[This blog was originally published by Summitas at www.Summitas.com]
Talk about a tough audience… Last month I spoke to a group of younger members of some very wealthy families, people under 40 – some way under 40 – who were just beginning to take responsibility for the family capital. What timing! Can’t you just hear the conversation around the dining room table? “Well, Mom and Dad, I’ve been managing the family’s portfolio for one year now, and we’re only down 42 percent!” Ugh. Many investors are like deer caught in the headlights these days, but some of those young people seemed more like road kill.
My message to this group was that, whatever else they may have been hearing, the market turmoil was actually presenting them with some outstanding opportunities. To take advantage of them, however, they were going to have to stop the panic and start thinking rationally. Deep breathing exercises could help, maybe even taking up yoga, but the best way to put bad markets in perspective is to simply live through a bunch of them—even if you have to do it vicariously.
I’ve had the distinct displeasure of living through six Bear Markets in my adult lifetime. Let’s count them: 1968-70, 1973-74, 1981-82, 1987, 2000-03, and of course 2008-? The truth is, after the first three or four you begin to realize that Bear Markets are a routine part of the investment experience. In fact, without them you can’t have Bull Markets because prices wouldn’t start from a low enough base.
So the first thing I did with this group of young investors was to walk them through the Bear Markets I’ve experienced, noting why each happened (i.e., which bubble it was that burst), how bad things got, how long it lasted, and what the eventual recovery looked like. By the time I had droned my way through the first five Bear Markets my young investors were old pros. Suddenly, they were taking the current Bear in stride.
Now that we were all past the panic phase and again thinking rationally, the next question was the one all of us should be asking ourselves every day, in good markets and bad: How can I make money today? The nice thing about Bear Markets, it turns out, is that there are plenty of ways to make money, since everyone else is behaving badly. In fact, in my talk to the young investors I went through Twenty Things You Could Buy Today to make money.
One piece of advice I gave to them (and to you): Consider closed-end bond funds. These are mutual funds that never issue new shares – if you want to buy in, you call your broker and buy the share like it was a stock. If we lived in a perfectly rational, Modern Portfolio Theory world, closed-end bond funds would always sell at net asset value (NAV), that is, the value of all the bonds in the fund divided by the number of shares outstanding. But because we live in a post-rational, Postmodern Portfolio Theory world, closed-end bond funds always trade at premiums or discounts to NAV. During “normal” markets these premiums or discounts might be at the 2 percent or 3 percent level. But in the current market crisis discounts have ballooned out to 15% to 20 percent and even higher. Folks, this is like picking dollar bills up on the sidewalk.
None of us will ever be totally comfortable during Bear Markets, but like the young investors I spoke with, we can learn to think rationally during these periods, thereby improving our competitive position versus investors who are giving free reign to their panic.
Oh – about those Twenty Things You Could Buy Today? If you’re interested, click on the link below. There’s lots of Big Game out there, folks – Happy Hunting!
Please note that this article is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.