CINCINNATI BUSINESS COURIER
October 14 – 20, 1985
INVESTMENTS
Charles Vaughan
A TRILLION
A trillion here a trillion there, pretty soon it starts to add up. In fact, Sen. John A. Chafee (RR.I.) observed that it took 189 years for the national debt to reach $1 trillion but only four more years to hit $2 trillion. Observe, the miracle of compound interest in reverse. Perhaps in the spirit of state lotteries to solve financial problems, we should have a national betting pool on when it will hit $3 trillion.
When added to the other imponderables such as our growing international debt, instability in foreign exchange markets and slippery tax bill ideas, it is no wonder that investment markets are erratic. The reborn “cult of performance” has forced professional money managers to try too hard in pressing for results. Recent overreaction of hospital management and computer stocks to flat earnings projections point up two major problem areas in the current market situation.
First, the institutional influence on the markets is overwhelming. Second, many institutional managers are edgy and hypersensitive to any bad news. This situation poses special problems for the individual investor. Markets that are fraught with uncertainty always tend to be jumpy, but today’s market is especially so. The idea that an investment grade stock can lose over 10 percent in a day is intimidating. A greater problem, however, involves the selection of investment managers. Some who made their primary track records in high dividend, quality stocks have changed to more aggressive strategies to keep up the pace.
This sort of professional market myopia creates market activity without meaning. If institutional investors, all seeking to beat “average,” account for 80 percent of the trading volume, who are they trading with? My point is this: As professionals focus on shortterm rather than longterm consequences, every whisper of news takes on great significance. Buysell decisions can be made based on input that has little real, longterm significance.
Economic projections appear to be evenly divided. Ideas on inflation vs. deflation likewise seem to be balanced. This is what is referred to as a state of equilibrium. To a becalmed boat even the slightest breeze can be a cause of excitement. To amateurs that is acceptable, not for seasoned professionals. This is a time when astute investors should be preparing for the next “fair wind.” The macroeconomic issues ultimately will resolve themselves one way or the other and present opportunities.
Meanwhile, rather than chase the next takeover candidate or worry about next quarter’s earnings report, investors should concentrate on enhancing longterm goals.