40th Reunion: Panelists' Opening Remarks
At our roaringly successful 40th Reunion, several classmates appeared on panel discussions focused on various issues of current interest. Transcripts of those discussions are not available. But we've asked the classmates involved to submit their opening remarks for publication on this Web site.
We will post every file we receive, as they come in. Here's the first one from Nikos Monoyios ’72 :
Princeton University Reunions Panel
"Investment Advice in a Turbulent Economy"
Nikos Monoyios ’72
Friday, June 1, 2012
In the fall of 1968 when I first sat in this room and tried to figure out what Prof. Burton Malkiel was talking about in his Econ 101 lectures, I had no clue about the stock market or the subject of investing. A couple of years later, I was fortunate to secure a relatively menial job of assembling the index for the first edition of his classic book "A Random Walk Down Wall Street”. Since there were no PCs let alone word processors, I had to read the manuscript several times and assemble the index on actual paper index cards. The book sparked my interest in the stock market but puzzled me because on the one hand it tried to show that the average investor (or even the professionals) could not possibly hope to beat the market but on the other hand told us how he had done it successfully enough to allow him to leave Wall Street and become an academic.
Through a rather circuitous route, I ended up pursuing a career in investments partly for the challenge to prove that the impossible could indeed be accomplished. My professional career was spent managing well-diversified equity mutual funds using quantitative models with consistently good results. At The Guardian Park Avenue Fund my former colleague Chuck Albers and I over 26 years were able to beat the S&P 500 by 372 basis point per year after fees and expenses. We repeated this performance with the Oppenheimer Main Street Opportunity Fund where we beat the R3000 by 525 basis point annually over 8 ½ years until I retired in 2008. Personally, I have pursued an entirely different style of investing with highly concentrated small cap value stocks in the energy and mining sectors with even better but admittedly much more volatile results.
The main lessons that I have learned over 40 years that are still relevant in a turbulent world are these:
1. Although it is very difficult to beat the market, it is not impossible and the rewards can be great.
2. Risk is in everything. There are no risk free assets.
3. Bonds are especially risky right now.
Jeremy Grantham, of GMO said earlier this year: "We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long duration portfolios loom, and monetary policies already have added to the specter of rising yields”. http://www.cbsnews.com/8301-505123_162-57373079/jeremy-granthams-investing-strategies-for-2012/
James Tisch, CEO of Loews this week called bonds "certificates of confiscation”. http://www.businessweek.com/news/2012-05-30/tisch-calls-bonds-certificates-of-confiscation
Warren Buffet echoed his sentiment in his 2011 Berkshire Hathaway Annual Report letter saying: "Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits and other instrunents. Most of these currency based investments are thought as safe. In truth they are among the most dangerous of assets. Their beta may be zero but their risk is huge”. http://www.berkshirehathaway.com/2011ar/2011ar.pdf
4. This leads me to the next point which Richard Thaler, Amos Trevsky and Princeton’s Daniel Kahneman have called Myopic Loss Aversion. Investors tend to be more sensitive to losses than gains of a given magnitude. They also have short-term time horizons and check their results too frequently especially in today’s volatile and wired world. This leaves them to underweight volatile investments like common stocks and prevents them from realizing the superior returns from stock ownership in the long-run. I know that I will lose money on many of my investments and I know that I will lose money over many short time periods but it is the risk I take to make money in the long run from my big winners.
5. Fees, transaction costs and taxes matter. Here I agree with Prof. Malkiel that as a default option, low cost index funds make sense for most passive long term investors. At the risk of offending many, I would avoid hedge funds, funds of funds, limited partnerships and high turnover funds.
6. I would also avoid leveraged investment products and leveraged companies (financials) or companies that rely on credit to sell their products (housing, autos etc)
7. Inflation and currency depreciation is the greatest risk facing U.S. investors today. Forty years ago, the US was a creditor nation and had the dominant economy in the world. Today we are a debtor nation and our relative strength in the world is declining.
Even though I am 62 years old and retired, I do not own any fixed income investments. If I did, they would be bonds denominated in strong currencies of commodity exporting countries with small populations like Canada, Australia or Norway.
I am 100% invested in stocks primarily in energy and mining companies with an international focus. I also own land and cattle as I believe that food and energy inflation are interconnected. I view gold only as an insurance policy against financial collapse and as such I would only allocate 1% to 5% of my assets to physical gold.
In parting I would close with the advice of Polonius from Hamlet:
"Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry”.
Nikolaos D. Monoyios C.F.A.
GPAF annualized rate of return from inception June 1, 1972 to February 28, 1998 +17.00% vs. +13.28% for the S&P 500. Chuck Albers was Portfolio Manager during this entire period. N. Monoyios was a member of the investment team from January 1979 to February 1998.
MSOPP annualized total rate of return from inception September 30, 2000 to April 30, 2009 +1.82%vs. -3.44% for the R3000. N. Monoyios was co-manager of MSOPP during this entire period. C. Albers from inception until his retirement in December 2003.
From Skip Rankin:
Opening Remarks of Skip Rankin
at the Alumni Faculty Forum
at Princeton University - June 2, 2012
Unlike many countries, the United States has failed to adopt a comprehensive federal renewable energy policy. While certain laws have been enacted and specific renewable energy programs have been initiated, almost all of the federally organized programs and incentives are authorized for short periods of time and therefore must be periodically re-authorized or re-funded. As a result, there are "peaks” and "valleys” in the development, construction and financing of renewable energy projects in the United States. Most significantly, many of these incentives are an outgrowth of special policy initiatives, such as the Economic Stimulus legislation of 2009 and specific tax initiatives, rather than the outgrowth from a uniform federal policy on renewable energy as part of a comprehensive national energy policy. Today, most of the installed renewable energy projects in the United States are the result of state-passed initiatives and programs rather than federal programs. Twenty nine states plus the District of Columbia and Puerto Rico have established mandatory renewable portfolio standards ("RPS”), and nine states have set voluntary renewables goals. The RPS is the single most effective program for encouraging the development and installation of renewable energy projects. It is projected that the RPS programs will support in excess of 6,750 megawatts of new renewable power by 2025, an increase of over 575% from levels in 1997. This figure represents enough clean power to meet the electricity needs of more than 47 million typical homes. The RPS programs currently promulgated by California, Illinois, Minnesota, New Jersey and Texas create the five largest markets for renewable energy growth in the country.
The DOE estimates that domestic wind power could reach a capacity of 61GW or greater by 2030. A major incentive for the growth of wind power has been the Production Tax Credit ("PTC”), which originated with the Energy Policy Act of 1992. Currently, an income tax credit of 0.022 per kWh is available for electricity produced from utility-scale wind turbines. The PTC has expired three times in the last decade only to be renewed each time, although with significant interruption to the industry as each expiration date approached. Currently, a "placed in service” requirement applicable to the PTC for wind projects has been extended to the end of 2012. As of today, it is not certain if the PTC will be further extended beyond this calendar year. Already, the impact of the expiration of the PTC has been felt in the wind industry, with a reduction in the development of new projects, the curtailment of manufacturing for the wind industry, and the related layoffs of workers in that industry.
Offshore wind power in the United States remains a relatively new industry with the first U.S. offshore wind farm to still be constructed. While federal authority for certain wind projects, including the Cape Wind Project off Nantucket Sound, has been obtained, there are still significant difficulties in the permitting process and in obtaining approvals of local states and communities, and thus the industry has grown slower than initially anticipated. Nevertheless, it is a subset of the wind power industry that is ripe for development and growth in the mid-Atlantic and Gulf Coast regions.
The DOE estimates that approximately 16 GW of solar thermal capacity could be available by 2020. Concentrating solar powered thermal plants with heat storage capacity are increasingly a choice for large central station generating plants in the sun-rich areas of the Western United States. Many solar energy projects are eligible for the current ITC which is equal to 30% of eligible expenditures. Such property includes equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat.
The renewable energy market in the United States relies primarily on market forces and tax incentives to encourage development and installation of new projects. Private capital has been the driving force thus far in the development of renewable energy in the United States and is likely to remain the main source of capital for such projects in the near term. This reliance on market factors creates opportunities for overseas investors, particularly if such investors are experienced in the sector and can bring along with them a knowledge of new technologies and improved applications.
The need for additional renewable energy projects is clear. State governments have continued to be supportive of these projects and additional private capital will be the main driving force to assist the industry in achieving its next level of capacity.