MoneyLife Radio Grills OSAM’s CIO
“[Market forecasters] are so far off that you’re much better giving a monkey a coin and going with whether it lands heads or tails.”
— Jim O’Shaughnessy, OSAM Chairman & CEO/CIO
Chuck Jaffe, acclaimed MarketWatch columnist and “The Big Interview” host,1 challenges the continuing OSAM tradition of “completely ignoring Washington D.C. and other noise,” provoking Jim to blurt out the derogatory monkey comment quoted above.2
“The Big Interview: Jim O’Shaughnessy”
MoneyLife Radio transcript3
(Monday, Feb. 13, 2017)
Chuck Jaffe, MoneyLife Radio (MLR): Jim O’Shaughnessy, welcome back to MoneyLife.
Jim O’Shaughnessy (Jim): Great to be here, Chuck.
MLR: Now, you and I have talked in the past — and you are somebody who really believes that, you know, market forces are there; you want to ride them, you want to take advantage of them, etc., and that they — you know, we can’t necessarily turn the tide and change things. Be invested.
MLR: At the same time, we are living in interesting times that are scaring the heck out of people.
MLR: And even if you can look at the charts and say, “This is what happened on the charts,” you can’t look at anything and say, “Well this is the last time we had a President like this one —
MLR: “— and here’s what’s going to happen.” So I’m curious: for somebody with your long-term faith and your dyed-in-the-wool sensibilities and methodologies… do you just ignore everything that you’re hearing out of Washington??
Jim: Absolutely. And that is a continuing tradition for me, Chuck. I’ve been ignoring Washington for most of my career. Because ultimately what you said is what I am: very bullish on the United States of America. And I will always be very bullish, on the United States of America. I think Buffett said it best where he said, “You’re not gonna get rich, you’re probably gonna go broke, if you try to short the United States.”
So the way I look at it, Chuck, is, you know, let’s not make it personal — right? — about President Trump. Let’s just talk about the fact that the United States has gone through far worse in our past. We had a Civil War where more Americans died than in any other war. We had a President, President Abraham Lincoln — you think Trump is fooling around with the Constitution, Lincoln actually did. He suspended Habeus corpus!
So, a lot of people don’t really know their history, and when you do and you see the results of what’s happened in U.S. markets — you’ve just gotta be very bullish, and you have to be very, very patient about what will happen over say, the next 4 to 10 years.
MLR: But we have to acknowledge that Lincoln, by the way, was in Washington at a time before it had Exchange Traded Funds. I’m just saying; I’m just pointing out…
Jim: [laughter] That is a great point.
MLR: There were no real market forces kinda like we have today that would have average people going, “Hey, hey, you know, this whole thing is making…” Like, he existed before there was Facebook, and before there were ETFs. And those two things —
Jim: [laughter] You are absolutely right and that is a very good point. Nevertheless, that’s one of the reasons why, you know, my friend Cliff Asness (who founded AQR Capital Management) — he’s got a great Tweet, which is, “Having and sticking to a true long-term perspective is the closest you could come to possessing an investing superpower” — right? And by that I mean (what you were just referencing there) is all that I rally against, right? People paying attention to the short-term news and making emotional decisions, based upon a Tweet they saw, or something they saw on TV, or something they read… basically, in very short periods of time, it’s all noise. There’s very little signal.
And so, if you want to really be a great, successful, long-term investor, one of the things you have to do is you have to align your decision-making with when you need your funds. And you know — easiest thing in the world to say; one of the hardest things in the world to get people to actually do. And you know from my way of looking at it, it’s because you know who we have to blame is evolution right? Evolution programmed us to pay much more attention to what’s going on right now, right? As opposed to what might happen in 10 or 20 years, right?
If you’ve got your “ancient investor” genes — makes a lot of sense, right? Who do we descend from? We descend from the guy who saw the bush rattling, and ran away! Because it could have been a predator. Those are the genes that made it down to us. So we are really heavily disposed to look at very short periods of time and assume that they’re going to, you know, play out over the very long term. It’s really the opposite. And you know, when you do that, when you use — you overweight short-term information for your investment decisions, you’re creating a reactionary model, not an anticipatory one.
MLR: So, if we go back to everything you were saying before I made a crack about Abe Lincoln’s times and their lack of certain modern conveniences, you were saying that you believe this rally can continue for the next 4 to 5 years. That you’re optimistic about what we’re going to see. And of course 4 years may be all we get of a Trump administration; it may be half of a Trump administration —
MLR: But we are looking at this long bull market, and nobody has repealed “market” and nobody has repealed “market cycles”…
Jim: Absolutely not.
MLR: But we’re also coming out of a 30-year bull market in bonds — a generational bull market in bonds. Is this a generational market for stocks, potentially?
Jim: Gotta give you the honest answer: I have no idea. Over the next several years I fully — FULLY — anticipate that we’ll see corrections (probably more than one). We could even see a 20% bear market. I think though that over that time period — let’s call it the next 5 to 10 years from now — stocks will be higher than they are today. I don’t have any ability to forecast when and where these corrections or even a small bear market are gonna happen. I can simply say, “Yeah, you should probably anticipate it.”
But, again, you want to align your thinking and decision-making with what’s going to happen over the very long term. I don’t make many forecasts or predictions, because I believe they’re bunk. When you look at Philip Peetlack’s work and you look at David Dreaman’s work… I mean, the numbers are just terrifying. People are so far off that you’re much better giving a monkey a coin and going with whether it lands heads or tails.
However, like we do everything, we tend to look just at numbers, right? And you mentioned the generational bull market in bonds. Well I was early, so I’ve been wrong, but I think that we certainly are nearing the end of that generational bull market in bonds. And you know bonds are simpler than stocks, right? It’s math. If interest rates go up and you have a long-term bond, your price is gonna go down. It’s very, very simple. And I don’t think that people are really aware of how bad bond markets can behave. When you go back to the 1920s you can see that they have drawdowns of 50% when you’re looking at real rates of return (in other words, inflation stripped out). And that is devastating.
So you know, we’ve been lulled into complacency with this incredible bond market bull. And you know, you just have to think for a moment… in 1982, what — they were double-digit rates? And now they’ve come down to virtually nothing and they’re not gonna go negative, and they’re not down gonna go to zero. So I think that on the bond market side, we have been recommending to clients that they really swap out any really long-term bond holdings with intermediate-term bonds, which won’t get hurt nearly as much.
Now, as far as the stock market goes? You know, we think that the market is, what we would say, “fairly priced.” In other words, unless earnings come in much better — and several have been coming in very good — and then we get back to the current administration in Washington… I think it all comes down to, let’s not judge it based on the man (or what he might Tweet). What we wanna judge it on is what gets passed and becomes new law.
And the way I look at it is, if we can get, say, 3 things: if we can get (1) regulatory reform, (2) comprehensive tax reform, and (3) if we can get something going on — and this could even be bipartisan — with infrastructure, I think that would be a home run. And so that’s more like, “Let’s see what they’re actually able to get out there.” And that could be very, very positive for the market going forward.
MLR: …But for the investors who wanna sorta say, “OK, look, I buy it, etc.” … it is so hard these days to invest and not wanna do something that’s gonna get you a little bit more. Is the moral of the story really, “Look, be satisfied with what the market gives you, maybe a little bit more, maybe a little bit less.” But if you are just kinda calm, and put together a strategy and sit with it long-haul, that’s gonna be better and you don’t have to worry about what anybody’s Tweeting, what anybody’s doing… you can just go about your daily business?
Jim: Exactly. I mean, it sounds like you’re quoting me there. You definitely want to try to just — as best you can — avoid the emotions. Because the emotions are coming from the lizard brain, right? You want the most modern part of your brain thinking and planning. And no one can know the future. But you know Twain had a great quote, which is, “The future is not exactly the same as the past, but it rhymes.”4
And so I think that the best thing investors can do: find a strategy that’s gonna work for you — and, if you’re really conservative, it’s gonna be a very different strategy than somebody who’s aggressive — but then let it work.
MLR: Well Jim, great stuff as always, I really wish we had more time — we don’t — but what that means is I’m gonna have to make more time by having you back in the not-too-distant future. I hope you’ll come.
Jim: I absolutely will.
MLR: Thanks so much!
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- See moneylifeshow.com/chuck.php … Twitter @MKTWJaffe and @MoneyLifeShow
- OSAM regrets the disparaging monkey remark, but it’s on record now in the radio archives and soon we may have protesters from the NHIA (Non-Human Investors Alliance?) picketing outside our HQ to show for it — thanks Jim, and Chuck. Ed. Note: This entire footnote is fake news.
- See our News page for an .mp3 recording of this and other OSAM interviews with MoneyLife Radio (MLR).
- Ed. Note: “History doesn’t repeat itself, but it rhymes,” is widely attributed to Mark Twain. The quote suggests that, although history doesn’t exactly repeat itself, it is possible to find recurrent themes in the same way rhymes superficially align words with one another.