The Zurich Axioms By Max Gunther
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Shun long-term investments
An executive of the Swiss Bank Corporation, Frank Henry’s alma mater, told me the said story of a long-term investor named Paula W. who got herself bulldozed pretty thoroughly.
She had started adult life as a production line-worker at the Ford Motor Company. Taking advantage of the company’s generous educational and self-improvement programs for employees she had worked her way up to management. Along the way she had accumulated a few thousand shares of Ford common sock. Her husband died when she was in her middle fifties, leaving her as the owner of a big house in a Detroit suburb and a Florida holiday cottage, neither of which she wanted to maintain any longer. She decided to sell them both, take early retirement from Ford, put all the money into Ford stock, and live happily ever after on the dividends.
This was in the late 1970s. Ford was then paying a dividend of $2.60 a share. Putting the newly purchased stock together with her previous accumulation, she had something like 20,000 shares. The dividends thrown off by these shares totaled some $52,000 a year. This amount was fully taxable as income (except for the none-too-generous exclusion of $100 that our kindly IRS allows), but when supplemented by her small early retirement pension, it made Paula secure and comfortable.
Her broker, also a woman, phoned her once or twice to warn that trouble seemed to be brewing in the auto industry. It might be a good idea to sell Ford before the price dropped, the broker suggested. If Paula was interested mainly in income, why didn’t she consider buying shares of a big utility? Utility companies traditionally pay out a big percentage of their income in cash dividends. The stocks tend to move sluggishly in price, but the dividend yields are commonly in the range of 9 t 15 percent – a good two or three times what most other companies pay out.
But Paula said no, she would prefer to stick with Ford. She knew the company, trusted it, and felt comfortable with it. As for the possibility of a drop in the stock price, she said, that didn’t concern her at all. It was a long-term investment. She had no plans to see it in the foreseeable future. She didn’t even check the stock price in a newspaper more than once a year or so. Up an eighth, down an eighth – who needed that kind of aggravation? She was above it. All she wanted out of her stock was one of those nice fat dividend checks every quarter. Beyond that, she told the broker, she just wanted her stock locked away in a vault and forgotten.
In 1980, Ford chopped its dividend from $2.60 per share to $1.73. Paula’s income was down to $34,600.
As we noted before in another context, the auto industry’s troubles were deepening in 1980, and all the big carmakers’ stocks were plunging in price, including Ford’s. Paula should have been out of it long before, but she was rooted.
In 1981, Ford cut its dividend to 80 cents. Paula’s income dropped to $16,000.
In 1982, Ford paid no dividend at all. Paula was desperate by now. She had to sell some 4,000 shares during this bleak year to raise cash for living expenses and pay off some mounting debts. The stock price, of course, was appallingly low by this time. She was forced to sell those shares for far less than she had paid for them.
In 1983, Ford began to struggle out of the soup. The directors declared a 50-cent dividend. Paula had only 16,000 shares left at the beginning of the year, and during the year she had to sell off another 2,000 shares. Her dividend income in 1983 was in the neighborhood of $7,000.
Things looked a bit brighter in 1984. The dividend payout was $1.20. Paula, with 14,000 shares left, collected $16.000. It kept her alive, but it wasn’t what she had envisioned in her long-range plan.
Jesse Livermore wrote: “I believe it is a safe bet that the money lost by [short-term] speculation is small compared with the gigantic sums lost by so-called investors who have let their investments ride. From my viewpoint, the [long-range] investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they can lose it all. The intelligent speculator will …… by acting promptly, hold his losses to a minimum.”
As we’ve seen, Livermore was not a 100 percent successful speculator. He not only made four fortunes but turned around and lost them, and finally he lost his life in some personal darkness. But when he had his speculative engine well oiled and tuned, it hummed like a Rolls-Royce. He was worth listening to.
So heed the central sentence of his: “This [long-term] investors are the big gamblers.”
They surely are. Betting on tomorrow is chancy enough. Betting on a day twenty or thirty years in the future is absolutely crazy.
Long-term investment, like so many of the fallacious procedures we’ve looked at, does have its charms. The main one is that it relieves you of the need to make frequent, perhaps painful decisions. You make just one decision – “I’ll buy this and sit on it” – and then relax. This caters to laziness and cowardice, two traits with which all of us are abundantly supplied. Moreover, having a long-term nest egg, coupled as most nest eggs were with some kind of a long-range plan, gives you the cozy immersed feeling. Life is all figured out! No thing of the night can get you! Or so you think.
Still another charm of many long-term investments is that they save on brokerage commissions. The more frequently you jump in and out of brokered entities such as stocks, currencies or real estate, the more your capital is going to get chipped at by commissions and fees. This may have some importance in real estate, where commissions are large, but in most other speculative worlds it usually has scarcely more significance than a great bite. Still, many long-term investors use the commissions-and-fees question as a rationalization.
Your broker or dealer would prefer that you be a light-on-the-feet, fast-moving kind of speculator rather than a long-term sitter. The more moves you make, the money money the broker/dealer makes. In this particular case, his financial interests coincide perfectly with your own.
Don’t get rooted. Every investment should be, at the very least, re-evaluated and made to justify itself afresh every three months or so. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is it progressing toward the ending position I envisioned?
This doesn’t mean you have to keep jumping around just for the sake of jumping. But if circumstances have changed since you first got into this investment, if it is sagging, if that ending position seems to be receding instead of getting closer, if you see another opportunity that looks clearly more promising to you in the light of the changed conditions – then make a move.
The urge to sit on long-term nest eggs doesn’t spring solely from our own laziness, cowardice, and other inward problems. There is a good deal of sales pressure applied by the world around us.
Many big, publicly held companies, for instance, offer attractive-sounding arrangements by which employees can invest regularly in their own stock. You sign up to invest so much a month, and to make it easier for you, some companies will even arrange to deduct the amount from your paycheck and buy stock automatically. You never see the money. It’s painless investment!
Or so they like to tell you. What this kind of arrangement does is to root you in a place where, perhaps, you may not always want to be rooted. What would have been the sense, for example, of getting stuck in a long-term investment in GM stock over the past couple of decades? The stock was trading over $90 in 1971. It hasn’t been close since.
Individual brokers and dealers in various speculative entities also offer what they usually call ‘convenient’ monthly investment plans. You kick in so much a month to buy whatever you specify. This doesn’t inexorably lock you into long-term investments, but it does have that tendency. The danger of it is that it encourages you to concoct a long-range plan: “Let’s see, now, if I invest X dollars a month in Hey Wow Electronics, and if the stock price rises by a modest 10 percent a year – why, by age sixty-five I’ll have X thousand bucks! I’ll be rich!”
Don’t you count on it, my friend.
Mutual fund salespeople will also wave a lot of alluring long-term blandishments before your dazzled eyes. Trust people too, have their convenient monthly investment plans. They will send you charts in four scrumptious colors showing how nifty it would have been for you if you’d stuck with them over the past twenty years. Or if their performance was so miserable that no amount of clever charting can cover it up, then they will send you charts showing how terrific the future is going to be if you sign on.
Then there is the life-insurance industry. This is a world of appalling complexity. To boil it down to its essentials, however, we can say there are two main kinds of life insurance: those that root you in a long-term investment and those that don’t. My advice: shun the former.
Long-term investment life, which is sometimes called ‘whole’ life but also goes by dozens of other names, is designed to do two main things. It provides money for your beneficiaries in case you cash out, and it provides an annuity or cash lump for you in case you stay in the game beyond some stated age. In all its bewildering variety of forms, one thing doesn’t change: it is very expensive.
The affable, conservatively dressed salesman who spreads his carts out on your coffee table, talking in reverent tones about long-range plans, sincerely wants you to buy this kind of life insurance. He will bank a walloping good commission if you come aboard. He wants you to commit your good money for twenty or thirty years, but the deal is probably less long-term for him than it is for you. In all likelihood it’s front-end-loaded meaning that he collects a good proportion of those thirty years commissions in the first year or two.
His main selling point will be that you aren’t buying, you’re investing. If everything turns out right, eventually you’ll get back what you put in, or a substantial part of it. Meantime your family will be protected in case you turn up your toes sooner than planned. Wonderful, no?
No. What the salesman is asking you to do is plain crazy. He wants you to make a commitment to invest thousands of dollars over a span of years into a far, far future. How do you know what the world will be like in that future? Sitting here today, how can you be sure you’ll want to invest in this annuity setup ten years from now, or twenty? Maybe, indeed, the world will change in unforeseen ways and make that annuity worthless. So why lock yourself into it?
If you have dependents who would be in financial trouble without you, protect them by buying the cheapest term insurance. This will pay off on your death, but that is its only purpose. It locks you into nothing. If a time comes when your dependents don’t need you anymore, or some other change happens in your life, you simply drop the insurance and stop paying the premiums. Meanwhile, because the premiums are low, you have had money to invest in ventures other than insurance.
All you can know about the future is that it will get here when it gets here. You cannot see its shape, but at least you can prepare yourself to react to its opportunities and hazards. There is no sense in just standing there and letting it roll over you.
Speculative Strategy
The Twelfth and final Axiom warns about the futility and the dangers of planning for a future one cannot see. Do not get rooted in long-range plans or long-term investments. Instead react to events as they unfold in the present. Put your money into ventures as they present themselves and withdraw it from hazards as they loom up. Value the freedom of movement that will allow you to do this. Don’t ever sign that freedom away.
The Twelfth Axiom says there is only one long-range financial plan you need, and that is the intention to get rich. The how is not knowable or plannable. All you need to know is that you will do it somehow.