Investing after WW2

Right after World War II, a widely anticipated global depression was expected a common occurrence after nearly every major world conflict. Surprisingly, in the United States, a major interest in equities prompted the success of a handful of companies that became known as the nifty fifty. These companies dominated in managerial skills, product R&D and financial resources. Investors remained skeptical about economic progress throughout this growth era, and markets faced the traditional wall of doubt, the trellis up which green investment ivy must climb.

''Buy high, sell higher" dominated investment styles over this period. Supply and demand for equities became the watchword more than underlying valuation. To adapt a phrase from a quantum physicist, "there appeared to be an underlying price spin tilted in the direction of the positive" other things being equal, something that had gone up would go up more. Another description might be the economics of increasing returns. Eventually, the era ended with the shock of 1967 and the subsequent decline of growth funds in the sharp market downturn in the United States during the 19734 period.

The developed (ex-US) markets essentially those of the advanced countries that were the major protagonists in World War II, whether victor or vanquished during this period were dominated by international reconstruction programs. The Marshall Plan in Europe and its counterpart under the administration of General MacArthur in Japan and Asia led the way. These programs were typically centered around infrastructure improvement and, with the exception of the UK, did not produce much in the way of private equity development until the second half of the period, when government programs became directly supportive of private development activities.

Style radiation

The spread of investment insights may be visualized as waves radiating outwards in concentric circles from pebbles falling into water. The source of these investment pebbles is the United States. The dynamic force behind the rise of post-World War II equity markets has been academic research coming out of US universities. The availability of cheap computer time, cheap graduate student labor and creative senior professors (six of whom have now received the Nobel Prize in Economics) has contributed to the development of concepts like the capital asset pricing model, the efficient market hypothesis and performance measurement, as well as the growth of derivatives markets.

Not every investment technique is appropriate at every place around the world at the same time. Ideas radiate, interfere with one another and produce new patterns, then reach the periphery at the same time as new stimuli occur at the origin. Technology and communications accelerate the speed of ideas radiating outwards until, finally, the impact reaches emerging markets. As the process is repeated, it is accelerated further.

We can divide the investment world into three parts the United States, developed (ex-US) markets and emerging markets. Most US institutional investors have dedicated teams covering each of these segments. In some cases, they have specialized teams within each team segmented by geography.

The investment world was reshaped immediately after World War II. In fact, if we go back farther, we can gauge the present long-wave bull market from the Battle of Midway in 1942. If we look at equity styles since then, we see that there have been two
major waves, each lasting one or two decades. And a third may have begun.

Paying down debt: the delicate dilemma

As we close our discussion of debt, we must address one of the more delicate dilemmas of modern marriage: how to handle debts each of you may have accumulated before the nuptials. Years ago, such a discussion hardly would have been necessary. People married young, well before they had accumulated significant debts—or assets, for that matter. Today, the opposite is often true. When people wed today, it may be after a decade or longer as professionals, plenty of time to borrow plenty of money. The same is true of people in second or third marriages. It would be hard to imagine people in that situation without some debt burden. When couples bring individual assets to the marital table, that’s a cause for joy. When the baggage includes debts, the issue is more complex and more volatile. Broadly, there are two approaches you can take to premarital debt. You may decide to reduce your debt as individuals, or you may elect to pay down premarital debt as a couple. Each approach brings advantages and disadvantages. Paying down premarital debt as individuals can prevent conflict, particularly if one party incurred substantially more debt than the other. With this approach, the partner with the smaller debt load doesn’t feel financially strapped by decisions made before the marriage. This approach also permits each spouse to maintain a significant level of independence. But there are disadvantages as well. For one, the debt might not be paid down as quickly or as efficiently as possible, because only one partner is focusing on it. In addition, that partner may feel resentment at being abandoned on Debt Island. That could promote continued use of debt, resulting in financial hardships and marital discord.
If you elect to pay down premarital debt as a couple, you can develop an efficient game plan that emphasizes quick payment of high-interest debt. You can get out of debt more quickly and focus on your goals as a couple. This joint process also implies regular communication about debt, an activity that will help you many times over.
The principal disadvantage to this approach is that the partner who kept the slate relatively debt-free may feel exploited; the good spending habits he or she developed might appear to have come to naught.
As we mentioned, this is a sensitive matter, and we don’t recommend one approach over the other. What we do recommend is talking about any premarital debt and developing a game plan that pays off all debts quickly while keeping both partners satisfied with the strategy.

Comfort Zone Investing Case Study

Michael and Susan have been saving for retirement for 10 years. They are a composite from interviews and people I have worked with during the past 21 years. Since Michael’s major promotion 10 years ago, they have invested about $50,000 a year. Prior to that, they had less than $10,000 in investments. Now, stockbrokers, realtors, insurance salespeople, venture capitalists, hedge fund vendors, and other investment product peddlers have their number and routinely call them. Michael and Susan have compiled investments worth $450,000 during the past 10 years: half in a 401(k) and half in an online brokerage account. Immediately, you might notice the math. If they have invested $50,000 a year for the past 10 years, achieving a zero total return on their money, they should have $500,000 in investments. You might do the math, but Michael and Susan have not. You would also think that Michael and Susan would be happy with the size of their nest egg. Sill in their mid-40s, they are in the top 1 percent of wealth in the world. But they are miserable. Michael losses sleep over his investments regularly. Though he works 60 hours a week, he finds time several months a year to shift between $100,000 and $300,000 from one investment fad to another, believing he will increase his returns and then be happier with his portfolio. Among the other high-income employees where he works, this is routine practice. In fact, the main non-work-related topic among these employees is investing. Though not one of them has ever calculated their annual returns, they all constantly chase high returns and lose sleep worrying about the market. Susan, a stay-at-home mom and part-time consultant, is equally unhappy with their investments. She wants Michael to work less, even take early retirement, and consult part-time so he does not miss his children’s childhood years. She is certain they were happier before Michael’s big promotion. She is angry that their portfolio is in constant flux. She has no understanding of why one year they seem to have all their money in small cap stocks, the next year in municipal bonds, then in tech stocks, and now in hedge funds. She is convinced that they are on the verge of losing it all any minute and she will have to go to work full-time. You might think the case of Michael and Susan is unusual. It is not. Studies by Dalbar Inc. and others show that as many as 90 percent of individual investors underperform stock market averages because they buy and sell too often. In fact, studies by Brad M. Barber, Terrance Odean, Moringstar, and others have shown that individual investors make returns about half as high as the stock market. During 1970-2000 period when the market made 12 percent a year, individual investors made 6 percent. Individuals even underperformed the bond market by a significant margin. However, hiring professional money management does not solve the problem. Studies by Mark Hulbert and others show that professional money managers also trade too often and underperform the stock market 80 percent of the time. Unfortunately, all these studies focus on investment return.

Investing is not about numbers

Few investors realize that investing is not a numbers game. Making buy-and-sell decisions based solely on price movements is a strong indication you are outside your comfort zone. Buy at 5 and sell at 10 or buy at 10 and sell at 5 is trouble both financially and emotionally. Buy-and-sell decisions need to be made on the basis of knowledge of who you are as an investor, a fundamental understanding of the investment, and a determination of whether the underlying fundamentals of the investment meet your investment needs. If a company or mutual fund is having a bad quarter or a bad year or a great quarter or a great year, you need to understand how it is reacting to that situation and if its reaction indicates that it fits your investment needs. Price movements are external factors that tell you little about the company, the mutual fund, or yourself.
An emotionally mature adult would not make personal relationship decisions based solely on external factors. If you are in a new romantic relationship and your lover’s mother suddenly dies, do you end the relationship immediately (sell) or watch how your lover reacts to the loss of a mother and watch how you react to your lover’s loss. If your lover then inherits half a million dollars, do you make a decision to marry (buy) or do you watch how your lover reacts to new wealth and how you react to your lover’s financial gain. In a romantic relationship, your goal is to build a long-term positive relationship. Breaking up or staying together based on external factors such as a death or inheritance is clearly immature. The internal factors, your lover’s emotional development and your own, are the real basis for judging the long-term potential for marriage or a parting. The internal factors, your emotional makeup and investment policy, and the company’s reaction to success or failure, are the real basis to determine buy-and-sell decisions.
Investing outside the comfort zone is exemplified by basing trading decisions solely on price. Other external factors also influence investors when they are outside their comfort zone.

Investing is not about numbers

Few investors realize that investing is not a numbers game. Making buy-and-sell decisions based solely on price movements is a strong indication you are outside your comfort zone. Buy at 5 and sell at 10 or buy at 10 and sell at 5 is trouble both financially and emotionally. Buy-and-sell decisions need to be made on the basis of knowledge of who you are as an investor, a fundamental understanding of the investment, and a determination of whether the underlying fundamentals of the investment meet your investment needs. If a company or mutual fund is having a bad quarter or a bad year or a great quarter or a great year, you need to understand how it is reacting to that situation and if its reaction indicates that it fits your investment needs. Price movements are external factors that tell you little about the company, the mutual fund, or yourself.
An emotionally mature adult would not make personal relationship decisions based solely on external factors. If you are in a new romantic relationship and your lover’s mother suddenly dies, do you end the relationship immediately (sell) or watch how your lover reacts to the loss of a mother and watch how you react to your lover’s loss. If your lover then inherits half a million dollars, do you make a decision to marry (buy) or do you watch how your lover reacts to new wealth and how you react to your lover’s financial gain. In a romantic relationship, your goal is to build a long-term positive relationship. Breaking up or staying together based on external factors such as a death or inheritance is clearly immature. The internal factors, your lover’s emotional development and your own, are the real basis for judging the long-term potential for marriage or a parting. The internal factors, your emotional makeup and investment policy, and the company’s reaction to success or failure, are the real basis to determine buy-and-sell decisions.
Investing outside the comfort zone is exemplified by basing trading decisions solely on price. Other external factors also influence investors when they are outside their comfort zone.

Comfort zone investing is…

Comfort zone investing consists of knowledge of how different investments affect your emotions, knowledge of who you are in relation to investments, and choosing investments that match your personality.
The comfort zone is tested most often by large increases and decreases
in investment values. Studies of stock investors show that most investors react to declines in stock values by holding on too long-hoping the price will
improve. Investors also sell winners too soon to lock-in profits, missing even greater gains, and avoid purchases of bargain stocks that have declined in price fearing the declines will continue indefinitely. The net result is individual and professional investors consistently fail to make even half the stock market averages.
Many studies describe these phenomena. These self-defeating behaviors are attributed to thinking patterns such as “loss aversion,” the “disposition effect,” and “mental accounting.” Unfortunately, the studies only describe the patterns and the resulting low returns. The studies do not tell you why you are reacting dysfunctionally nor how to act maturely.
The comfort zone has three elements:
self-knowledge, investment knowledge, and matching yourself to the proper investments. If any of these three elements is out of place, your reaction to your investments will be dysfunctional. If you are in the right investments, you will act maturely. For example, many investors think that investing is solely about numbers. Unfortunately, focusing on numbers ignores both who you are and the nature of investments.