Friday, August 12, 2011

Why Do Investors Complain When Stock Prices Move Lower?

Before I head out on vacation next week, I thought I would share some wisdom from The Oracle of Omaha.

About a decade ago, Warren Buffett wrote a piece for December 10, 2001, issue of Fortune Magazine on the stock market. While the article made a number of good points, here was a portion that has stuck with me (I have added the emphasis):

This is the one thing I can never understand. To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying--except stocks. When stocks go down and you can get more for your money, people don't like them anymore.

That sort of behavior is especially puzzling when engaged in by pension fund managers, who by all rights should have the longest time horizon of any investors. These managers are not going to need the money in their funds tomorrow, not next year, nor even next decade. So they have total freedom to sit back and relax. Since they are not operating with their own funds, moreover, raw greed should not distort their decisions. They should simply think about what makes the most sense. Yet they behave just like rank amateurs (getting paid, though, as if they had special expertise).

These past few days - one of the most volatile periods ever in the stock market - have witnessed a reemergence of short-term thinking among so-called professional money managers, in my opinion.

One example: Bank of New York Mellon just imposed a fee on large pension managers who wish to place more than $50 million on deposit in their institution. For 13 basis points, large managers get the privilege of placing their funds under management - funds that presumably are being invested with a long term time horizon, to match the needs of their beneficiaries - with a very large custody bank.

Put another way, these funds will not be earning any interest or dividend income - they are guaranteed to lose money.

Or how does a money manager justify parking funds in US Treasury notes yielding 0.20% (before fees)? As a friend pointed out this morning, in would take 50 years in order to turn $1 into $1.10 at short term Treasury rates - yet there seem to be large demand for short maturity paper.

I don't know which way the market will trade over the next few weeks, but as I have argued in several blog posts this week the overwhelming odds favor the common stock investor for the next few years.

Yes, there are serious problems in Europe, and we are being governed by a very dysfunctional group of individuals in Washington. But buying bonds at the lowest yields since the end of World War II, or paying a bank to hold cash, hardly seems the stuff of professional investors.