Editor’s Note: This is a book review. It is most definitely NOT an investment article. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
Investing has been our passion and vocation for some time. Our basic tenet is that Gravity is the most important force in financial markets and that Asset Prices come down with a speed that is at least the Square of the speed at which they went up. Sort of a more precise description of the old phrase that asset prices take the escalator while going up but the elevator when coming down.
We like Simplicity. We think achieving Simplicity is profoundly difficult. So when we find a profoundly simple statement, we try to adopt it. One such adaptation is:
- Blessed Are The Meek For They Shall Inherit The Kingdom Of Financial Safety
Many would recognize the famous statement from which the above has been constructed. While they may recognize it, they may not understand how perfectly it applies to the pursuit of investing for consistently positive returns. To them, we say read the book “the Age of Deleveraging” by A. Gary Shilling.
As we write this, Financial Television Networks are full of bubbly and vain advice to investors to load up on stocks and commodities. The pitch is to invest in the most glamorous of asset classes, the ones that have gone up the most. Every single Guru that Financial Networks can summon is being summoned to trumpet the virtues of adding risk to investment portfolios.
That reminds us of the old proverb “Pride Cometh Before a Fall” and of Chapter 10 of Dr. Shilling’s book. Actually our own adaptation “Their Pride Cometh Before a Fall of Your Net Worth” is more appropriate. Because the pride of these stock investment gurus does not harm them but ends up causing great damage to the networth of investors who listen to them. Dr. Shilling’s book is virtually an antidote to these vain, self-appointed gurus.
In Chapter 10, titled The Outlook for Stocks, Gary Shilling writes “I’ve never understood the U.S. individual investor’s fascination with stocks, almost to the exclusion of all other investment vehicles”. He does not dislike stocks because he states that “…stocks do rise over time, essentially because of economic growth.” He does a good job of explaining the importance of Price/Earnings Ratios, Interest Rates & Dividend Yields and end up concluding that “Despite all the disruptions of the past decade – the dot-com stock blowoff, the housing bubble and collapse, the global financial crisis, the possible demise of the euro and brewing major problems in China & Japan – stocks still aren’t cheap.”
In Chapter 10, Dr. Shilling also demolishes the slogan of “equity fee collectors” (our nick name for always fully invested long only stock managers) that investors who are in and out of the market risk being out at times of great appreciation. Dr. Shilling advocates a completely different view. He states that “Being out of the market in the weakest months is very beneficial, even if the investor also misses the strongest months.”
As evidence, he writes “A Spanish research firm found that if you removed the 10 best days for the Dow Jones Industrial Average in the years 1900-2008, two-thirds of the cumulative gains were lost. But if you missed the 10 worst days, it found the actual gain on the Dow tripled.”
So his advise in Chapter 10 can be summarized by his admonition “If you forgo the last exuberant months of a bull market, you’ll still be ahead – financially and psychologically – if you’re also on the sidelines when the big bear emerges from hibernation.” It seems Dr. Shilling believes in the virtue of being meek to obtain financial safety.
Success in investing requires a Balanced Mind. But what is the characteristic of a Balanced Mind? How does one recognize such a Wise Person? These were questions asked about 3,500 years ago and the answer was the immortal statement below:
- In What Is Night To All People, the Balanced Mind Remains Alertly Awake. When The People Are Wide Awake In Fear, the Wise One Can Sleep Soundly.
We have adopted this statement as a key tenet of our own investing. The reality of the past dozen years is that people have been on a bunch of rides. Rides on themes that sounded so real, so rational and so clearly suggested the beginning of a new paradigm that people who rode these themes slept complacently through out the ride. This complacency is a characteristic of an investment bubble.
In Chapter 1, titled Spotting Bubbles, Dr. Shilling lays out “two very fundamental principles that have always guided” his forecasting. He writes “… a bubble wouldn’t exist if the majority didn’t believe it was fundamentally sound and sustainable”. So his second principle states that “a forecast that recognizes it as the flight of fancy it is and predicts its bursting is nonconsensous.” His first fundamental principle is even simpler “First, I believe that human nature changes very slowly, if at all, over time. So people will react to similar circumstances in similar ways.”
We concur. That is why the 3,500 year old definition of a Balanced Mind applies to investing today.
In Chapters 2-5, Dr. Shilling illustrates his two forecasting principles by taking the reader through the various Bubbles and the results of denial of these Bubbles. Dr. Shilling believes that the next decade will be a decade of slow global growth. In fact, he forecasts Chronic Worldwide Deflation in Chapter 8. This theme is developed and explained in Chapters 6-9.
Let us state clearly that we have never met Dr. Shilling. We have spoken to him only once. That was when we asked his help with data for our article about US Treasuries in August 2008 . We have no business or social relationship with him of any kind. We get to hear his views when he appears as a guest on Financial Television and when he does we usually feature his appearances in our Weekly Videoclips Articles.
Dr. Shilling writes in Chapter 12 “Full disclosure: I’ve been a bull on 30-year Treasurys since 1981 when I stated “We’re entering the bond rally of a lifetime.” How right was he? Look at the chart he sent us in August 2008 that shows the comparison between the returns from investing every year in S&P 500 vs. returns from investing every year in the U.S. Treasury 25-Year Zero Coupon Strip. It will amaze you or shock you depending on whether you are “meek” or otherwise.
If you were of Balanced Mind; if you recognized the bubbles in 2007 or in 1999 and especially if you took refuge in US Treasury Bonds, you would have slept soundly in 2008 & in 2001-2002 while investors who rode the bubbles remained wide awake in fear as stocks cascaded down.
It follows that Dr. Shilling would include Treasurys as the first of Ten Investments to Buy (Chapter 12)and glamorous assets as among the Twelve Investments to Sell or Avoid (Chapter 11).
Read “the Age of Deleveraging“. If you study it, you will learn the secrets of a Balanced Investment Mind as well as the virtues of being Meek.
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