STREETWISE: Patience and fortitude remain a necessity in equity investing

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Let us test the memory of older readers; for my younger readers here is a bit of history.

How many of you can recall an advertising campaign from decades past: “When E.F. Hutton talks, people listen.” If you can then you have probably been around the markets about as long as I have.

Looking back into history in the 1970s and 1980s, Nearly everyone on Wall Street paid more than a little attention to what Henry Kaufman had to say about the economy and interest rates.

Never was that the case more than nearly four decades ago, when the celebrated Dr. Doom, as the widely followed former chief economist of Salomon Brothers was popularly known, reversed his longstanding bearish outlook for bonds.

That sparked a then-record jump in stocks, recounted in Kaufman’s latest book, due out next month, “The Day the Markets Roared.”

Salomon has long since passed into annals of Wall Street history, along with E.F. Hutton, Bache, and scores of other brokerages. The result is a relatively few financial behemoths that control an unprecedented share of the financial markets. This, in Kaufman’s view, is a disconcerting aspect of the current Wall Street landscape.

Monetary policy is now the opposite of what it was when Kaufman made his famous call in 1982. The Fed, then under Paul Volcker, had raised interest rates to unprecedented levels to squeeze out inflation, at the cost of back-to-back recessions in 1980 and 1981-82.

In contrast, today’s Fed has lowered the fed-funds rate to just above 0%, while pumping in $1.44 trillion a year with its securities purchases.

At the same time, the Treasury has been able to fund fiscal packages totaling over $5 trillion at historically low interest rates. And the stock market has recovered to record highs. So, what is the problem?

It all reminds me of a marquee outside of a local restaurant. It said, “Be careful about following the masses for sometimes the letter ‘m’ is silent.”

Those words succinctly describe what happens every time the markets exhibit increased volatility. So, each time the Street vents its frustration, sending the major market indices into a temporary tailspin, should you react? The answer is no.

There is no need to regurgitate the continuing negative effect the coronavirus or COVID-19 is having not just on the stock market but on our daily lives. Unfortunately, the impact on both is likely to continue for some time.

Does that mean my views on equity investing have changed? Absolutely not. If your research has given you confidence in the long-term future of a company, (2 to 3 years), use the current volatility to buy when others are selling.

Yet, whenever there is a market downturn the Chicken Little syndrome comes into play with every financial Paul Revere shouting “the correction is coming, the correction is coming.”

The fear of impending doom is often a promulgation of theories utilizing indefensible assumptions grounded on questionable data. So, what is your defense? Regardless of the veracity of innumerable market theories, having a combination of patience and fortitude remains a necessity.

An investment methodology focused on capturing dividends has historically helped insulate portfolios from market declines, while utilizing the recommendations of prognosticators without doing your own research is fraught with risk.

Thanks to the First Amendment anyone can, without recrimination, go off half-cocked blathering prose that is tantamount to carrying a sign saying “Repent now, the world is coming to an end.”

One investment house was given to state that it is delusional to think you can expect to increase your wealth by investing long term. Such comments are often followed by the often incorrectly sourced quotation from John Maynard Keynes, “In the long run we are all dead.”

Interestingly, Keynes’ statement appears not in his meteoric work, “The General Theory of Employment, Interest and Money,” as many mistakenly state but rather in his 1923’s “Tract on Monetary Reform.” Discussing the fallacy of returning to a gold standard, Keynes wrote, “… the long run is a misleading guide to current affairs. In the long run we are all dead.”

You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns go to RuddInternational.com.