Friday, August 27, 2004

The Times, They Are Not A-Changin'

In a chapter of The Pure Investor unimaginatively titled, Think Long-Term, I advocate what academics call time diversification. Simply put: give your well-chosen funds enough time, the returns will normalize to the historical average. While this is easy to say, convincing my clients, and sometimes myself, of this is not always easy, so I use practical, tangible items to illustrate it.
Framed above the toilet of the upstairs bathroom of our office is the business section of the Cincinnati Equirer dated December 5, 1991. It is framed because the president of our firm has his picture in the center and is quoted in an accompanying article called "West Siders won't give up on their CDs." It is above the toilet as an in-office joke, but after looking at it several times, I realized it's a great teaching aid.

Along with the above mentioned article there are several others. I'll list their headlines.
First the bad:

  • Reports show slipping recovery (oh, no!)
  • Stocks decline in profit taking (drats!)
  • National Steel moving (local job losses to Japan!)
  • Mac might appeal (big fines, local layoff expected)
  • Pension fund probed (corporate corruption)
  • Pan Am 3rd Airline to fail in '91 (airport loses business/jobs)
Now the good/neutral:

  • Hanna-Barbera sale closes (Turner bought 'em. Big deal)
  • Enterprise arrives (great, another place to rent cars. Big deal)
That's a 3:1 positive/neutral to negative. At this point the Gulf war is over, but Clinton is about to start campaigning with the daily "It's the Economy, Stupid" mantra that it's the "worst economy since the Depression." Sound familiar? Anyone reading this in 1991 would be inclined to think that it's a good time to get out of the market.

One item seems to argue against the depressing news and coming campaign rhetoric. In the lower right hand corner is an article: Execs urge U.S. to build supercomputer network. From the lede:

America's biggest computer companies want the government to help develop a high-speed data network that would let everyone from university scientists to grade-school students use supercomputers.


Supercomputers...are hugely expense, but the proposed high-speed communications network - ultimately shared by perhaps millions of users - could make pro rata expenses reasonable.
The tone of the article is fanciful like those futuristic movies from the '30s showing flying cars in the '80s and I don't think the reporter Richard Vernaci had any idea the import of what he was writing; how this "supercomputer network" would increase productivity, spawn industries and expand knowledge.

With all the bad news, the Dow was at 2889.09 and the S&P was at 377.39. Now look at where they are at. It hasn't been 15 years since that was written. That's half an average retirement for at 65 year old retiree who dies at 95 (not unlikely).

So during rough seas when you hear nothing but negative, remember to keep you eyes on the horizon and not the waves.

Stay You