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21 Jun 2024 11:02
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  •   Home > News > Business > Features > The Investor

    When Experts Panic

    People tend to choose their advisors poorly, mainly because they consider them to be 'experts'. Unfortunately, experts tend to be constrained by their own feelings of self-importance. Tests have found that the higher the qualification and experience a person has, the less accurate their forecasts tend to be.

    Investment Research Group
    Investment Research Group
    Also, people forget that experts are humans as well, and therefore feel greed and fear as much as the rest of us.

    I was gob smacked to read the following recently by Bill Gross, the managing director of US-based PIMCO, the world's largest bond advisory company with over NZ$1 trillion under management.

    "Perhaps remarkably, during the week surrounding the Lehman crisis in September of 2008, yours truly frantically called my wife Sue to empty our two local bank accounts into apparently safer Treasury bills. I was not the only PIMCO professional to do so. Preserving principal as opposed to making it grow was the priority of the day…"

    In other words, he panicked. No doubt many less experienced and expert people did the same but one would hope an apparent guru like Mr Gross would have a) foreseen problems with the banking sector and b) taken evasive action.

    Keep in mind that Mr Gross has more than US$1bn in personal assets and it is hard to believe they all are in his local bank. Still, he ran around like a headless chicken like the most unsophisticated investor.

    Fortunately, he admits this and realises that fear and greed in others are likely to have a major role in the global economic recovery. He notes the interest rate on short-term deposits in the USA is just 0.1% a year - and there is more than US$4 trillion invested.

    He adds that such a low interest rate is too low to justify not taking a risk and that funds managers are moving US$20bn a week into other assets. The problem is these low interest rates may be driving funds into riskier assets and creating yet more bubbles.

    Think of how shares, gold and even property have performed in the past several months. He notes that asset price rebounds (aside from the historic highs in gold) have still not caught up with more dramatic slumps.

    Despite a 60% rise in US markets since February, investors are still down 36% of their money from their peaks in late 2007.

    His view, which mirrors comments I have made a number of times, is that the recovery is being driven by easy money from governments and central banks. The real engine of the economy - the private sector - has yet to fully recover.

    This means that, with rare exceptions like Australia and Norway (and probably NZ next year) most developed nations will not be raising interest rates for the foreseeable future.

    So what is the best strategy for investors? Gross says lower growth, deleveraging, and increased government involvement will reduce corporate profits and therefore dividends and interest. More regulation means companies are more likely to act like low growth utilities.

    He concludes that, if companies are going to move toward a utility model, why not just buy utilities? In the US, many yield 5-6%, substantially more attractive than treasury stock at .01%. In this country, 8% is not uncommon, some two or three times higher than short-term government stock rate.

    © 2024 David McEwen, NZCity

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