On the morning of Monday, September 26, 2022, I sent the following note to clients of Berkshire Money Management:
“Due to publishing deadlines, this column is never real-time. For investors, a five-day lag typically does not matter. But these aren’t typical times. I had opined that the mid-June lows for the market would be tested and, potentially, violated. On cue, stocks flirted with that test before the column was published.
“What’s next? First, I’ll try to find the silver lining of the dark clouds and look into some tax loss harvesting while the markets are down.
“Second, I’ll consider what type of ‘insurance’ to take out on portfolios. Earlier in the year, we made allocation changes from growth-oriented equity to value and ‘buffer funds.’
“Some days, I feel as if I am the only economist/financial advisor saying it, but the U.S. economy is in a recession. Since World War II, the average market decline during a recession is 31 percent; it could be worse or less. With the markets currently down more than 20 percent, the stakes are low at this point. The stock market’s returns after a recession one year, three years, five years, and ten years later are 21 percent, 48 percent, 100 percent, and 256 percent, respectively. It seems that a 10 percent-ish downside risk is worth it for that type of potential upside.
“But I still have concerns.
“During a Face the Nation interview on Sunday, September 25, 2022, Atlanta Fed President Raphael Bostic said, ‘I do think that we’re going to do all that we can at the Federal Reserve to avoid deep, deep pain. And I think there are some scenarios where that’s likely to happen.’ It’s troubling that a Fed official ‘thinks’ the Fed will do all it can to avoid ‘deep, deep pain.’ Early in the tightening cycle, Fed Chair Powell said the Fed’s rate hikes could result in a ‘softish landing’ for the economy. Later he said it could bring ‘some pain.’ Then he acknowledged that no one knows if this process will result in a recession. And now, the Fed ‘thinks’ they can avoid deep, deep pain.
“This Fed was heralded as transparent. I am disturbed that they are not as sincere as we thought. Or, perhaps, they are just bad at their job. The downside risk may be low relative to the one-to-ten-year returns on the other side of a recession. Still, the Fed continues to lower my confidence and increase the likelihood of holding onto those value stocks and buffer funds.”
The June 2022 low saw an S&P 500 decline of 23.55 percent. The day I e-mailed that note to clients, the S&P 500 closed at a new low for 2022, down 23.80 percent. If the bear market happened to have ended that day, it would have been the fifth smallest bear market since 1930. That day’s breach to a new low told us that the bull didn’t start again after that June 2022 low. Instead, that day’s new low added 69 days to the 2022 bear market, making it the twelfth longest on record (16 other bear markets have been shorter).
The market is oversold and could rally hard for a while. But I suspect the final bottom won’t occur until certain macroeconomic factors are satisfied. The inflation numbers the Fed is looking at must turn down. The data I look at tells me that inflation peaked in June 2022, but the Fed isn’t buying my hypothesis. That should lead to interest rate stabilization. Stable rates are required for households and businesses to have better cost control. For now, the medicine of rapidly increasing interest rates is worse than the illness of inflation. And corporations need to prove that a wholesale revision of earnings estimates isn’t coming (or, worse, we need to get that out of the way).
Why did the price of ballons go up? Inflation.
A quick shout-out to Nate Tomkiewicz for sending me this “picture is worth a thousand words” graphic below.
The Pastrami Must be Amazing: Hazards of Greedy Investing
On April 26, 2022, I wrote that “the extra froth in the market has me worried.”
In retrospect, I should have been much more worried! In that column, I mentioned the company Hometown International. It was a “fun” way to point out the froth in the market. It was sporting a market capitalization of $106 million at the time.
I contended that Hometown’s financials were not impressive, given the valuation. Its total sales for the last three calendar years were $67,953.
What was this high-flying growth-stock company selling?
Sandwiches. It’s a deli. Singular. Not a chain. Your standard, run-of-the-mill, neighborhood sub shop. Or, grinder, if you prefer.
Hopefully, no one went out and started their own deli after reading that article. Because, surprise! Three men from the deli were charged with a scam associated with the company. The culprits included James Patten, a former stockbroker barred from the industry in 2006 over fraud allegations.
Without getting into the details, the men engaged in illicit trading to inflate the stock by 940 percent. The men pulled the same scam in another small public company, E-Waste.
Is there a moral to the story? Part of me wants to say don’t chase a stock just because it looks like it’s on a rocket ship to the moon. Case in point, how have the stocks of AMC and Bed, Bath, & Beyond performed this year? Or Peleton? Or Netflix? Ugh. So bad.
I want to say the moral is to use a financial advisor. As the owner of Berkshire Money Management, I would be giving biased advice. Besides, maybe even Mr. Patten gave some good advice before he became overly greedy. So perhaps the moral of the story is to do your research. Or maybe don’t trust anybody.
Or maybe—just maybe—if some broker is pitching you how good their returns are, you could nod and smile and say “sayonara, baby.” Perhaps that should always be the understanding.
I advocate for what the financial industry calls “passive investing.” Not necessarily set-it-and-forget-it because sometimes I make tactical moves to protect investment portfolios. But the other side of that, chasing returns, seems to be a fool’s errand. At least when compared to outperforming the broader market. The alternative to passive investing is active investing; the returns of active investing usually lags behind the market.
According to S&P Dow Jones, it’s been a “good year” (air quotes added for emphasis) for active large-cap domestic equity fund managers relative to the S&P 500. A whopping 51 percent of them beat the index (he said sarcastically). In 2021, 85 percent of the active managers underperformed. Over five, ten, and twenty years, 84 percent, 90 percent, and 95 percent underperformed, respectively. (Don’t let some bozo argue, “but I pick mid-cap stocks, blah, blah …” Active management relative to other appropriate benchmarks is also ugly.)
That being said, I admit to being active. But my active investing is different from many others. I make moves to defend the value of portfolios. Other active managers differentiate themselves by saying they’ll provide you with the best returns. That’s an admirable goal. Let’s be clear—I’m not saying I am better in terms of either returns or ideology. I acknowledge that my advice for most investors (professional or otherwise) isn’t necessarily always the same tactics I utilize. I’m not particularly eager to ride out market crashes.
As the owner of a financial advisory firm, I ask you to take my word for it. If you can handle the gut-wrenching short-term (sometimes year-long) drops in the market, you’d have done just fine in terms of performance if you bought something like the SPDR S&P 500 index ETF (symbol: SPY) and never looked at it again. That’s the key, though. Like, seriously—do NOT look at it. Because, as the saying goes, we’re all long-term investors until we see short-term losses.
If you’re a passive do-it-yourself investor, I applaud your stone-cold buy-and-hold strategy. That’s not to bash my fellow financial advisors (or myself!). I worked out with two such colleagues this morning who, I feel, offer tremendous value to their clients. I was texting last week with another, and next week I have a lunch meeting with two others. They all agree with me that the Wild West stock picking stuff is inferior to long-term investing. The real value to clients is providing answers to questions you haven’t thought of yet. There are great advisors right here in our backyard who can help with that. The problem is that the financial industry is awful at explaining the solutions provided for client issues. So I wrote a book promoting the work my fellow advisors perform for their clients. It is called “Don’t Run Out of Money in Retirement: How to increase income, avoid taxes, and keep more of what is yours.” It could have been subtitled “the things financial advisors forget to talk about but can do for you.”
Clients of my financial advisor colleagues can use this book as a tool to discuss how your advisor can further help you. Not to hawk the book, you can pick it up at Amazon. But to save you $24.99, I’ll write about those topics in upcoming columns from time to time. This will make it easy for you to forward ideas to your advisor and ask if the tactics to increase income, avoid taxes, and keep more of what is yours are appropriate for you.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
