There are a few people who always have a thoughtful point of view on investing, no matter what is going on in the markets. IA Senior Editor Kate McBride caught up with one of them, Frank Holmes, CEO and CIO of San Antonio-based U.S. Global Investors, Inc., on July 30, to ask about his outlook during this time of market turmoil.
What's your outlook on the volatile market situation of the last month?
It was an extreme overreaction last week. When you look at just the math of the market, we always like to differentiate between the frequency and magnitude of moves, and the magnitude was two standard deviations on a weekly basis. Historically, noise is a move of [less than] plus or minus 2%. Opportunity is when markets move greater than plus or minus Sigma, or one standard deviation, for the S&P or Dow Jones in a week. When it moves 4% it's usually a great time to buy or not to buy. Last week just showed that it was a good time to buy.
Now one has to ask and ascertain: Are the fundamentals sustainable? We had great GDP numbers; we see the Chindias--the global boom--as sustainable. What is this [volatility] factor? I think it comes from margin calls; that a lot of the banks and prime brokers lending money to hedge funds basically said 'Enough here, we're going to reassess the risk.' And they quickly go out and start bringing money back in from Japan, and they start unwinding a trade, and so there's volatility. The subprime debt is having its rippling effect, but in the global scheme of trillions of dollars of economic activity, I don't think it's going to, stop this economic machine.
How can advisors guide their clients?
Two things: One is about managing expectations, it's very, very important. We published two pieces of research called Anticipate Before you Participate, Parts I and II. What is the worst day in the past five years; what is the worst week; worst month; worst quarter? What you'll find if you go back since the '80s, the worst quarter was not 1987, but it was--that October--the worst week, and worst day. So it is understanding: What are the downdrafts? A $100 gain is worth less [psychologically] than a $100 loss. So you must know what the downdrafts are, to manage those expectations.
What else do advisors need to know?
Look globally. When you're looking at news, the domestic newspapers do not give a strong enough balanced perspective about what's happening globally. We find the FT [Financial Times] does a fabulous job of capturing what's global--more so than The Wall Street Journal and The New York Times. You're the RIA, [and] your clients are coming in and they always read a negative story on China, and on resources, in The New York Times. The xenophobia that takes place can distort [for] someone the brilliance of Warren Buffett. Five years ago [he] went into PetroChina--he didn't go into Exxon, he went into PetroChina--he's made much more money in five years in PetroChina. If you want to think like Warren Buffett then you have to go abroad in capturing news, and one of the nice things about
The Internet is that it allows you to do that.