Playing the Long Game Can Earn Your Portfolio Big Rewards

Part of the network APRIL 17, 2020 ■ Playing the long game can earn your portfolio big rewards

By MARK ARMBRUSTER be used to offset gain and income in the future. he song “Mr. Bojangles” is a staple Another approach is to identify the most on radio stations that feature songs attractive market segments and buy them from the 1970s, even though it was when they are at their cheapest. What if you Twritten in 1968. Most of us have heard could buy an investment that has historically the popular version, by the Nitty Gritty outperformed the overall U.S. stock market Dirt Band, which hit No. 9 on the Billboard VIEWPOINT by 2.5% annualized over the past nine de- cades? What if this investment was trading charts. However, the original version by Mark Armbruster upstate New York native Jerry Jeff Walker at a historically low valuation? Would you is still relatively obscure. buy it? Most people wouldn’t when they real- “Mr. Bojangles” recounts an experience when they ended, stocks tended to experi- ize that I’m talking about value stocks, and Walker had when he was sitting in a New ence some of their best returns coming off that they have underperformed the overall Orleans jail after being arrested for public those bear market lows. stock market for the past 10 years. However, intoxication. It is a true story of a talented The best way to participate in this is to not for true long-term investors, such a scenario homeless man with whom Walker shared sell out of the market. Just like Woody Al- is a dream come true. Not only have value the cell. In addition to reaching number nine len’s rule for success, showing up and being stocks outperformed the market over long on the charts, the song has been covered in the market will account for a lot of the ulti- stretches, but their subsequent gains have by diverse musical heavyweights such as mate returns you achieve. That can be diffi- been even more impressive after long peri- Bob Dylan, John Denver, Neil Diamond, cult emotionally when the markets are rapid- ods of sub-par performance. It is uncomfort- Whitney Houston, Sammy Davis Jr. and ly declining, and your account balances able to buy into something that has under- many others. keep shrinking. However, the best investors performed for ten years but having the cour- In a 1998 article on Walker, the Dallas are made during these periods. age to seize these types of opportunities is Business Journal noted that his albums typi- Warren Buffett famously invested $5 bil- how many of the investment greats have cally sell 30,000 to 50,000 copies, not many lion in Goldman Sachs in 2008 while similar made their money. by the standards of the artists noted above. investment banks were literally going out of A recent white paper from institutional in- So it’s fair to say that commercial success business. He was able to negotiate terms vestment firm GMO points out that the U.S. from record sales has not been a great that mere mortals wouldn’t have access too, stock market has never suffered a perma- source of wealth for Walker, despite spend- such as preferred shares with a hefty 10% nent impairment of capital from starting ing his life as a professional musician. Public dividend and a large chunk of warrants to points when the market was trading at a information isn’t available, but royalties on buy additional shares at an attractive price. long-term price-to-earnings ratio of 13 or just “Mr. Bojangles” alone have probably ac- However, his courage in the face of financial less. Even with the recent downturn, U.S. counted for more income than all of Walker’s turmoil is what mattered. Buffett’s ultimate stocks still trade at a long-term P/E of around records combined. total return on the trade is difficult to calcu- 25, well above its historic average. So, the Do you think when Walker was in his Lou- late since terms were ultimately renegotiat- overall stock market may not be cheap, but isiana jail cell he was thinking about how that ed, but suffice it to say he made billions. It is much of the rest of the world is. Valuation ra- episode would be pivotal in his life? Proba- certainly an advantage to have $5 billion in tios for the developed international world are bly it wasn’t a “wake up call,” since he was idle capital when stocks are down, but even less than 15 times earnings, and for the an admitted alcoholic and didn’t stop drink- more modest individuals have the opportuni- emerging markets they are even lower. ing until many years after his legal skirmish. ty to profit handsomely from market down- Since international stocks have been poor Interestingly, what likely was a bad day for turns if we have the risk tolerance to get in or performers relative to U.S. stocks in recent Walker actually turned out to be an opportu- stay in the game when things look the worst. years, they may also be difficult to stomach, nity that would set him up financially for the Beyond just being present to participate in but they will likely experience strong returns rest of his life. the markets, there are deliberate moves you in the coming decade. We may not be “down and out” today the can make to improve your odds of financial Good investing can be hard, but great in- way Walker described his circumstances in success. The first is to realize every loss vesting takes an almost inhuman amount of the song. However, today’s environment of available in the taxable portion of your port- emotional control. It is easy to look at the re- sickness and economic decline is certainly folio. It may seem contradictory to advise cent past to make decisions, but it is wise to challenging for many. It has also taken a selling stocks, but just because you sell remember Wayne Gretzky’s advice to “skate heavy toll on the capital markets. doesn’t mean that you have to be out of the where the puck is going, not where it has As of this writing, the stock market has market. Doing tax swaps by selling invest- been.” The best returns often come to those fallen over 35% from its peak in February. ments at a loss and immediately repurchas- who are able to turn their worst days into That’s a painful drop, and it may get worse. ing similar (but not identical) investments their best days, just like Walker. So, while The worst historical bear markets have seen can keep your portfolio exposures in place your portfolio may be down, this just might stocks drop by around 50%. Despite the but net you significant tax benefits. These be the opportunity that sets you up financial- magnitude of their drops, a characteristic losses can be used to offset capital gains ly for the rest of your life. that 100% of historic bear markets have in and modest amounts of ordinary income. Mark Armbruster is president of Armbrust- common is that they eventually ended. And They also carry forward indefinitely and can er Capital Management Inc.