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We Are Living In Interesting Times…

In the Summer 2008 issue of In The Vanguard, a newsletter The Vanguard Group sends out to its customers, the newsletter interviews two outgoing managers of their Wellesley Income Fund: Earl McEvoy and Jack Ryan. Both have years and years of experience in investing, managing several other funds, and the interview was enlightening.

Here’s my favorite question and its answer by Ryan (the whole interview [3]):

There’s an old blessing (or curse), “May you live in interesting times.” You’ve guided your funds through some very interesting times. Which stand out?

Mr. Ryan: I think we’ve always lived in interesting times. For example, if you think back to the 1970s, before we were Vanguard portfolio managers, we had a major banking crisis. New York City was going bankrupt. Consolidated Edison cut its dividend—and electric utilities had never cut dividends. We had a recession, and the rise of the “Nifty Fifty” stocks. So we’ve always had interesting times. What’s different today, perhaps, is that there is more financial news coverage, which can make the situation of the moment feel very intense. (emphasis mine)

It’s interesting Ryan says that because its something I’ve come to learn after reading of the turbulence in the 70s and 80s. I’ve been listening to Alan Greenspan’s Age of Turbulence [4] and things, at least numerically, seemed far worse in prior eras. We cry about a 20% drop since the highs of last October, but on Black Monday, October 19, 1987, the stock market fell 22.6% (508 points!). We talk about foreclosures, job losses, and inflation… all of which were far worse in previous bad economic times but the US economy endured. In the S&L crisis, 747 banks failed!

The sky isn’t falling, things aren’t that bad, we just live in interesting times and the media is making the most of it. Here’s what both managers believe is in store for the future, as well as some advice:

Economic news has been downbeat lately. What is your outlook for the U.S. economy?

Mr. McEvoy: With respect to the Federal Reserve, I think they are finally accomplishing the type of yield curve they want. If the Fed can keep short rates low, banks will be able to shore up their capital by borrowing short and lending a little bit longer. However, I don’t see how we avoid an increase in the inflation rate, which will put pressure on long-term bonds.

Mr. Ryan: The outlook is challenging, but if you’re thinking long-term, it’s an excellent opportunity to look for companies or mutual funds that are well-positioned for the future when the economy does recover. This is exactly when you want to increase your investment exposure.

The opportunities for investing are just as great today as ever. The world continues to develop. People want to do well. They want to grow their companies. They want to get ahead. There is a lot of wealth in the system that will be invested. The opportunities are there. It’s just a matter of studying, doing some work, trying to improve your judgment, and taking advantage of opportunities as they present themselves.