Frank Boland's blog

It is always after a stock’s decline that one discovers the reason it had previously been going down. The more parabolic (straight-up) a stock’s previous assent has been, the greater the need for a sell discipline. If you’re an investor on your own, or are looking to hire a portfolio manager, you or they must have a SELL discipline. We certainly know this from the extent of declines occurring in the current bear market. The average stock is down 30%!  Percentage declines of 50%-90% are common.

The last time the Federal Reserve was faced with raising interest rates - on a secular basis - was almost 60 years ago. Of course, no one could have imagined, three generations later, it would happen again. Both times it was thought to be a cyclical or “transitory experience.” In 1965 Fed funds were 1% on a 17-year journey to 20%! This resulted in the stock market going through several cyclical bull and bear markets going nowhere until 1982. Current Fed chairman Jerome Powell was 12 years old when it started. This time Fed Funds were lower at .0% on the way to … and for how long?

When a phrase of two words becomes famous, it’s not only apt to be truthful but powerfully accurate.  “Creative destruction” was first articulated by Austrian economist Joseph Schumpter in 1942. He used the phrase to describe capitalism.  It meant any innovation in the manufacturing process which increased productivity. Schumpter intended the phrase to describe what he called, “the essential fact about capitalism.” To him it was the crucial reality of how capitalist economies evolve and grow.

Those who are born mathematically “gifted” often develop an elitist attitude. Society reinforces that with movies such as “A Brilliant Mind” (John Nash) and “The Theory of Everything” (Stephen Hawkins). M.I.T. Professor Paul Samuelson personified this cultural mindset when he said, “When the worst economics grad student leaves M.I.T. and goes to Harvard, both of the departments’ averages go up.” As you may know, Samuelson taught in the 20^th century at a time when economics was heavily mathematical winning the Nobel Prize in economics in 1970.

In the last century, one could walk into a building and see plant and equipment. That’s not possible in today’s knowledge/service-based economy. Assets are “soft,” even invisible. The result is that we are forced to trust the validity of published numbers. However, given the deceptions that occurred with Enron and WorldCom, we know it is risky. It’s often revealed in bear markets. Computer Sciences was the first software fraud to be charged with a false statement of profits (2.8B) in 2006. The next major fraud will once again be in software.

A pale green Pontiac Bonneville had just pulled up to the front of my parent’s two family house. The car was a “monster.” It “dripped” of chrome and weighed in excess of 5,000 pounds. At the time, I was a 12 year-old caddy as was Peter Lynch. It was 1955 and that car was a major status symbol. The man who owned the Bonneville had been an army buddy of my father’s ten years earlier in the war. But that day he was an investment salesman selling a “Contractual Plan” for Fundamental Investors, a mutual fund. A product that cost 8.5% a year. Not 1%.

As you might recall, Cathie Wood’s ARK Disruptive Innovation fund was up an amazing 60% in 2020.  The S&P 500 was up 16% that year. Thus the fund outperformed the S&P 500 by 46%! Last year it was down 25% underperforming by 50%. But that’s not why I consider the actively managed ETF a hedge fund. It’s because it has the macro based investment style that is often used by hedge funds.  Macro is a top down style attempting to identify a global event that could occur.

Bank of America recently published a chart showing the entire history of long-term interest rates. The piece was titled “The 5000-Year View of Rates & the Economic Consequences.” While not from the dawn of time, it is from the dawn of civilization starting in ancient Suma. The chart showed short- and long-term rates through this time period.

An analyst at J.P. Morgan recently wrote about Amazon, “… next year its business will exceed Walmart’s and become the largest retailer in the world.” Jeff Bezos is already one of the richest men in the world. But what is more startling; his wealth of close to $200 billion or the short timeframe in which it was created? From the time of the industrial robber barons to the knowledge/service-based fortunes of today, no one has ever become so rich so fast. Tim Berners-Lee’s creation of the coding for the internet in 1989 had made it all possible.

Fortunately, it is rare to see anguish on someone’s face. One day in New York, near the end of 1987, I did. The October crash was still vivid in everyone’s mind. As I opened the door of an “upstairs” trading room, I saw a friend at the far end of the long trading desk. He was standing with a phone pressed up against his head gesturing frantically. Prior to going “upstairs,” he had been a specialist on the floor of the exchange. I had seen such behavior from him before, but I had never seen his face that flushed with anger.