essays pieces of the puzzle
Monday, June 20th, 2011
a long run

Twenty-eight years ago today (also a Monday), I walked in the door of one of the largest investment management firms in the United States, not knowing what was in front of me.  Above you see some of what happened during the intervening years.  The defining feature is shown in the lower panel — the tremendous drop in interest rates during that time.

The series at top with the best performance is a fully-collateralized position in long bond futures.  It beat stocks handily, and the much less volatile BarCap (formerly Lehman) Aggregate also provided strong competition, if in a less-sexy package.  Gold lagged for years until its recent revival.

By June of 1983, the strong rally in stocks that had started the previous August had brought forth a torrent of IPOs, most for small technology companies, each of whom assured this novice that they were going to get twenty percent market share at a minimum.  Within the week, the OTC market (as we called it then) had made a significant peak; it would choke on the supply for awhile.

But with some exceptions (one noted below), the next many years featured terrific returns, exciting investors about the possibilities inherent in investing for the long run, especially in stocks.  The latter part of my career has seen that optimism largely disappear.

Before that first day, I got a call saying I should bring some casual clothes to change into after work, because we would be going on a post-close cruise through the beautiful St. Croix River Valley on a co-worker’s boat.  Not a bad way to start things off.

A few years later, we were scheduled to go on another ride on the same boat, this one to close the season — on October 19, 1987.  After watching the historic collapse of the stock market, we drove to the marina in a state of shock and disbelief.  When we got there, we found that the boat had been pulled out of the water for winter, ahead of schedule.  There would be no cruise.

It’s easy for us to think about a long run and think of it as the long run, extrapolating history into narrow expectations of the future, be it regarding asset class returns, corporate performance, or our own careers.  But, sometimes we’re left standing on the dock, befuddled.

I can’t wait to see what the next twenty-eight years will bring.  (Chart:  Bloomberg terminal.)