Boomer Market Advisor: Let's get right to it. When are we going to see light at the end of the tunnel?
Craig Columbus: I think a new administration provides important clarity. In an era where Washington is so important as it relates to investment markets, we need to stop ad-hoc policymaking. And the challenge that has really weighed on the market is that TARP, in all its iterations, has appeared so ad-hoc.
BMA: Are we doomed to repeat the stimulus mistakes of Japan in the 1990s?
CC: I think if it's aimed strictly at short-term consumption fixes, it will be largely ineffective. I think the infrastructure element of a stimulus program could be effective as long as there's some mechanism to prevent good money being thrown after bad.
BMA: There is belief that we'll come out of this sooner than most people think because of all the coordinated liquidity injections by central banks around the globe. Do you agree with that assessment?
CC: Six months ago, you would talk to European investors and they would still largely see this as an American problem. I think that level of coordination is very encouraging, particularly in the case of the German Central Bank. It's good to see that the western world is not relying on the United States to be the only oar in the water.
BMA: What are you telling your clients at this point? Can you still sell "stay
the course"?
CC: I think clients need to be adaptive because we're going where no man has gone before. You can draw analogies to the Great Depression, but at the end of the day they're not one-for-one.
BMA: We've been taught for longer than anyone can remember that "It's different this time" is a very dangerous phrase. But that's what you're saying?
CC: The macro-environment is different because the size of the debt issuance is so large. In inflation-adjusted dollars, World War II was about a $3.5 trillion undertaking, by far the most expensive we've seen. When we're all said and done here, I think we'll have a similar size cost to the current undertaking. So therefore, I think we will go through a period of significant adjustments or dislocation. Now do I still think diversification is critical? I would argue it could become even more critical. It will not just be diversification by asset class but diversification by instrument as well. I think that is a way that you can repair the portfolio.
BMA: Can you get specific about the instruments that are particularly effective right now?
CC: We do some covered call work, which would be an example of a way to get some exposure. We have a large cap growth strategy where we have a constant hedging piece. Let's say it's 80 percent net long, 20 percent constant inverse or 60 percent net exposure; we have a strategy like that. For certain clients, structured products are something to look at.
BMA: Are your clients familiar with behavioral economics? Do you talk about the concept with them?
CC: As a practical matter, no.
BMA: Do you describe the principles behind it without actually naming the term?
CC: Yes. And there is no question that while we are going where no man has gone before, there are still valuation anchors, and there are still technical anchors that allow us to put some of these events into context. I think now more than ever there's a struggle going on between the concept of portfolio repair and the uncertainty overhang. And I think with most clients - much like the 2000 to 2002 period - it's going to take time to repair the investor psyche.
BMA: When we talk about behavioral economics, a big part is loss aversion. How does that play out with your clients? Are they frozen in fear?
CC: We spend a lot of time talking about risk management. But there are no easy answers to risk management; they all come with tradeoffs. I think clients are willing to accept some of those tradeoffs. You see much more receptiveness on the part of clients for exactly the reasons you stated because there is a very strong loss aversion, particularly given current volatility. We did a study that showed in 2008 there were 16 plus or minus 5-percent days on the S&P 500. In the prior 10 years there were a total of seven. So the volatility is so jarring.
BMA: What about the value of dividend investing in the current market?
CC: I think you often hear of clients trying to adjust to living a low-yield world because, while there may be a price to pay in terms of future inflation, the velocity of money has essentially collapsed. A study of Japan shows that yields can stay low for a very long period of time by virtue of quantitative easing. I think that's one of the great challenges of investing. If you go back and study other slow growth periods like the 1970s, in particular, dividend yield becomes increasingly important. Now there's a lot of yield mirage out there or unstable dividends, but essentially in the 1970s two-thirds of the total return to equities came from dividends. I think that's a huge point.
