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The following is the transcript of an interview with Barry Hyman published in the Star Advertiser on March 27, in its entirety and original order.
Q) Have investors missed the boat to get into stocks following a two-year rally in the stock market?
A) It is important to define Investors as opposed to Speculators. Speculators try to predict things such as timing markets and the behavior of other market participants. Investors, by my definition, do not. A wise investor weighs the merits or intrinsic value of each individual potential investment compared to the price of that investment and benefits from opportunities in which there is a large disparity, or pricing inefficiency, which not only creates a likelihood for gains but also builds in a “margin of safety.” In that context there are always opportunities from which to benefit rather than worrying about missed boats.
Q) There are more index and sector funds than ever before. Is this a good way to invest?
A) Not in my opinion. To me it makes a lot more sense to analyze each investment one at a time and invest only in those whose value exceeds their market price by a sufficient margin, than to invest in all of the investments in a particular sector or market index and end up owning the good, the bad and the overvalued. I’d rather not own the investments that are overvalued or whose products, management, ethics, integrity, business model or competitive factors are lacking.
Q) Should investors be concerned about the fallout from Japan and, conversely, has the Japan situation created buying opportunities?
A) The tragedy in Japan is horrible. First and foremost my heart is heavy and my compassion goes out to all the families who lost loved ones and those who are suffering. As an investor, the answer to both questions is “yes.” Investors should weigh all factors, especially risks. At the same time risks, and others’ overreaction to them, create opportunities. In the case of Japan, investors need to be cautious when contemplating investments in companies that are extremely adversely affected by the tragedy. But at the same time the overreaction by investors has created tremendous opportunities. For example, from its peak level in February to the intraday low on March 15, the Nikkei index of Japanese stocks dropped nearly 25%. In that mass hysteria panic selling of Japanese stocks, prices of companies that had little or no financial exposure to the catastrophe fell along with those whose fortunes were adversely affected. Investors who are able to do the analysis and are willing to take advantage of the opportunities created by others’ emotional behavior stand to benefit greatly. It is the classic wealth transfer scenario.
Q) Where can seniors, or people with fixed income, invest who don’t want to risk their money in stocks?
A) This is definitely a conundrum. With interest rates forced as low as they are by Central Bank policies in the U.S. and Europe, people on a fixed income need to be wise. No fixed-income asset class that pays decent income is without risk of principal in this environment. Those with limited risk of principal provide very little income and present risk to purchasing power from the inflation that is and will continue to result from “easy” Central Bank policy. So back to the first answer: one must be a nimble and skilled investor in this environment, evaluate each investment one at a time and construct an investment portfolio that balances risks while providing required income, in the form of total return.
Q) If buying CDs, should people go with shorter-term investments in anticipation that rates will rise going forward?
A) This is akin to asking what direction the market is headed. There is not a simple one-size-fits-all answer. In response to the Central Bank policies of keeping short-term rates, the bond market is expecting inflation to continue to rise, and in response has already driven longer-term rates up considerably. Who is to say whether they will keep rising? When the Federal Reserve’s “quantitative easing” policy ends, history tells us economic growth will likely slow, and thus longer-term rates may fall rather than continue to rise. So instead of trying to time such movements, investors are better advised to build and manage well-constructed portfolios that balance risks and take advantage of pricing opportunities, even in the fixed-income area.
