Saying All the Right Things

I've only been writing this blog for a few months, but I've been setting my investment opinions down on paper for about six years now. If you read what's on here, you might come to the conclusion that I'm saying a lot of the same things most advisors are saying. Just about everyone is saying the right things now: Things will turn out OK; stocks are cheap; be patient.

The problem is this: Most of *them* were saying the same things two and three years ago. I wasn't.

In this "I told you so..." installment of the blog, I offer some examples of past writings.

Going back to my April 2005 client letter...

"Most every major asset class is overvalued. The world trade system is precariously unbalanced and at some risk of painful correction...The savings rate in the U.S. is now teetering on the negative. Our irrationally exuberant habit of tapping our home equity to buy SUVs and big-screen TVs continues to prop up the economy in the face of dismal real personal income growth...It has been more than a year since we unwound fat-pitch positions in REITs and High-Yield bonds...Sure, we own some stocks and some bonds, but our core models (and the vast majority of actual client portfolios) have about half of the normal allocation of stocks and medium-term bonds..."

"My major investment theme these days is “keep your head down.” This is not the time to acquire volatile assets. The return expectations are too low to compensate us for the risks. I have some clients encouraging me to take more risk — saying that they can accept the risks. Sorry, but I can’t advise the traditional risks right now."

"I am quick to remind clients that stocks decline by an average of over 40% in a recession. I have no reason to believe the next recession will be any different. That means that, sometime between today and whenever the next recession starts, stocks need to rise by 75% if we hope to just break even after that recession is over! ... When is the next recession? I don’t know, but I am going to be utterly shocked if it takes longer than 3 years to begin. That would mean stocks must rise more than 20% in each of the next three years in order to ensure that our portfolios can survive a 43% decline during that recession."

Flash forward to October 2007, as the market was peaking and all the bad financial system news was supposedly behind us:

"By now, you have read the explanations for these gyrations: The drop in the housing market has led to a high rate of defaults in the sub-prime mortgage markets. Simple enough, and we would agree that mechanism is the likely top-line trigger of much of the turmoil. However, we suggest that the sub-prime meltdown is a mere special case of a larger and more general problem. The larger problem is, well, larger – and is far from resolved."

"Wall Street does not stand idly by and let market conditions get in the way of profits. The simple answer to the lack of satisfying risk premiums: leverage. Take more risk than your capital would normally justify. Borrow as much money as you can, and buy any asset that offers the tiniest bit higher yield. There are only two catches – you have to believe that (1) the assets you buy will hold a steady value; and (2) the money you borrow will always be available."

"Trying to make money by borrowing at 4% and investing at 5% is like trying to squeeze blood from a stone. You can squeeze and squeeze, but you eventually realize that the blood you see on the ground is your own."

"Still, we believe that the worst is not over. The crisis in the credit markets is deeper and is festering. Too much money was lent too readily, for questionable purposes, for too long. Already, we see the cancellation of large private equity deals and leveraged buyouts. The commercial paper market remains tenuous. Mortgage approval standards have risen dramatically (as they should). The housing market is in an apparent free fall. Price drops haven’t hit every town and every price range – yet."

And, finally, in January 2008 we were saying:

"Our outlook for 2008 is significantly more cautious than in recent years. While in past years we have been worried about the high value of stocks, we have not been terribly worried about the economy in general. We are not in the business of forecasting recessions. However, if we were...we might forecast a recession for 2008."

"The intent of the Fed’s lower rates is to stimulate borrowing, which in turn could stimulate general economic activity. We’ve been around the debt markets long enough to know that if people can’t even afford the principal payments, they sure can’t afford the interest payments, no matter how low the rate might be. If a mortgage on an office building exceeds its market value, a lower rate will not cure the situation. The building owner will be likely to just walk away and let the bank foreclose."

"Domestic Stocks. Value range: 4.5 [out of 5.0]. In our valuation methodology, stock valuations are in the highest 10% of periods over the past 100 years. Returns over 5-year periods following valuations like we see right now have been near zero over inflation. We are underweight domestic stocks by 15-50%, depending on client objective."

Those who've been following us for several years probably began to think we were perma-bears. The flip side now is that I worry that new readers will think we're like everyone else -- perma-bulls. We're neither -- we are rationalists who take current prices and conditions for what they are and make decisions accordingly.