SUMMARY - "PIG" :
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://www.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
The people at fault are the pros in the industry.... those who make a living selling stocks, or pushing mutual funds, or journalistically feeding off those who do (and this includes some market letter writers who are old enough to know better).
Consider the egregious "buy and hold" mantra promoted by the "experts" who neglect to tell you there are long periods when such a strategy proved disastrous. For example, it was not until 1953 that the Dow surpassed its September 1929 high; in the meantime, the buy-and-hold crowd was surviving on dividends (assuming such people were fortunate enough not to be in one of the investment trusts that went entirely belly-up). Anyone who bought the Dow stocks at their 1966 high did not, after allowing for the depreciating value of the dollar and the taxes paid on the resultant illusory gain, break even until 1994! As for the success of a late-1960s mutual-fund buy-and-hold strategy, ask the Mates Fund shareholders how they're doing.
Are the "experts" looking after your best interests? Perhaps a few believe they are, but they are greatly outweighed by those who are motivated by self-interest, those who derive financial gain in the form of salary, commissions or advertising dollars. You won't find any of them saying to you, "You know, stocks are pretty richly priced now, and historically the odds are not in your favor if you buy in at these levels, so why don't you just sit on your pile of cash for awhile and wait for a better buying opportunity".... because if they did, they would feel the lost income in their own pocketbooks. (Ask Jeff Vinik.)
Let's face it, most of the novices plowing money into mutual funds don't have the expertise for stock selection, asset allocation or other investment strategies. They are dependent on the "experts" to do it for them... and these "experts" have an inherent conflict of interest, because their financial well-being depends on a continuing inflow of new customers.
What will happen when, in the next bear market, the novices discover that the great wisdom and expertise of the pros has not kept their portfolios from declining in tandem with the overall market decline? Will the pros say, "Oops, sorry, we're only human after all?" Unlikely. No, in the face of declining interest in stocks (along with declining commissions and advertising revenues) they will conjure up whatever strategies they think will generate an increase in business, at severe risk to your wealth.
Caveat emptor.
Forget whatever puff pieces you have read about Clinton's idyllic small-town upbringing. Though Morris just gives the information without much comment, it's clear that Bill Clinton grew up in family that was about as dysfunctional as they come. Bill never knew his biological father WJ Blythe, who died in a car accident three months before Clinton was born. But to the extent that charm and the skill of persuasion are inherited, Bill got it all from his father, who was a natural salesman and a real ladies' man.... in fact, becoming a bigamist when he married Bill's mother (his third marriage, her first).
For the first few years of his life Bill was effectively raised by his maternal grandmother while his mother was away in school, training to become a nurse. When Bill was four years old, his mother married Roger Clinton, who was alcoholic and abusive. Today we know that the only successful way to deal with the disease of alcoholism is to withdraw support from the alcoholic, then let him or her hit bottom until he or she makes the decision to go through recovery and resume a normal life. But in the 1950s alcoholism was considered to be a lack of moral fiber, not a disease, so families struggled along as best they could with the alcoholic member, showing to the outside world a face which masked the turmoil within.
There is no question that as a child Bill Clinton was both emotionally and physically abused by his stepfather Roger; but his mother was careful, when Bill and/or his younger half-brother Roger were taken to the hospital for treatment of the physical abuse, not to have anything appear in the written records.
Bill would do his best to protect both his mother and his younger sibling against his stepfather's alcoholic rampages, but it was not until he was a strapping teenager, at more than six feet and 200 pounds, that he was able to "make good" on his efforts. In many ways, Bill was deprived of a normal childhood, as he had thrust on him at a tender age the responsibility of being a surrogate father.
Life would have been even more miserable had it not been for Bill's uncle Raymond Clinton, who had connections, both political and to the underworld. (Hot Springs, where Bill spent most of his childhood, was the summer watering hole for Al Capone and other 30s-vintage gangsters.) It was Uncle Ray who provided the first family (rental) home, whose ties helped keep Bill from being drafted, and who generally was in the background "looking after" Bill's best interests.
One cannot help but admire the extent to which Bill Clinton overcame enormous odds, by virtue of his charm, energy, intelligence and hard work, to succeed in his pursuit of the presidency. He also owes a great deal to two very strong women in his life, his mother and grandmother, while the males in his upbringing, except for his uncle Raymond, appear to have been weak or nonexistent.
Left unsaid in Morris' book are the scars such a dysfunctional upbringing leaves on the adult. The worst, as any victim of child abuse (who has sought understanding through counseling) will tell you, is that when anything goes wrong in your life, or somebody complains about you, you will immediately assume you are at fault. This is because you have been raised to be a victim, without the self-confidence to say, Hey, I'm OK; it's the other person (the abuser) who's wrong! It takes a lot of training to overcome this childhood scar, and adults who grew up in abusive households never really have the self-assurance of those who grew up in "normal" families. In the adult Bill Clinton we can see this in his almost obsessive need for approval; and this is why you will find him jumping on the bandwagon of the popular issue of the moment.... whatever it takes to get approval from as many people as possible.
Another scar is the classic case of "the end justifies the means".... lying (covering up for family members) to preserve appearances. Today it would be OK for a kid to tell his friends, "My daddy's an alcoholic, so he doesn't live with us now, and Mommy and I are seeing this really nice lady who's helping us out". That's today.... but in the 1950s this would be a real no-no. You were supposed to stoically suffer just so the neighbors would never find out. So lying is wrong, but not keeping up appearances is more wrong.
From his uncle Raymond, Bill learned the value of connections, which provided relief from what would have been an even more dysfunctional upbringing, and which were of great value to him as a young man. Bill Clinton's entire political life has been one of developing connections and using them to advantage. Let's be honest, he's very good at it.
It's difficult to say where the "party boy" Bill Clinton.... the philanderer and drug-user.... came from, but it probably was because he had too much responsibility thrust on him as a boy; and when, as an adult, he found he could "buy" the good times he had missed using his talents, his charm, his good looks and his connections, he decided to indulge, overcompensating for what he lost out on while growing up (and in Hot Springs, these pleasures were readily available).
I don't remember the time or the exact words, but at some point a newsperson asked Bill Clinton what the most important part of being president was. He replied, "Moral leadership".... setting the ethical standards for the country to follow. I remember thinking to myself at the time, "right message; wrong messenger". But, in hindsight, I do not think Bill Clinton lacks ethics; in fact, I think he has a good sense of what's right and wrong. It's just that ethics for him are an abstraction, a goal; something that's desirable; but not something by which you live your life, regardless of the consequences. Consequences can be painful, as Bill Clinton discovered as a child. So what's important for a successful life are approval, appearances and connections, after which one can indulge in the luxury of ethics.
At any rate, I wondered to myself, just how bad has my advice (at least, that which I followed myself) been? At a glance, I was a year early, missing a modest rise in 1993; I was safely in cash for the 1994 decline (not accurately reflected by the Dow); but I was totally out of sync in 1995, getting caught in a whipsaw in January and missing completely the almost-meteoric rise of the current mania that began in March.
So I turned to the TIAA/CREF stock and money-market figures for the period, which reflect what I made, or could have made, in my pension plan. Ignoring for the moment the whipsaw in January 1995 (a minimal loss), just because it makes the calculations much easier, from the end of December 1992, when I went into cash, and the present, the difference between the total money-market fund gain and the gain in the CREF stock fund for the period is about 22% (16% vs. 38%). This works out to "missing" a gain of about 6.5% per year.... or 5.6% per year at a compound rate.
In other words, for nearly complete security I sacrificed an additional return equivalent to slightly less than the current one-year T-bill rate. I also "sacrificed" getting caught up in the worst stock-market feeding frenzy since 1929, and trying to bail out at the top before the market meltdown strikes. Though I've had a long wait for stocks to return to more reasonable levels of valuation (where I can again buy them), my all-cash position has not been the disaster that those market novices sending me unfriendly e-mail messages would have me believe.
At what point would my "safety first in cash" strategy be ahead of the intolerant greenhorns? If the Dow, tomorrow, were to drop to 4350, that would about be the "break-even" point. But "fair value" for the Dow stocks, in terms of sales, book value and dividend yield ratios, is still in the range of 3100-3200, unchanged from a year and a half ago. Thus, a drop to about 4350, where "cash" beats stocks, would still leave stocks 37% overvalued and with plenty of room to drop further in what would most certainly be a major bear market. As far as I am concerned, owning stocks in what may well turn out to be the financial mania of the century does not provide sufficient additional return over "cash" to justify the enormous added risk.
The 1987 Crash clearly demonstrated that, in this age of electronic wonders, the computers will quickly take stocks down to fair value as soon as the hot air escapes the bubble. If, as I expect, the next "incident" is a true meltdown which closes the markets, the resulting psychological damage among investors could eventually.... if not right away.... take stocks to severe undervalue, where (as in 1974 and 1982) they would again be superb buys.
In last month's issue I pointed out that net money inflows to mutual funds were unlikely to keep rising exponentially. Even if they just leveled off, stocks would be unlikely to reach new highs after September. Actually, recent figures show that net money inflows are now declining. That's the fuel that's been pushing stocks to new highs, so late July or early August is now the most likely latest period for the market top.... and there's a good chance that we're already past the highs. Right now, you can flip a coin to decide whether the market meltdown will come shortly before or shortly after the November elections; based on current trends, it could equally go either way.
A. "Phoenix" -real portfolio, begun on October 1, 1995.
Original cost: $ 8,090.45
Present value: $ 8,732.82
Increase: $ 642.37 [7.94%]
Yield: $ 311.53 [3.87%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +22.40%, for a compound annual rate of return of 2.15%.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG" :
Portfolio cost: $ 5,120.00
Present value: $ 6,127.35
Increase (decrease): $ 1,007.35 [19.67%]
COMMENT on "PIG": There is no change from the last issue, other than to correct the formula calculation of the totals (math error). The professors are not planning to buy any more stocks until next month (July), at the earliest.
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $19,278.44
Increase: $10,952.25 [131.54%]
Current yield: $ 886.95 [4.49%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +75.70%, for a compound annual rate of return of 6.13%.
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 25Jun96: stock, 99.35; MM, 16.06
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.63%
Gain, January 1 through March 31, 1996: 1.28%
Total gain since January 1, 1988 (8.25 years): 136.62%
Compound annual rate of return: 11.00% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 208.18%, for a compound annual rate of return of 14.62%.
COMMENT on "Timer's Trend" : We're still on the SELL signal given on June 7, and the broad market is considerably weaker than indicated by the popular averages, which are stagnant. Declining stocks continue to outnumber advancing ones (the basis for "Timer's Trend"), even on many days when the Dow closes higher. With the gush of new mutual-fund money now tapering off, June 7 may turn out to be THE sell signal, after several months of frustrating whipsaws; hindsight will tell.
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Mon 18 Mar 96 . | . # }| 5683.60 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 19 Mar 96 . | .# | 5669.51 | . + *
Wed 20 Mar 96 . | .# | 5655.42 | . + *
Thu 21 Mar 96 . | # | 5626.88 | . + *
Fri 22 Mar 96 . | .# | 5636.64 | . + *
Mon 25 Mar 96 . | .# | 5643.86 | .+ *
Tue 26 Mar 96 . | .# | 5670.60 | .+ *
Wed 27 Mar 96 . | .# | 5626.88 | .+ *
Thu 28 Mar 96 . | # | 5630.85 | .+ *
Fri 29 Mar 95 . | # | 5587.14 |~.*~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 1 Apr 96 . | . # | 5637.72 | . + *
Tue 2 Apr 96 . | .# | 5671.68 | . + *
Wed 3 Apr 96 . | .# | 5689.74 | . + *
Thu 4 Apr 96 . | . # | 5682.88 | . + *
Mon 8 Apr 96 # . I . {| 5594.37 | + *
Tue 9 Apr 96 . I .# | 5560.41 |~+*~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 10 Apr 96 . I# . | 5485.98 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~~
Thu 11 Apr 96 . & . | 5487.07 + . *
Fri 12 Apr 96 . I . # | 5532.59 + . *
Mon 15 Apr 96 . I . # ]| 5592.92 | .+ *
Tue 16 Apr 96 . | . # }| 5620.02 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 17 Apr 96 . I # | 5549.93 | . + *
Thu 18 Apr 96 . | . # | 5551.74 | . + *
Fri 19 Apr 96 . | . # | 5535.48 |~.~~*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 22 Apr 96 . | . # | 5564.74 | . + *
Tue 23 Apr 96 . | . # | 5588.59 | . + *
Wed 24 Apr 96 . | . # | 5553.90 | . + *
Thu 25 Apr 96 . | . # | 5566.91 | . + *
Fri 26 Apr 96 . | . # | 5567.99 | . + *
Mon 29 Apr 96 . | .# | 5573.41 | . + *
Tue 30 Apr 96 . | .# | 5569.08 | . + *
Wed 1 May 96 . | . # | 5575.22 | . + *
Thu 2 May 96 . #I . | 5498.27 |*.+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 3 May 96 . I # | 5478.03 |~.+~*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 6 May 96 . I #. | 5464.31 | + *
Tue 7 May 96 . I# . {| 5420.95 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 8 May 96 . I #. | 5474.06 |+. *
Thu 9 May 96 . I .# ]| 5475.14 | + *
Fri 10 May 96 . | . # }| 5518.14 | .+ *
Mon 13 May 96 . | . # | 5582.60 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 14 May 96 . | . # | 5624.71 | . + *
Wed 15 May 96 . | . # | 5625.44 | . + *
Thu 16 May 96 . | .# | 5635.05 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 17 May 96 . | . # | 5687.50 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 20 May 96 . | . # | 5748.82 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 21 May 96 . | .# | 5736.26 | . + *
Wed 22 May 96 . | . # | 5778.00 | . + *
Thu 23 May 96 . | # | 5762.12 | . + *
Fri 24 May 96 . | .# | 5762.86 | . + *
Tue 28 May 96 . |# . | 5709.67 | .+ *
Wed 29 May 96 . & . | 5673.83 | + *
Thu 30 May 96 . | .# | 5693.41 | + *
Fri 31 May 96 . I #. | 5643.18 |~*~~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 3 Jun 96 . I #. | 5624.71 |+.~~ *~~~~~~~~~~~~~~~~~~~~~~~~
Tue 4 Jun 96 . | . # | 5565.71 |~ +~~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 5 Jun 96 . | . # | 5697.48 |~. +~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 6 Jun 96 . | #. | 5667.19 | .+ *
Fri 7 Jun 96 .# I . {| 5697.11 | + *
Mon 10 Jun 96 . I #. | 5687.87 | + *
Tue 11 Jun 96 . I #. | 5668.66 | + *
Wed 12 Jun 96 . I# . | 5668.29 |+. *
Thu 13 Jun 96 . & . | 5657.95 + . *
Fri 14 Jun 96 . I# . | 5649.45 |+. *
Mon 17 Jun 96 . I# . | 5652.78 |+. *
Tue 18 Jun 96 . & . | 5628.03 + . *
Wed 19 Jun 96 . & . | 5648.35 + . *
Thu 20 Jun 96 .# I . | 5659.43 + . *
Fri 21 Jun 96 . I #. | 5705.23 + . *
Mon 24 Jun 96 . I #. | 5717.79 + . *
Tue 25 Jun 96 . #I . | 5719.27 + . *
=====================================================================
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.