How is this crisis different than the Great Depression?
The financial
system wasn’t very complicated then, so it’s totally
different. Frankly, I don’t think anyone understands the Great Depression
that well. Most misunderstand what the New Deal did for us. I don’t
think it did much to help; in fact, it made it [the Depression] longer. We got
out of it with World War II, which made it possible to suck up a good part of
the labor force. You take all the men, make them soldiers, and don’t
pay them. That’s what worked.
What can we learn from the pain we’re experiencing now?
The world is
risky. It’s not very easy to see through things while you’re
going through them. Who knows? We had this big crash in 1987 that resolved
itself within months. Now this one seems to be different. We seem to be having
a recession more on the order of 1980-82. Hopefully it won’t be more
severe than that. But at that time, we didn’t have such a collapse of
the financial system. Every downturn is different.
If markets are efficiently priced, why did they crash?
Efficient-market theory can’t cause a recession [laughter]. It gets
blamed for everything. In a period of high uncertainty, it’s very
difficult to figure out what the right prices are for stocks. For example, how
do you value all of these toxic mortgages and other stuff sitting on banks’
balance sheets?
This is basically a general market crash. If you want to take a message to
investors, this is a period where diversification is more important than ever,
because not only has the volatility of the market as a whole gone up, but
individual stock volatility has gone up. There’s much more dispersion
of returns now than there was when stock market volatility was lower.
Is it possible to time the recovery of the stock
market?
For most investors, is passive investing the way to go?
It’s
not a belief. It’s a fact. It’s simple algebra. Passive
investors [who typically invest through index funds or ETFs] don’t lose to active investors. If some active investors
out there — including mutual funds — beat the market, that’s
at the expense of other active investors. You have to pick the right manager or
stocks, and there’s no hope of doing it well.
Are we in a new era where the old rules don't work?
I have no
advice with respect to asset mixes. If you wish you hadn’t been so
heavily invested in stocks, you probably never should have been invested in
stocks. Periods of high volatility occur. This is very high, but they occur. If
you’re really upset about your mix of assets right now, then you got
in under false pretenses. There will always be periods of volatility.
Goldman Sachs recently suggested that a “trough in the global
industrial cycle may be in sight.” What do you think?
I have no idea,
and I don’t see how [Goldman Sachs] would. They’re not
credible on that score, because they don’t want people to pull out of
markets. That’s their business.
What's been your personal investment strategy recently?
I honestly
haven’t done a thing. I don’t see any other message than
that volatility is very high and that it’s too late to avoid the loss
of value that’s occurred. I couldn’t have predicted it, and
I don’t know anyone else who could have. Do nothing. I think all of
this market timing is statistically unfounded. I don’t trust it. You
may avoid a downturn, but you may also miss the rise. Choose the risk tolerance
you’re OK with and hold tight.