Frank Boland's blog

As we all know, it is difficult to go against a crowd’s belief. Religious scrolls are filled with stories of those who did … and died. Such conflict often crosses over from religious to secular situations. Such a juxtaposition occurred in the 17^thcentury as Galileo hypothesized that the earth revolved around the sun. The crowd, with the hierarchy of the Catholic church, imprisoned him for the last 11 years of his life.

With most mistakes we make in life, we have no idea of what the immediate outcome will be. There’s just a feeling it will be negative. But in the investment world we often know quickly what the mistake is going to cost us. When that happens, it is unnerving because we now know that the emotional impact of losing money is 2.5x that of gaining it. We always knew this intuitively, but it wasn’t until psychologists Kahneman & Tversky received the Nobel Prize in Economics in 2002 for proving it that we could acknowledge what had previously been just an innate feeling. 

The last time inflation and interest rates started to rise simultaneously was 58 years ago. Then, as now, it had its genesis from too much government spending. The process was euphemistically called “Guns and Butter.” “Guns” represented the expense of the Vietnam War and “Butter” was the euphemism for the then newly introduced welfare structure in 1965. Little has changed. Currently, entitlement programs are still a growing massive part of the federal budget (49%), and we are currently in a proxy war with Russia and possibly China.

If the “name” CMGI isn’t familiar to you, it’s probably because it’s an investment story that’s over half a century old. Yet, its relevance to FAANG and technology stocks today is remarkable. In its time, it was one of the few stocks whose trading symbol was better known than its corporate name of College Marketing Group Inc. Others similar with symbol familiarity were RCA in the 1920s and IBM in the ‘50s.  All three represented technological advancement.

As you might recall, we identify the period of 1955-1956 as the beginning of the modern investment era. Prior to that, stocks had yielded more than bonds as they were deemed inherently riskier. It was a belief that changed in the 1950s with the arrival of Jerry Tsai at Fidelity Investment Management. His mother, who had influenced him throughout his life, was a stockbroker in Shanghai, China. Tsai had gone to college here graduating from Boston University with an MBA.  Fidelity Capital Fund was launched in 1958 with Tsai as the manager.

“The Road to Hell is Paved with Good Intentions.” Such is the old (1828) Portuguese proverb. It would seem to be a reasonable description of the Federal Reserve’s prior policy for 12 years with interest rates at 0%. Ironically, there are also 12 Federal Reserve Governors on the Federal Reserve Board. These board members have more than 400 Ph.D. economists giving them their “expert” advice.

Mansions result from great partnerships. It was a lesson I first learned as a 12-year-old caddy. I would always ask the person I caddied for what he did for a living. To me, he was rich, and I also wanted to grow up and be rich. However, my father had inculcated me in the belief, that if I wanted to succeed, it would be solely up to me. His father had been killed in World War I, and his mother moved from Canada to Boston. He was placed in an orphanage while his three sisters stayed in a convent in Nova Scotia. His mother went to work as a housekeeper.

Price distortion in the stock market started in 2005 with the impact of high-frequency-trading. Three years later the Fed responded to the debt crisis with 0% interest rates. Both events would lay the groundwork for price distortion. Zero percent would obliterate active stock managers and give rise to trillions in index funds. The zero-interest rate policy set up what was to become a negative feedback loop. Over half the stock market became indexed which effectively removed it from the process of individual price discovery.

As I pulled into the parking lot of Pier 4 on the Boston harbor, I was stunned by what I saw. To my right were two colossal ocean liners, each about 1,000 feet long. The ships had large flags reading, “Welcome to DEC World.” It was 1987 and Digital Equipment was then a 14-billion-dollar computer company, second in size only to IBM. The ships had been hired to be used as hotels because every hotel in Boston was full; over 42,000 people had arrived in the city that week as “DEC World” guests.

Since 1956 there have been 10 bear market cycles when the market declined 20% or more. The first one led to the ensuing 1957 bull market that would give birth to the modern investment business. It also pioneered a new sector, then called electronics, now known as technology. In 1958, Jerry Tsai was chosen to manage the new Fidelity Capital Fund. Roland Grimm – the Fidelity Trend Fund manager – would tell me years later, “We had just 25 million under management and lost money every day we were open.” But that new bull market changed the investment business forever.