Monday, November 27, 2017


Sydney M. Williams

Thought of the Day
November 27, 2017

I will tell you how to become rich. Close the doors.
Be fearful when others are greedy. Be greedy when others are fearful.”
                                                                                                            Warren Buffett (1930-)

The Law of gravity has not been repealed. What has risen will, at some point, decline. But, when? Hundreds of people are paid millions of dollars to predict the unpredictable. Yet, the best advice about the direction of the market over the short term I have ever read was given by J.P. Morgan. The story may be apocryphal, but it was re-told by Benjamin Graham in The Intelligent Investor (1949); it still resonates. Asked by his lift boy, in 1901, what will the stock market do? He replied, “it will fluctuate.”

The past year has seen establishment-types in Washington, mainstream media and coastal elites trying to undo last year’s election. Has the market’s positive performance deepened their denial and made more passionate their hysteria? Would they have been so relentless had stocks done as Paul Krugman (economist and New York Times columnist) predicted when news of Trump’s election was clear? Krugman wrote as stock futures plunged early before trading began on Wednesday, the 9th of November. As to when they would recover, he opined: “a first-pass answer is never.” The DJIA rose 257 points that day.

The performance of U.S. equity markets since the election of Donald Trump has been remarkable. He came after a President who entered office following the worst financial crisis since the 1930s. Stocks were at five-year lows. Mr. Obama’s two terms saw the market (DJIA) rise 151%; he left office with an approval rating in the mid 50% range. In contrast, Mr. Trump was elected with stocks near all-time highs, and he has the lowest approval numbers in memory. However, those ratings run counter to optimism seen in polls like the IDB/TIPP Poll: Economic Optimism Index – a mixture of consumers, workers and investors. Over the first sixteen years of this century, the Index averaged 49.3, or slightly negative. Today, it stands at 53.6. During the last year of Mr. Obama’s Presidency, the number was under 48.

Benjamin Graham, considered the father of value investing, explained his concept of investing this way: “In the short term, it is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, it is like a weighing machine – assessing the substance of a company.” Is a year a long enough period to measure Mr. Trump? Is the market reflecting his popularity, or is it weighing what he has accomplished, in restoring cost-benefit analysis and undoing restrictive regulations in federal agencies like the EPA, FDA, FCC, Transportation and the Department of Education? Is it measuring Betsy Devos’s focus on making public school more competitive through vouchers and Charter schools? Is it weighing Mr. Trump’s appointment of originalists as judges, ones more predictable, as they are aligned with the Constitution and less governed by politics or relativism? Does it see an end to authoritarianism at the CFPB?

I don’t pretend to know why markets have done what they have. And I know they will correct, but when and by how much? So, what should investors do? There are no simple answers. The needs of each is individual. The future is like peering through a windshield in driving rain. Clarity is confined to the past.

But, in my experience, market timing is only accurate in retrospect. What I do know is that over the long term – two, three or four decades – stocks have risen. They should continue to do so. If one had bought stocks on September 3, 1929, the day that year the DJIA peaked, one’s compounded annual return, through today, would still have been 4.8%, even though stocks did not exceed those 1929 prices until 1954.[1] If you had reinvested dividends your total compounded annual return would have exceeded 6%. On my birthdate, January 31, 1941, the DJIA was roughly one third of what it had been twelve years earlier. If my grandparents had given me a $1000 as a birth gift, and if I had been smart enough to leave it invested, it would be now worth $187,000, or a 7.01% CAGR. Over the 48 years I spent on Wall Street annual returns compounded at 6.3%, despite stocks being lower fifteen years after I got into the business.

Mr. Obama became President at a fortuitous time. During his eight years in office, the DJIA compounded at an annual rate of 12.1%. But, had you bought stocks on the dawn of the new millennium, on January 3, 2000, your compounded return would have been only 3.9%. That modest performance reflects the bear market that began in March 2000 and ended in March 2003; and the one that began in October 2007 and ended in May 2009. If one goes back 100 years, stocks, as measured by the DJIA, have compounded at 5.9% – a reasonable assumption for future prospects, considering what the last century saw: a world-wide depression, two world wars and numerous smaller ones, a cold war that lasted forty-five years, the deaths in office of three presidents (one by assassination), a bout of inflation that sent Treasuries to 20% yields, the first attack on American soil since the war of 1812, and a credit crisis that nearly sent financial markets into a tail spin.  But it was also a period that highlighted American creative genius, that saw the Country land a man on the moon, and which witnessed revolutions in farming, manufacturing, transportation, merchandising, electronics, computing and communications.

There have been structural changes in markets. Among them has been the shrinking of the number of publically traded stocks, and the concomitant increase in value of those that survived. According to the Carlyle Group, there are 3671 companies listed on U.S. stock exchanges today. Twenty years ago, there were about 7300, yet the value of publically traded stocks today – about $27 trillion – is double the value of all publically traded stocks in 1997. What happened? Private equity allows start-ups to wait longer to go public. Mergers and bankruptcies caused the disappearance of many micro and small-cap stocks. Also, passive strategies have limited the number of shares available for trading. Since the millennium, about $1.7 trillion has been invested in index funds, ETFs and other similar strategies, while funds actively managed have seen about $1.4 trillion in outflows. Equity derivatives have affected valuations, altering the nature of risk. And, over the past eight years, the Fed purchased over $4 trillion in government and agency debt. That has ended. The yield on 30-day Treasury Bills has risen from 0.26% on September 30, 2016 to 1.29% now. Over the same time, the spread between Investment Grade Corporates and the 10-Year Treasury has narrowed from 191 basis points to 137 basis points, implying a willingness to assume more risk.

In response to Mr. Buffett’s quote in the rubric at the top of this essay, I suspect people are neither greedy nor fearful. They are somewhere in between. But, keep in mind, investing is for tortoises, not hares. Avoid being cute or believing every seer. Think long term and maintain perspective.

The only addition I would add to the wisdom of J.P. Morgan quoted at the start of this essay is that over the long-term stocks rise; though returns can be negative for a decade or more. The caveat: our democracy, entrepreneurship and capitalism survive. Warren Buffett recently predicted the DJIA will hit 1,000,000 in the next hundred years. One’s first reaction is that the Wizard of Omaha is losing it; but 1,000,000 on the DJIA from the current level implies compounded annual returns of 3.7%, easily doable, as long as our democracy stays strong. My guess is that my great grandchildren will see that happen.

[1] All the data for the Dow Jones used in this Thought of the Day comes from The Book of the Dow, published by Birinyi Associates in 2012. Any errors in calculation are mine. Data since 2011 is from my own records.

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Tuesday, November 21, 2017

Burrowing into Book: "A Strange Scottish Shore," by Juliana Gray; and "A Casualty of War," by Charles Todd

Sydney M. Williams

Burrowing into Books
Reviews of Selective Readings

                                                                                                                               November 22, 2017

“A Strange Scottish Shore” and “A Casualty of War,” are historical mysteries, both authored under pen names. Juliana Gray is my daughter-in-law Beatriz Williams. Charles Todd is the name used by the mother-son team of Caroline and Charles Todd. 

“A Strange Scottish Shore”
Juliana Gray

In the space of an instant, I was hurtling backward, or forward,
 or upward, propelled toward some magnetic pole.”
                                                                                                A Strange Scottish Shore
                                                                                                Juliana Gray

Beatriz’s interest in history and mythology is combined in this story with her fascination for time travel. In the Author’s Note, at the end of the book, she explains her concept: “In my own head, time makes sense as kind of river flowing in one direction, and time travel as the ability to jump around to different points along that river.”

As in her previous novel, A Most Extraordinary Pursuit, we follow Emmeline Rose Truelove, a researcher for Arthur Maximilian Haywood (the Duke of Olympia). In this story, she travels to a castle on Scotland’s Orkney Islands to study an artifact, a suit of clothing, that had belonged to a Selkie who had risen from the sea to marry the castle’s first laird. Haywood is already there when she sets out. Emmeline is accompanied by Lord Silverton, a rakish and mysterious young man who is in love with her. The year is 1906. The story she tells, as was true in her first in this series, in based on a myth. In the first, it was the tale of the Minotaur and his labyrinth on the island of Crete. In this, the story is based on Selkies, mythological creatures who are seals in the water, but once on land shed their skins to become human. In western Scotland and Northern Ireland, tales of Selkies go back over two hundred years. This legend is explained in a rubric before each chapter: a quote from a book the Duke of Olympia will write in the future, in 1921 – “The Book of Time,” by A.M. Haywood.

Without providing details, I can tell you that Silverton disappears on the way north, and that Emmeline travels back 600 years to find him, in a manner plausible, at least to this reader. Silverton speaks, in almost fatalist fashion, of rules that govern our lives: “Everything’s guided by rules, isn’t it? Even the things we don’t understand. Our whole lives are spent trying to determine what the rules are.” I will not tell how the story ends, but don’t be surprised with the occasional spectral appearances of Queen Victoria and Emmeline’s recently-deceased father.

“A Casualty of War”
Charles Todd

We were so close to ending this wretched war. It was hard to watch
 men die when rumors promised safety and peace so near at hand.
                                                                                                A Casualty of War
                                                                                                Charles Todd

This is the ninth Bess Crawford mystery by Charles Todd. The mother-son writing team have also published nineteen mysteries starring Ian Rutledge, a police detective haunted by memories of the Great War. The Todd’s interest is World War I, and especially the psychological effects that War had on those who served: “As if the mind could cope on demand, and put the darkness away.” The authors are Americans, but their characters British.

The story opens in the War’s final days, with Bess Crawford as a nurse in a forward aid station. The Germans are in retreat. Twice, a wounded Captain Alan Travis, a Barbadian related to a wealthy Suffolk family, is delivered to the aid station. He claims to have been shot both times by another English soldier who looked like his great uncle. He suspects it was his cousin James, a brother officer whom he had met earlier while on leave.  It turns out, though, that James had been killed in action shortly after the two cousins met – thus, the mystery. Doctors and the military claim he suffers from shell shock, or what we now know call PTSD – Post-Traumatic Stress Disorder. After the War, Captain Travis is returned to England for rehabilitation, where Bess finds him strapped down in a mental ward. As her former patient, she disbelieves the diagnosis and feels responsible to right a wrong. She and her family’s trusted friend, Sergeant Major Simon Brandon travel to the Travis ancestral home where contested wills, imposter claimants and murder charges greet them. After some harrowing adventures, Bess and Sergeant Major Brandon prevail and Captain Travis is vindicated.   

Vera Brittain is a heroine to Beatriz, with her moving account of the Great War and its aftermath, “A Testament to Youth.” Brittain must also have influenced the Todds. “A Strange Scottish Shore” and “A Casualty of War” are fun and compelling reads. Why not jump around that river of time, if not literally at least fictionally, to a point when political partisanship was less vicious than today?

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Monday, November 13, 2017

"Moderation in the Realm of Politics"

Sydney M. Williams

Thought of the Day
“Moderation in the Realm of Politics”
November 13, 2017

Moderation in all things, especially moderation.”
                                                                                                Ralph Waldo Emerson (1803-1882)

When considering moderation in politics, we must differentiate between outcomes and process – ideologies versus behavior. The French political philosopher Montesquieu claimed humans naturally migrate toward the center – that policies are best that accommodate the greatest number. On the other hand, Adam Smith, in his The Theory of Moral Sentiments, suggested it is moderation in social interactions, regardless of political opinions, which allow people to relate to and understand one another.

Most Americans believe in a mixture of government and personal independence – an equilibrium allowing the country to prosper, while preserving the obligations society demands. Politics is the search for that balance, but it is a Sisyphean struggle that never satisfies everyone. Polarization is today’s political nemesis. Mainstream media argues that extremism, especially from the right, has made people yearn for moderation. As well, blame is laid on social media that gives expression to myriad views and inspires populist politicians to take advantage of the resulting (seemingly) broken system. Blame is also attributed to media outlets like C-SPAN, venues for posturing politicians playing to their ideological bases.

Those desirous for moderation in politics often hark back to the 1950s, a period seen as relatively quiet – a time of normalcy, to borrow a word from the 1920s. But that era of uniformity, in the long history of our country, was atypical. The number of newspapers had declined, and was still falling. Talk radio did not exist. Television was in its infancy, with only three network television stations, each with fifteen-minute or half-hour news segments. There was little difference between John Chancellor of NBC, Walter Cronkite of CBS and John Daly of ABC. There were no forums for alternative views. We were trapped in a monolith, with little option but to conform. But that is not as it always was. Pamphleteers and writers of broadsheets, in the early years of our republic, provided thousands of people the opportunity to vent individual opinions, much like bloggers today.

Five years ago, David Brooks wrote: “The moderate tries to preserve the tradition of conflict, keeping opposite sides balanced…that most public issues involve trade-offs.” But he added, “Being moderate does not mean being tepid.” I agree. It is not moderate outcomes we need, but moderation in the way we present and debate ideas – we should be civil, but should never underestimate the rarity and value of freedom. It is fundamental to our being, as Senator Barry Goldwater made clear when he declared in 1964: “Extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue.”

In the years since Goldwater spoke, our government has become more bureaucratic and, consequently, less free. Those who support more government search for opportunities that give breath to their desire for more bureaucracy. We saw it in the last Administration, from the environment to healthcare to education. The internet, its ubiquity, the memes it creates and its unwitting promotion of extremism, is another example. Claims that Russia hacked our election has given legitimacy to the demand for more regulation of the internet and social media. “The Economist” jumped into the fray this past week, with a title story sub-headlined, “Once considered a boon to democracy, social media have started to look like its nemesis.” The article referenced the disinformation campaigns of Vladimir Putin’s Russia into Ukraine, France, Germany and the U.S. They quoted officials from Facebook who claimed that Russian-paid ads reached about 40% of our population. But, keep in mind, Facebook has said that Russian ads added $100,000 to revenues last year, while total fourth quarter 2016 ad revenues were $8.81 billion. In the scheme of things, Russia was not that important to Facebook. Social media has allowed millions to express themselves, some in polarizing fashion, with many – perhaps most – making unsupported allegations. But, legitimate opinions, based on facts and solid work, are also expressed. (I could not write and publish as I do, without the internet.) Separating fact from fiction is difficult. In 1971, the economist Herbert Simon warned: “A wealth of information creates a poverty of attention.” With knowledge doubling every twelve months, the amount of data readily available has vastly increased and methods of communication are more varied and numerous than forty-six years ago. But, we restrict it at our peril.

Attempts to control or regulate social media lead to bigger concerns. Who, for example, will watch the watchers? Could not this become Orwell’s Big Brother in Oceania? The problem is not dissimilar to attempts to control campaign finance spending. Those in favor may be well-intentioned, but consequences are not always as intended. Well-funded candidates with smart lawyers find loopholes. I am not an anarchist, but I do know that every regulation imposed diminishes someone’s freedom. As a paid-up citizen of the U.S., I appreciate the need for government and regulation, but I also know that authoritarianism can descend from a bureaucratic administrative state.

In his recent book, Faces of Moderation: The Art of Balance in the Age of Extremes, Aurelian Craitu, Professor of Political Science at Indiana University, wrote that Plato defined moderation as “the virtue that allows us to control our passions, emotions and desires.” He noted that democratic institutions depend on politicians acting with “self-restraint, common sense and moderation;” yet “we live in a world of hyperbole and political intransigence.” In such a world, “moderation appears as a bland, incoherent and undesirable virtue,” unlikely to succeed in a political campaign. (Think of Mitt Romney – smart, decent, but unexciting.)

Political extremism does cause people to yearn for moderation. But, we should be careful, less moderation leads to uniformity. Many want the balance of which David Brooks wrote. But, do we arrive there with moderate-thinking politicians? Or, are we better off with those who believe passionately in their causes, but are flexible and pragmatically inclined to accept what they can? Like Stuart Little’s quest, the search for perfection in government goes on. We are a diverse nation, with multiple ideologies. We can and should debate issues, but in a forum of civility where principles are not sacrificed and where moderators (and the media) are impartial. It is compromise that is missing in Washington. When selective colleges put together freshmen classes they don’t seek the best all-round high school seniors; they look for the best musician, the best athlete, the best artist, the best math, science, history and literature students – all ‘extremists’ in their fields – to compose, in composite, a class that reflects the ideal they desire. Should not Washington have the best legislators, men and women who are principled but not inflexible?

Professor Craitu added: “An able politician…resembles a good funambulist: he or she needs balance in all respects, must be prudent, alert and quick to react…He or she must have the courage to go against the grain when needed, and should always demand the other side be heard on any controversial topic.” Self-righteousness and partisanship have become common in Washington. The moderation we need is in behavior, not policies. One should not be moderate in one’s views toward liberty, freedom and democracy.

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