Part Two: Editors Roundtable - December 2014

Steve McDonald
by Steve McDonald

[Music playing]Joel Bowman:So the question, I guess, is, are we – five years later, are we closer to the bottom or closer to the top?Steve McDonald:In this market?Joel Bowman: Historically we have, and I'd be interested to hear everybody's opinion here because historically the average bull market since the Great Depression lasted, I think, about 4 1/2, maybe five years or about 5 1/2 into this one, are valuation's screaming “Sell” or are they screaming “Buy”? I mean, it's – is this a 2008 moment or is it – you know, nobody knows –

Steve McDonald: This is Australian perspective.

Joel Bowman: Nobody knows where the stock market's going to be, of course, in six, eight, 12 months' time, but based on the kind of stuff that you guys look at.

Marc Lichtenfeld: I think this is kind of an example of some of the things that are wrong with the media in general is that it doesn't have to be a screaming “Sell” or screaming “Buy” moment. We know the markets go up over the long term, and they go up a lot. So if you have a long-term perspective, I see there's absolutely nothing wrong with and encourage to start buying now if they haven't yet, not to hold it for six months, unless it's purely a trade. That's a totally different animal, but if you have a 10-year time horizon, even, you know, seven years, I think you'll be perfectly fine investing today. Are valuations more rich than they were a few years ago? Of course they are. Historically, they're not super expensive. They're just slightly above the historical average of the S&P 500. Yeah, the P/E is just slightly above the historical average, so for a long-term investor, I think you'll be absolutely fine being in the markets today, and even in getting started if you haven't yet.

Alex Green: And incidentally, when people say, "Are we going to stay in a bull market or not?" one of the things you have to think about is there are secular bull markets and there are cyclical bull markets, and the difference is this. Some people say that the great secular bull market of the '80s, which began in 1982, didn't end until March of 2000. One gigantic move that lasted 18 years, okay? But, along the way, you had this very nasty day in October 1987 when the market dropped about 23%. And we also had a technical bear market in 1990 when Saddam's troops rolled into Kuwait. And yet, if you look at that period of time, it was a huge, as I said, 18-year bull market. Now, we could be in that kind of a market now, but that doesn't mean there's not going to be some nasty drops along the way, so my perspective is always you want to hope for the best but plan for the worst because no matter what you think may be ahead of us in the market, things may not work out the way you expect them to, and so you take certain steps, you asset allocate, you use position sizing on your stock portfolio, you run trailing stops to protect your profits and your principal, and that way, no matter what you think is going to happen, you're prepared for whatever might happen, and that's what sophisticated investing is really about.

Matthew Carr: Yeah, I always believe that you always have the opportunity to make money regardless of what the market is doing, and it's – right now, I think the best approach has been, you know, just buying those dips. We've had a number of dips every single year, big huge pullbacks, you know, 5% to 10% like we had in October. Just attack those.

Steve McDonald: It kills me. I get up every morning about 5:30 and I turn on Squawk Box because the first hour of Squawk Box, you know, I know you have to –

Matthew Carr: It's the same show I watch – I do the same thing – 5:30, watch Squawk Box.

Steve McDonald: And it's only the first hour because you have to ignore all the distractors on top and bottom of the screen. You have to ignore the people who work for CNBC. You have to ignore that little box on the side where they keep flashing what the futures are doing, and you have to listen to the guests, because they get the best minds in business. And I get up and I turn this on and I'm just stunned at what the people who work for CNBC say. They'll say things like, "The market is really getting hammered today, you know, it's off 245 points." Well, 245 points in terms of a percentage is – yeah, the market to equal the 1987 crash has to be 3,500 points in one day. That's how bad it can get out there. But my point has always been the media always looks for a way to distort the reality of the situation. The reality is, if the market's down 3,500 points, I'm buying anything I can get my hands on. Are you kidding me? I had a friend in the – let me just finish this one point, otherwise I'll cut you out of this completely.

I had a friend in the brokerage business, and that day that that market was selling off, I'll never forget it. He's banging the phone on the desk going, "Do you hear that? Do you know what that is? That's opportunity, you idiot. We're buying. We're not selling." And he hung up on every client. It was unbelievable. And he was dead right. Go ahead, Matt.

Matthew Carr: Oh, no, I was just going to say the same problem with the media and the way stuff moves. I get mad coming into work, you know, listening to radio, the financial news coming in. If it's down 10 points, they're, like, "It's a bad day for the markets – pre-market. We're already down 10 points." You know, and if you're up 160, they're, like, "Oh, well that was a good day." You know, if it's up 20, they're, like, "Oh, it's going to be a big strong bullish day. You know, pre-market we're up 20 points."

Steve McDonald: The markets are looking good today. We're up 20 in the futures. I'm sorry, Alex.

Alex Green: No, I mean, you're right. All this narrative about why the market's doing what it is, as if they can divine that what's going on in the minds of millions of investors who are actually out there transacting. I mean, one of the silliest things I often hear is “Why is the market down? More sellers than buyers.” Except when you stop to think that there has to be someone on the opposite side of every trade, so every day there are exactly the same number of sellers and buyers because someone's got to be selling the shares you're buying and vice versa. So yeah, the media – sometimes it's distorted. Sometimes it's just nonsense, and I think to be a good investor, you have to be able to simply keep the white noise out of your investment perspective and realize what the media is doing and why they're doing it because the media doesn't exist to deliver objective truth; the media exists to sell advertising, and the way you sell advertising is you grab viewers, and the way you grab viewers is you scare the pants off of them by telling them a plane crashed in Nelson County, details at 11:00, and get them to tune in.

And they do the same thing with economic statistics and earning reports and bankruptcies and so on, and it gives people a distorted view of what's happening because most Americans are going through their day in peace and affluence and no great disruptions, and yet, you turn on the TV and it's just explosions and fires and some terrible event somewhere, which is a terrible distortion of what's actually happening. The truth of the matter is the media doesn't do long-term incremental improvement well. They're really – if it bleeds, it leads. That's the whole mantra of the media, and so it delivers a very distorted view of the world, and that can't help but affect people's perceptions when they go in the market to invest.

Steve McDonald: All right, let's close –

Joel Bowman: Long-term incremental improvement is a pretty boring headline. But to be fair, even if it's delivered by someone as good-looking as most of the Fox News presenters are, that's still a boring headline.

Alex Green: But let me just say that what the media misses is living standards have never been higher, human longevity has never been greater, educational attainment has never been higher, we're living longer, healthier lives with more modern conveniences than ever before. Our great-great-grandparents would think that we're living out a utopia, and yet turn on the evening news, and what does it look like we're living through. And not that that stuff isn't real; it's just not an accurate depiction of the world at large.

Steve McDonald: Well, let's close out with this. What can we do to change it? Because something's got to give here. We cannot continue to have what I call a nation of money morons, which is what we are, and I don't think it's our fault. I don't think it's the fault of the average guy. You know, nobody's taught anything in school. I mean, I learned about – even in college in economics and business I learned about widgets and how the banking system creates money and supply and demand and Keynesian thinking. And the first day I walked into a stock brokerage to work, my manager said, "So are you good a stock picker?" and I lied and I said yes. I didn't have the faintest idea how to pick a stock, you know? And what do we have to do? What has to happen?

Alexander Green: I'd say it starts with the “off” button, because you're not gonna change the nature of the media. You can only change your relationship to the media, and personally I just don't watch TV news. I don't feel like I need to get my newsworthy information from a TV channel.

Joel Bowman: Yeah, I think you have to be really self-selective when it comes to the kind of media that you intake. I mean, it's kind of difficult. You can be at a – I was in an airport yesterday and there were televisions blaring everywhere. You get in the taxi and the radio's on telling you the end of the world is nigh, et cetera, et cetera. But I think if you whittle down the bombardment of media intake that you have to a small and select group of individuals that you trust and you would feel safe putting your money with, then you're probably ahead of 99% of the population.

Steve McDonald: Yeah, but boy, the noise between that – that decision and where most people are is just awful.

Matthew Carr: Yeah, I agree with Joel. I mean, you just have to be self-selective. You know, there's always two sides to every story. I mean, I'm kind of amazed right now – you know, the Greek stock market collapsed the other day. They didn't even make a blip. But two years ago that was headline news, like, every single day about how bad the situation was in Greece. And just do your own due diligence.

Marc Lichtenfeld: I'm going to go a little bigger picture and say we need to be teaching financial literacy in the schools. That might not help the current generation of adults, but it could vastly improve things down the line. You know, our kids aren't taught really anything about how to manage even just personal finance, how to understand whether something is a good investment – a stock, a business, a bond, anything like that. So everybody's so focused on these test scores for math and science that they're losing a lot of other important things, such as balancing a checkbook, which is I think a pretty important skill for any kid to learn to be an effective adult. So I think if we can start teaching kids a little bit about money, by the time they'd get to be adults maybe they won't be as affected by some of this deceit.

Steve McDonald: I have four sisters who need to learn how to balance a checkbook and I'm going to send them to you. [Laughter] Let me leave you this month with this thought. I want you to take a little time this week and think about your personal money history, and think about how much money you'd be worth if you had ignored the headlines, if you didn't sell in 1987, if you didn't sell in 1994 and 2000 and 2008 or 2009, if you were a buyer, if you had ignored the noise and the press and bought, or just left it alone for that matter. How much would you be worth today? It's – I sat back and went back through it before I actually got involved in the business, and it's scary. I mean, it's really scary if you go back and look at your account statements and see when you sold and match it up to the news stories and what was going on. It's really pathetic.

Thank you, guys, so much for your time. I really appreciate it. For everybody here at the Editors Roundtable and at The Oxford Club, I’m Steve McDonald. Thanks for being a part of us. We'll see you next month.


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