NEWSWEEK: Why do you think the Fed cut again?
TOM GARDNER: A lot of economists have been critical of the Fed for not acting quickly and substantially enough to slow down the market decline, not just for businesses that shouldn’t really be out there in the public markets, but for healthy, vibrant, strong companies that have been absolutely waxed during the past year. Historically, when there is one rate cut, there are usually a couple of rate cuts. Although I can’t be sure what [Fed Chairman Alan] Greenspan is thinking, in this case he must be looking at the overall climate and thinking that there is a real pessimism out there that needs to be counterbalanced.
Is the Fed more concerned than anyone had previously thought?
Any time you have a surprise intervening move, it’s a noteworthy event, whether it’s a rate hike or a rate cut. Everyone is trying to interpret exactly what the Fed’s position is…I think Greenspan is worried about companies saying, ‘There’s no reason for me to spend, because there are no profits for me to spend.’ When rates are cut, more capital again becomes available. Although now, I think, venture capital is much more educated than it was five years ago. And it will be much more prudent, much more skeptical.
What did the market’s surge mean?
I think one or two days is too short term to predict whether or not the rise is meaningful. I’m more inclined to think about how the businesses are doing.
How are you feeling about tech stocks these days?
I would challenge the classification of tech stocks, just because I think it’s very difficult to draw a meaningful generalization. Tech companies are such different creatures. Looking forward 10 years, I think there are some wonderful opportunities in technology. We are not going to see the same across-the-board enthusiasm for new technology because the market, and investors, have been taught a lesson over the past year. But the core profitable opportunities in technology-and there are so many of them over the next 10 to 20 years-are such that something like the QQQ [an index of the 100 largest companies on the Nasdaq] is a wonderful investment for someone to have in their portfolio. By investing in the QQQ you are getting the big heavies in the Nasdaq, and most of them are technology-related businesses. I think technology, as defined by the Nasdaq 100, is undervalued over the next 10 years. I think it’s a great investment.
What about for the next year?
I have no idea. At a conference in Kansas City, someone said, ‘I have three years to invest in new technology before I retire. Is this a good time? Because I’m down by about 35 percent.’ And I said, ‘Honestly, if you have only that short a time frame, even at this price I would be thinking about selling some of your holdings, because you’re taking too much of a risk over that short period of time.’ So a lot of it, for me, comes down for your time frame.
How about the market as a whole. Is it a good time to invest, or is it a month or so too late?
It all depends on your time frame. The average American is 34-years-old, so if we are talking about the average American it’s a good time to invest. And I know it sounds contradictory to say that it was a good time to invest one year ago, but if you are methodically adding new money, I think it’s always a good time to invest. It was very difficult to call exactly what would have happened over the past year. Then there are baby boomers and people who are getting a lot closer to retirement. As you begin to move up against that five-year time frame you should really begin to think about preservation, not accumulation.
What about an index fund for somebody who is older? Is it conservative enough?
For five years or more, it’s conservative enough for me. I think a total-market index fund like Vanguard’s should be in every investor’s portfolio, even if you have only the minimum in that portfolio, just to remind yourself of what the overall market is doing. Then, if other investments in equities aren’t doing any better than the index fund over five-year periods of time-or whatever longer-term period you want to take-why not just keep adding to that index fund? I’d say the average 60-year-old today would be very well-served by an index fund.
Some economists predict that the worst is over, others predict that the economy will continue to weaken before it recovers. Where do you stand?
I’m inclined to think that we’ve seen the worst, but I would not change my investment pattern based on that inclination.
Can you talk a bit about conflicts of interest some people in financial services might have?
Every time there is a reallocation there is a transaction fee, it generates revenue for the firm.
So the market strategist who says let’s go from 60 percent stocks, 30 percent bonds and 10 percent cash to 70 percent stocks, 20 percent bonds and 10 percent cash has just generated transactions across the board. The brokers can then call their clients and say, ‘We’re upping the stocks and lowering the bonds, do you want to make the shift? Well, it’s going to be a $500 fee for you to do that." That $500, a decent amount of it, is going into that broker’s pocket, so he has a real motivation to get out there and use the market strategist’s changed portfolio allocation. There’s a great quote that I ran across today, that says, ‘Too many financial services firms are engaged in the business of selling you a product that’s good for you, but best for them.’
So who do you trust?
Investors should either just index, passively invest and add money at very low fees methodically over time, or they really should engage the overall market and study it and learn about it. You should take, with a grain of salt, anything you hear for any source…. I think investment clubs and books that focus more on timeless education rather than momentary prediction are good resources. And I think-this is self promotional so I hate to do it-but if you find a community that has a civil and open forum, it can be a wonderful resource for those who want to dig in and learn this stuff.
Just how responsible is Greenspan for the movements of the market? How much influence does he really have?
I think he has pretty substantial influence. I think he should be given a certain amount of credit if the economy does well and a certain amount of blame if it doesn’t. But we should really be looking at the businesses, their values, and the leaders of those businesses. Let’s start with the S&P 500. Those 500 companies make up only 5 percent of all the public market companies in America and they make up 85 percent of the total value of the market. Those 500 companies and the leaders of those companies are setting the standard for commercial achievement that balances corporate profit and consumer happiness.
