April 15, 2020
A message that started out as a memo to staff is expanded upon in this newsletter as Chris elaborates on his investment management philosophy and ponders what financial advisory/investment management practices will stand the test of time.
This article was originally published 4/22/2020. It was updated on 4/24/20 for clarity of language.
I recently sent this brief message to our staff. I am now sharing it with you, partly because it articulates what I believe is a foundational element of our investment management philosophy.
All of us are unsettled (to put it mildly) about the state of the market and the worldwide health threat that is driving its gyrations. But as someone who has survived 57 years of markets characterized by euphoria (“we are rich, rich, rich”), by despair (“all is lost”) and by boredom (“let’s just close up shop and come back in 3 months”) I can tell you that, however tempted we may be to believe that these, or any, market conditions are the determinants of our economic well-being (or lack thereof), it just isn’t so. If you own good assets, properly diversified and properly managed (that is, you have someone who knows what’s what minding your store), then the price levels at which particular markets trade is of no matter (that is, of no economic matter; emotional matter is another ... matter). But all bets are off if at any point you abdicate your good sense and let despair force your hand (that is, sell indiscriminately at market lows) or let euphoria force your hand (that is, buy indiscriminately at market highs).
One of the reasons there is so much emphasis on the long term in the investment community is not because there is going to be some magic moment at the end of the day when all will be well. There will be no such magic moment. Instead, there will be a lifetime of moments (good, bad, indifferent) which have the practical consequence of averaging all these price levels into the value of your holdings. And if you have stayed the course and followed the rules (good assets, adequately diversified, a competent store minder), you should do just fine.
A final thought. What is true for investors is true for WEIL. We are here for the long term because, in case you didn’t catch it above, we are the store minders for hundreds of families who are themselves here for the long term and who view us as partners in their lives.
By now, I’m sure, you do not need to hear another word on the current impact of the pandemic on your personal lives because I know you are doing all you can to mitigate that impact: maintaining social distancing; staying hydrated; supporting, at a distance, the needs of your family, friends, neighbors and community; exercising; washing your hands/sanitizing frequently. And even as we are living with and through all this, we know that, while we cannot control which of the various traumas Nature/God/the Universe (or human ignorance) decides to unload on us, we can choose our response. We can use this time of internal exile to bring to life what is best in us and what is needful in the world. So stay creative, stay constructive, stay productive and stay affirmative.
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I have written before about the hazards of prediction. Forecasters, futurists and other would-be predictors of outcomes arising from current circumstances run a common risk: that is, of being flat-out wrong. Think 2008/2009/2010 when the common wisdom held that “interest rates are going up.” Think the 1980’s when the common wisdom held that “the USSR will always be a powerful adversary.” Predictions are particularly problematic if, as individuals, families, businesses, nations, we choose courses of action based on the belief that such predictions have the status of settled fact (which is the curse of ideology, by the way).
With this said, I am going to identify what I see as some of the longer-term consequences of the pandemic that seem to me likely to reshape both individual and institutional lives and, so, the life of the country. And yes, we at WEIL are going to have to make some decisions based on these consequences (more on this below) even at the risk of calling it wrong. But fortunately, “calling it wrong” need not be as risky as it sounds. First, diversification tends to hedge the (inevitable) wrong calls; and second, there are gradations of wrong calls - some “wronger” than others. So “wrong” might simply mean we didn’t do as well as we would have done had we made the right call.
So ... here we go (with one last qualification: while we live in politicized times my hope is to remain agnostic here as to the political implications of these scenarios. I want to describe what I see in as cold-blooded a way as possible and leave to others the hot-blooded arguments and disagreements these scenarios may invoke).
Since the birth of the Republic there have been deep disagreements as to the role of government in the national life, individual and institutional. Oversimply, the argument has often come down to a question of size: should government, and particularly the federal government, be “big” or should it be “small”? Without getting into a textbook-length discussion of the issue, it seems to me that the pandemic has offered a clear example of where “big” might be preferred by many. The full impact of government intervention will not be understood for some time and, yes, there is much to criticize in some of the ways in which the intervention is being executed. But the brute fact of the intervention itself – unprecedented (at least since World War II) in its scope and comprehensive “touch,” its massive provision of financial aid and its intrusiveness, with virtually no dissent – now seems to be widely looked upon not just as a “good thing” but as a necessary one. For now, at least, the argument that the intervention, in principle, is a mistake appears to be a fringe position. Virtually everyone agrees that, but for the intervention, the consequences of the pandemic, already terrible, would be orders of magnitude worse. And who but “big government” has the power, the resources and the will to respond to this kind of national, indeed global, tragedy – of which, it will be contended, there are more to come. A defense of small government now becomes an argument for the risk of widespread helplessness and thus its corollary, significant death and destruction, as and when another large-scale disaster strikes. My sense is that this will be politically unacceptable on its face. Big government wins by default.
Of course, we live in a double entry system: for every debit a credit, for every credit a debit. The longer-term consequences of big government, whatever might be the advantages (including, of course, its advantage as intervenor of first resort whenever widespread disaster strikes) are troubling. Why? The reason (not the only reason, I am sure some people would say, but the one I am focused on) has to do with debt and deficits and their implications for the health of the economy. These are huge and controversial subjects, and you will have to forgive me for giving them a once-over-lightly treatment. All I want to point out here is that what will certainly constitute a threat to the nation’s well-being is evolving and big government is the lead dog in this evolution. Why? The federal debt, including the estimated amount of the contribution to the pandemic intervention, now stands at about $23.5 trillion (not including unfunded Social Security and Medicare “promises”). Before the pandemic effect, 2020 federal government income, largely tax collections, was estimated at $3.5 to $3.6 trillion versus an estimated $4.7 trillion of expenditures. The resultant deficit would then be about $1.1+ trillion.
No one really knows the full extent to which the pandemic will impact that deficit, but we do know that tax collections will be less and government expenditures will be more. Conservatively, it looks like a deficit in the range of $3.8 trillion and, therefore, a federal debt at fiscal year-end of about $27.3 trillion. Furthermore, any pre-pandemic estimates of tax collections in out years are now clearly obsolete. No one knows to what extent personal and business incomes, and so tax collections, will be impacted longer term – but the consensus is that the effect will not be trivial. So, we face a growing federal debt into the future, from a level today that is already troublesome. Some will argue, magnitudes notwithstanding, that these debt and deficit issues are manageable. Perhaps, perhaps not. But the federal debt and deficit must now be considered in conjunction with other prospective contributors to our debt and deficit problems. These items include, primarily, funding shortfalls in Social Security, Medicare and material underfunding of state and municipal pension “promises.”
Debt obligations cannot increase forever. Government “promises” will continue to be called on and at an accelerating rate. While there are a number of ways of dealing with these issues, one of them – reducing the size and thus the cost of government – may not be on the table ... if only because the capacity (from the military, law enforcement, medical/public health and particularly financial establishments) to respond to a major disaster will require that a large and powerful government be in place. So what does all this mean longer term? First, if debt needs to be paid down and the costs of government cannot be materially reduced, then taxes will have to go up. Second, if the capacity to satisfy promises made by various government entities to its claimants degrades, then such “promises” may have to be “renegotiated” (that is, reduced).
The punch line: if large numbers of people have to pay materially more in taxes or live with materially reduced benefits, or both, there will be a materially negative impact on, among other things, consumer spending. This translates into a materially negative impact on GDP – of which, remember, consumer spending is almost 70%. All this, in turn, translates into a real future possibility: a slow, low or no-growth economy. All is not gloom and doom. We are facing a long-wave phenomenon, which means we have opportunities, over time, to course correct. But, obviously, an opportunity will come to nothing unless exploited. Exploitation requires an informed citizenry, activist advocacy groups and courageous politicians. We will see.
As recently as a month ago, I was pretty sure that one consequence of the pandemic would be a radical reorientation away from office-based to home-based work. One month later ... well, maybe not. Three reasons: First, many jobs, probably a majority, simply cannot be performed off-site. Second, based on my own experience, personal productivity takes a hit. Off-site, I work (and I suspect others work) at an estimated 80% of my on-site productive capacity. On the other hand, the experience of some of my colleagues here at WEIL is that they are not only working more, but also more efficiently. So, we await empirical evidence to see whether I or they are in the mainstream. Third, critical synergies that occur when employees are clustered on-site do not often work, or work badly, at a distance. By synergies, I mean not just the periodic emergence of good ideas when people are working together in a group setting. It is that and more. It is the team-building, the comradery, the assessment of each other’s strengths and weaknesses, the mutual support, the disagreements, the learning, the acknowledgement of successes large and small, all these and more – part of the normal routine when we are together, weakened or flattened when we are not. This does not mean that some employees may not change their work venues from offices to homes. Some certainly will ... but perhaps not enough to threaten office-building landlords and not enough (unfortunately) to relieve freeway congestion.
Finally, given all we know and all we don’t know about how economic life will look next week and next year and three to five years from now, we at WEIL are undertaking a full-scale rethink of the conditions which we must satisfy if we are to continue as successful “store-minders” for all those, including our own families, for whom we work. Basically, we are asking ourselves four questions:
What are the components of our financial advisory/investment management practice that will continue to stand the test of time, no matter what the economic environment?
Are there components that need strengthening (more staff, more investment, more education)?
Are there components that are or will become obsolete, and should therefore be discarded?
What new components should we adopt that will be responsive (insofar as we are able to judge) to any economic environment?
The original Christopher Weil & Company was formed in 1971. The founder was first licensed in the investment business in 1963. Many WEIL people have been with the firm for decades. We have done business with thousands of people under all kinds of conditions. Altogether, we have enough “time in service” to qualify for the rethink we are now undertaking. We also recognize that we are faced, as we move forward, with a once-in-a-lifetime “wild card” that will be a constant presence in our discussions. That is, how will the pandemic and its consequences rework the structure of business and government and how will it rework individual attitudes regarding employment and job security, compensation, health care (adequacy and cost), comfort in crowds (theaters, sporting events, public transportation, restaurants), travel (planes, trains, automobiles ... and cruise ships)? I could go on, and so could you.
The WEIL staff values your input. Please send us any ideas you may have that strike you as relevant to our discussions. Periodically, we will publish what we are discovering as we move through this process.
Chris Weil
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