Long before the credit crisis, you warned stocks were overvalued and housing was a bubble. Any surprises?
Even going back to 1998, I was counting
on the market coming back to what we consider a long-time normal price, around
900 for the S&P. We can’t say we were enormously surprised,
though now it’s trading below that level, because after a big bubble,
markets have always over-corrected.
And I was saying in 1998, when we were
horrible early sellers, for which I took a lot of
grief, that my next great mistake would be buying too soon. I
have no doubt that will happen. And we were buying in October, happily from a
very low base of equities. We added a big dollop of U.S. blue chips and two
small dollops of riskier assets — emerging markets and small-cap international
— to our asset mix.
Looking out over the next seven years, we see
annual returns in the range of 7 [percent] to 11 [percent] for all three asset
Is it time to buy stocks? Or could they fall further?
If you’re tough enough to hang
in there for a while, you’ll eventually get a decent enough return.
On the other hand, I think there’s a 2-to-1 chance it will go to new
lows in the near term. You need to build up some cash, though, because the
market could drop another 30 percent. We think it’s perfectly capable
of hitting 600 or below in the next year or so, which would be a great buying
opportunity for stocks. In the meantime, the market could be pretty brutal.
Will asset valuations revert to their historical means?
Yes. Reverting to the mean is a pretty
slow, mild process, but it’s dependable in the long run, say over
seven to 10 years. The market will go back up, the valuations will increase
from today’s levels, and over the long term you’ll do
pretty well. That said, it would be nice to have some ammunition to buy some
strong stocks when the S&P 500 hits 600 or lower. And that’s
what we’re planning.
We’ve kept some pretty substantial
buying power in most of our accounts — money in fixed income so we
can transfer into equities. If the market continues to drop at this pace, we will
be fairly steady buyers at intervals on the way down. We’ll throw in
most of our lot and buy stocks when the market hits 600.
What if you’re disillusioned by
is better than picking
a single asset class. Always. The problem this time is that the bubble was
centered in risk taking. Every risky investment had bubbled under the pressure
of too much money, too low interest rates, and too many hedge funds.
that every risky category of investment went down together. The only
diversification that mattered this time was in anti-risk asset classes, such as
cash and government bonds. Long government bonds last year were up 30 percent.
That was a huge diversification. And cash was cash. And that was one bet we got
right that helped a lot. Had we not diversified, things would’ve been
Do we need professional help more now?
It all depends on how much time
and energy you’re willing to put into it. I don’t think
professionals hold a lot of advantages, because even though they know what to
do, they can’t bring themselves to do it. It’s not good for
their business in the near term. An individual doesn’t have that
It isn’t that difficult to see when the market is
overpriced. So when the market gets way over 16 times earnings [roughly the
S&P 500’s historical price-earnings ratio], reduce your
exposure. When it gets down below that level, it’s time to buy.
You’ll outperform most professionals if you do something that straightforward.
So, go beyond just buying and holding good investments?
I think that’s a very low
hurdle. If you have no time and are completely traumatized and are thinking about
finances, then buy and hold some index and throw away the key. Buy-and-hold
works fine in an efficient market. But if you haven’t learned in the
last 10 or 15 years that the market is capable of being utterly crazy, then
you’ve learned nothing.
If you have a certain amount of self-control
and patience, you can move the pieces of investing — stocks versus
bonds and cash — around. Reduce the risk when people are too
aggressive and prices are too high, and increase the risk when everyone’s
Are you talking market timing or portfolio rebalancing?
No, not . It’s a
We were overweight emerging markets for 12
response to value. If it’s cheap, you buy it. If there’s a
sale on and you go and buy, I guess you could say that’s timing. You
time it for when the market is cheap. People think of market timing as hopping
in and out of the market, day-by-day tactical stuff. I’m talking
about long-term strategic moves.
years, because they were cheap for 12 years. And when they get expensive, we
get out. I call that sensible asset allocation based on risk and return.
timing, by the way, is a tag some buy-and-hold investors use to put down
anything that involves using your brain. These are the same people who like to
watch the locomotive coming and get run down in the name of discipline.
We were overweight emerging markets for 12