Looking after long-term family money is very different from running short-term trades...
We wrote it to make ourselves think deeper about preserving and growing family wealth. Writing a book is good for that. It forces you to expand on your ideas and organize them in a logical way. When you're done you often find you have new insights and a fuller understanding of your subject matter.
But writing a book is not the end of the process. It merely plants thoughts that grow and mature over time and bear fruit much later. One of those thoughts is the starting point for today. Family office investors have an advantage that other investors do not: time. The challenge is how to use it.
The simplest way we can benefit from our time advantage is to wait for great investment opportunities. You want to buy at 'once-in-a-lifetime' market extremes... times when bearishness reaches a maximum.
Market bottoms occur when selling has been exhausted and the market can go no lower. That's when you find real bargains. Of course, this is also when buying is highly unpopular...and the herd is stampeding in the other direction.
The Dow Jones has traded lower than 10 times earnings on three separate occasions in the last 100 years. A rather clumsy trading strategy would have been to go long the Dow whenever its P/E ratio sank below 10...and then short whenever it went over 20.
In the 1930s, the payoff was about 200%. In the 1950s and 1960s came another triple. And between 1980 and 1995, it produced a fivefold increase. In other words, this strategy – low risk, because you would have always been buying at low price-to-earnings multiples – could have multiplied your money about 45 times.
This is little more than a way of doing what all investors are supposed to be doing: buying low and selling high.
Julia Guth and her father, Jim Cooke, interviewed Will and me about our family office project for The Oxford Club. Julia made the point that it was 'too easy... you just spend most of your time waiting.'
But waiting is the hardest thing for most investors to do. Besides, they don't have the time to wait. For the typical investor, waiting is almost out of the question! The average investor can't buy low or sell high – at least not following this simple model. He is a prisoner of his own life- and money cycles.
He rarely has any money to speak of until he is in his 40s and 50s. And then he feels he has to take advantage of the investment opportunity at hand. He can't wait for the market to tell its story. He has his own narrative to worry about. And that usually involves building up a 'retirement nest egg' by a certain time, often only a few years after he begins investing.
If you look at stock markets today, for example, you find P/E ratios well above 10. This is way out of our range. But prices could remain high for many, many years.
What is the investor to do? He cannot simply do nothing. He can't wait. He has to 'put his money to work' as soon as possible. Every stockbroker and retirement planner tells him so. Waiting is simply not an option.
That is the advantage of time. As family office investors, we can wait. And we can buy at historically low prices. So low that, barring a genuine Armageddon, you are practically guaranteed capital gains over the following 10 years.
That is precisely what we are doing. We are waiting for ultra-low prices in stocks...and looking around the world to try to find them. We are also looking...and waiting...for ultra-low prices in real estate.
One other major thing we are waiting for: a turn in the bond market. Not that we will take a direct position on it. But we will be 'short' bonds in our other investments, particularly by owing (not owning) long-dated mortgages.
Mostly, as Richard Russell puts it, we are waiting for the market to 'tell its story.' We know markets and economies travel in long patterns – up and down and then up again. But we never know for sure in what direction they are going at any particular time. We have to wait to find out. Then we can make a major move into the market without the same levels of uncertainty and risk that other investors must live with.