Transcript
Eric Crittenden: From 2009 to current, you've had really high growth and low inflation, and that's the best-case scenario for stocks and it's a pretty good scenario for bonds, which is why people are invested in stocks and bonds and not too happy with alternative investments and commodities and whatnot.
In a period like the 1980s, what you had was a little bit different, you had high growth but you also had high inflation. Stocks and bonds did okay, but other things like commodities and certain currencies did fantastically well. You could have had a different portfolio, a different portfolio would have been optimal during that period of time.
In a period of time like the '70s, it was radically different, stocks did very poorly in real terms with a couple of 50% declines, so you had a lost decade, more than a lost decade, and bonds did very poorly as well because interest rates went from 3% up to about 18%. In real terms, bonds did tragically bad and stocks did pretty bad at the same time.
That scares me and says, all right, well, if I'm managing money over that 14-year window, I've put my clients through a lost decade, I've charged fees, I've generated shit tons of taxes for people on the bond side because the yields were nominally high but the real returns were negative, and they actually went backwards in real terms. 14 years later, my clients actually have a lower net worth, a higher cost of living, they've paid me fees and they paid the government all these taxes and they've gone backwards. I look at it and say, "That's not for me."
Some people might look at it and say, "Hey, that's just a risk that we run, that’s the cost of doing business. If it happens it happens and that's okay.” Okay. I'm saying, "No, I would rather have a different portfolio that has a much lower likelihood of experiencing something like that."
We know you don't get something for nothing, so how would I build a portfolio that makes me comfortable? Well, it would need to minimize that lost decade risk, it would need to minimize the risk of dramatically underperforming equities in a bull market. I think it's bad to not make money when the GDP is growing, the economy is growing, and the stock market's doing well. I feel like that money is there for the making and you should have the courage and the fortitude to participate. How would you do that? How would you ensure that you would benefit from being an investor when investors are making money in stocks, but also protect yourself from a lost decade or any of these other things? That's where using some of the other ingredients the right way comes into play.
If you just stick it in stocks and bonds, you do fine in most market environments but you do tragically bad in an environment like the 1970s, or an environment like the great depression. If you participate in commodities and currencies the way I think money is made in those particular sectors, it gives you something that I believe makes money over time, competitively, but is fundamentally different from the risk and reward of stocks, and it's fundamentally different from the risk and reward of bonds, so it's truly a diversifier.
Also, you get the benefit at least historically of actually thriving when stocks do poorly and thriving when bonds do poorly and in particular, thriving when both stocks and bonds do poorly at the same time.
Now, I can't guarantee that's how it'll play out always, no one can guarantee these things, but I think that's valuable information from the past to know that there is this other, thing that fills that pothole and doesn't drag the whole portfolio down.
I look at it and say, "I like this thing, I think it adds a lot of value, and it gives me what I'm looking for." Which is I have the portfolio that has the reasonable rate of return, but I'm also, it appears, getting rid of, to a large degree, the potential for a lost decade and the potential to get totally left behind in inflation. By adding it in, it really just solves those two problems that I worry about, that other people are going to worry about but they're not worrying about right now.
