One of my mentors in our business was a long –time pension manager nearing retirement named Ray who, even though he was “the client,” routinely offered me sage commentary in a variety of circumstances.
Because of his wisdom, Ray was typically my first call every morning. Many of those calls ended with him telling me “Here endeth the lesson.”
One of those mornings in the hot summer of 1993 I was talking with Ray about a new 100-year corporate bond offering from Disney (DIS) that my firm was about to bring to market on behalf of the entertainment giant.
I remember talking to Ray about the issue and focusing on interest rate trends, insurance company and pension fund demand, convexity, modified duration and all manner of other niceties. It was a pretty hot deal.
Indeed, Alan Greenspan, then Chairman of the Federal Reserve Board of Governors called the bonds “one of the more important indicators that the long-term inflation expectations that have so bedeviled our economy and financial markets seem to be receding… a very good sign.”*
Ray was having none of it.
He listened patiently to my spiel and then, as he was wont to do, gently brought me back down to earth with one simple comment.
Ray quietly said (and I remember it as if it were yesterday), “If, 100 years ago, you had bought a 100-year bond from the leading entertainment company in the world, you’d be holding a bond issued by a player piano company today.” The statement was as insightful as it should have been obvious.
As you might guess, I had no ready reply.
No matter how complex the market-related subject we were discussing became – and he was a proficient quant too – Ray never lost sight of good common sense.
For example, as a double check on the official economic data, every Friday Ray would ride the bus into New York City over the George Washington Bridge and record the number of delivery trucks he saw heading into the city.
He also read the New York Daily News every day in addition to more establishment papers to remain in touch with what the public at large was reading and doing.
Ray was always testing the data he used with his own experience and vice versa. It’s part of why he was so good at his job.
The thrust of the comments is that the more interest there is in the market by the public at large and the more expertise they claim to possess, the frothier the market. It’s excellent advice.
Lynch’s thoughts are also consistent with known behavior, obviously, since the Dalbar study annually finds that the average investor's return on stocks is dramatically less than the return of the S&P 500 index.
Before market professionals get to cocky and condescending, however, let me remind them (and remind myself too!) that professionals have similar difficulties in both the equity markets and the credit markets.
On account of Ray, I watch for market tops based upon cheesy commercials and late night infomercial content.
Late in the last century, it seemed like every other commercial was about becoming a day trader to make a fortune in tech stocks. That didn’t turn out very well for the vast majority of them.
In 2008, late night television was glutted with touts pushing another way to get rich quick in real estate. That market crashed. And today the constant focus is gold.
I don’t know how gold will perform in the coming days, but my training at the College of Ray tells me to be careful.
We have many remarkable tools of investment analysis and I try to use all of them. I recommend careful quantitative analysis using the latest and best tools. But don’t lose sight of common sense either.
Listen to Ray.
* Thomas D. Lauricella and Constance Mitchell, “Credit Markets: Coca-Cola Joins Disney at the Very Long End with a Sale of $150 Million of 100-Year Bonds,” The Wall Street Journal (July 23, 1993).