Cover Story, by Mark Robertson, Managing Partner
Posted on November 1st, 2008
Our presidential candidates had plenty of venom for "Wall Street" and "investors" during the campaign. In this letter, we share that tomorrow is NOT the future when it comes to long-term investing.
Yes, we can! Many of these thoughts were formed prior to the presidential election and please be assured that every effort was made to make them as non-partisan as possible. The constructive criticism that follows has been earned by both major candidates and we wish the new President well as numerous challenges and opportunities present themselves in coming days and months ahead. Our message is about the comprehension of time horizons, in ways neither candidate seems to have truly embraced so far.
Dear Mr. President:
You’ve reached the end of an arduous marathon and achieved victory. Congratulations. The journey has been a long and winding road and you’ve been immersed in the diversity of this Great Nation for over a year.
Regardless of outcome, the election of 2008 has been historic. Our nation continues to progressively embrace the dream of “Of the people, by the people and for [ALL] the people …” so eloquently laid down by President Lincoln.
Our Community of long-term investors understands the nature of stump speeches. In fact, we understand it better than “average” and know that the President does not make laws but merely proposes them. Hence, we give either candidate a free pass when proposal details seem to ebb and flow on the campaign trail. We understand proposal development and the influence of changing opinions and the construction of consensus.
Our Community also embraces “organizers” as we work together in one of the most enabling Volunteer networks in this great nation. We have something in common with both national campaigns. The Volunteers of the National Association of Investors work tirelessly to share the potential of long-term investing. We know that, working together, much of the mystery and fear associated with investing can be effectively eliminated and paths to opportunity opened.
In that spirit, we truly believe that we can help both candidates and both campaigns to a better understanding … and frankly, a better future.
We confess that our skin crawled a little bit when one of the major candidates often “hissed” the word, investor, in a derisive tone when characterizing the challenges facing our economy and financial markets. And please stop the lemming rhetoric about Wall Street versus Main Street.
The other party was no better, painting the Wall Street collective with a single broad stroke, labeling the entire environment as evil and greedy. We’ll be the first to admit that Michael Douglas as Gordon Gecko and Richard Gere as Julia Robert’s billionaire boyfriend seem to be alive, hungry and “innovative” as ever. Clearly, there is much to be done. But trashing the whole enchilada is wrong.
First, there’s a massive difference between “investors” and the group that you’re attaching that hissing derisive label to.
Second, not all CEOs are nefarious and evil.
The path to a better future starts by realizing that tomorrow is not the future from the perspective of long-term investing. And that — precisely — is where much of the problem and fear resides. This ignorance has been cultivated for decades and it’s at the root of the vast majority of problems on Wall Street today — from a number of directions.
Fiduciary responsibilities matter. Yes, the tenets of prudent man rules and the safeguarding of long-term assets are important. Treating our long-term assets as if we need them tomorrow leads to a tragic mistake in investing.
We clearly recognize that fear is a weapon in the arsenal of those who seek election. Successful candidates use doses of fear wisely. But it’s time to stow it for approximately four years — at least in the realm of investing. In the realm of short term stock market performance, fear can be devastating … and it is.
Our daughter is a first-year teacher at a local high school. She’s returned home over the last few weeks to share stories of educators abandoning their 403(b) plans by switching their retirement account balance to cash equivalents (money market accounts) or guaranteed return vehicles.
Treating our retirement assets as if we need them tomorrow leads to tragic mistakes in investing. Our daughter’s fellow teachers will likely be “left out in the cold” when the stock market reverses and advances suddenly in a massive fit and start.
Will this happen? When will it happen? No one knows. Both presidential candidates are on a first name basis with Warren, so we’ll suggest that you buy him a steak in Omaha and ask him why he’s Buying American. Now. He also has a dramatically different definition of risk than the academic “investors” around you. Ask Warren to explain risk. Ask the others to explain it and listen carefully to both and decide who’s right by following the money. Warren’s perspective will have very little to do with “tomorrow” and he’ll be the first to admit that he has no idea how much the market will advance or decline or when. But I’m absolutely certain it’ll have very little to do with “tomorrow.”
Take a look at the accompanying figure. This illustrates the value of a certain 401(k) account since 1995. Maximizing the monthly contributions led to a balance (at one time) of $784,333 until the current swoon hit. Contrast the reduced balance of $512,352 vs. the $190,701 achieved by investing in 2% CDs along the way. You (and your opponent) probably think the higher total includes some “earmarks”, but it doesn’t.
A Profile of Long-Term Investing. The Tin Cup model portfolio has invested the maximum 401(k) contribution since January 1995. Total assets peaked on Halloween 2007 at $784,333 and have fluctuated down to $512,352 on 10/31/2008. Investing the same monthly amounts in a 2% guaranteed return vehicle would now be worth $190,701. Did we really “lose” $272,000? Of course not.
It’s also going to be hard for you to believe that not everybody signs multi-million dollar book royalty deals or marries a beer distribution executive. Most of your constituents have to build a nest egg one month at a time. Tomorrow is NOT the future. Our social security and pension programs are in the condition they’re in because they fail to honor and recognize time horizons. The 2% rate of return on social security is achieved by treating the entire “account” as if we need to pay out 100% tomorrow.
This ignorance manifests itself in yet another current challenge. After decades of low rates of return, some state pension funds decided to go for the gusto — chasing some hedge funds to reach for those “dramatically higher returns.” Enter the lottery tickets also known as credit default swaps and as President, you need several Excedrin already. The answer lies “in between” and is known as the NAIC.
The NAIC is a Community based on two broad purposes: (1) Provide a way for many people to start an investment program in a small way, without too much experience, and build their investment knowledge to the point where they have the ability to acquire a sizeable investment portfolio and manage it profitably, and (2) Broaden the awareness and interest of individuals in the ownership of equities … in many cases, this takes shape as members/practitioners have as great an interest in helping others to learn about effective investing.
Let us know after you settle in at 1600 Pennsylvania and we’d be happy to recommend a local volunteer event in D.C. or nationwide. You might want to bring along the Treasury Secretary, too.