectors going in and out of favor. In other words, the overall market keeps going up despite rolling corrections in different components. This could be a sign of an auto-correcting market that keeps any area from being too overextended to the upside, thus allowing the major indexes to continue upwards longer than people expect.
My dad loved to find good individual stocks to own, and I think he would still be able to find some attractively valued companies, if not outright “fire sale” bargains. The periodic rotations would likely trigger some occasionally, fairly attractive prices for some successful individual companies. Here at Moller Financial, while we don’t typically own individual stocks, we do also take advantage of these rotations by rebalancing out of the pricier areas into those that have gotten cheap.
Finally, one thing to know about my dad – he was always bullish. He had that necessary optimism in common with most of the other super-successful investors.
My dad would certainly bemoan these paltry rates of return available in the bond market today in sharp contrast to the early 1980s when he was able to lock in 10-year returns in the mid-teens. Ever since those super-high yields, my dad had employed a ladder of bonds. He liked the ladder with treasuries maturing every year for ten years. Whenever a bond would mature, he’d reinvest in another 10-year treasury to keep the ladder intact. He loved this approach that allowed him to lock in relatively higher 10-year interest rates while keeping maturities spread out. He eventually, somewhat reluctantly, replaced some maturing treasuries with municipal bonds for their better after-tax yields though still in the ladder structure.
So, what might he say and do in today’s markets? I think he would “hold his nose” and go ahead and keep locking in 10-year treasuries or munis knowing that he could not really time interest rates. For years, we’ve felt they were crazy low and then the next year they would be lower. The upshot is that he would stay with the strategy that worked so well for him over the years. Though, to be truthful, when he got into his 90s, he decided that he did not really need bonds maturing after he reached age 100 somewhat contradicting the fact that he kept buying those green bananas.
Other Asset Classes
My dad really hit his investing stride in the mid-1970s. At the time, the easily investable universe was not nearly as diverse as it is today. Yet, over time, he did follow the Moller Financial approach of diversifying across some of the newly available asset classes. Briefly, he felt:
- International Equities. He did embrace the strategy of including non-U.S. stocks through mutual funds. He would get frustrated during those long periods of international stock underperformance relative to U.S. stocks but stayed resolute knowing that when the tide did turn the international stocks then tend to outperform for years.
- Real Estate (REITs). He liked investing in these funds with their exposure to the real estate industry. In particular, he liked their high dividend payouts as they had to pay out their rental income. As many of his age group, he treasured investments that generated meaningful current income, so REITs were right up his alley.
- Commodities and Natural Resource stocks. As a guy who made his living trading commodity futures at the Chicago Board of Trade, he knew that commodity futures were not necessarily good “investments”. However, he has always invested in companies that work in the natural resource field, particularly energy companies. An added bonus to him was the fact that many of these energy companies also paid nice dividends.
And, putting it all together?
My dad just really loved following and investing in markets. He would track many things and invest in a few. Yet, he always adhered to the basic strategic approach:
- Favor stocks – this is where you really make your returns
- Stay diversified – don’t fall in love with one investment over all the others
- Rebalance when the allocations got too far away from his targets
And, finally and most importantly, after tracking and analyzing various markets, he would say: “Time to take a nap!”