How Can You Best Protect Your Portfolio?

Interview with Grant Williams

Grant Williams, one of the founders of Real Vision Television, shares his thoughts on what direction the world is going financially. Grant says, it boils down to risk and buying at the right price, rather than selling at the right price. Here’s why.

Douglas Goldstein: I’m very excited to have on, The Goldstein on Gelt Show, Grant Williams, who has spent 30 years in the world of finance.

He’s been with UBS and Credit Suisse. He’s been from London to Tokyo and New York, and to Singapore.

He’s got a very interesting newsletter called Things That Make You Go Hmmm, and he’s also involved in Real Vision Television.

Greg, you’ve been around the block and you’ve seen so many ups and downs in the market. These days there seems to be a lot of chatter and fear among people on the one hand, and on the other hand, people are very optimistic.

How do you get through the chatter to try and understand what direction the world is going financially?

Filtering through the Chit Chat in the Financial World

Grant Williams: First of all, thanks for having me on. It’s a great pleasure to be here.

It’s funny, but bubbles are only ever evident in hindsight, certainly to the masses, and in the middle of every bubble there have been plenty of people talking about the sky falling in.

The trouble is the sky always does fall in at some point.

So everyone that says, “The sky is going to fall in,” is always right. It’s just a question of timing and that’s where we are now. There are a ton of metrics-

Douglas Goldstein: I don’t want to get too specific. You’re saying that’s where we are now, but that’s where we always are.

If I’d asked you the same question five years ago, or ten years ago, or if I ask it to you again in five years, is your answer going to be the same?

Grant Williams: It’s a question of degree.

If you look at what’s happened since ’08, we’ve had this massive rebound. The people who fear the worst will point to the reason that the rebound has occurred, and the people that don’t fear the worst don’t really care.

They’re just riding the trend and they’re both perfectly acceptable ways to play this.

The problem comes when you get to extreme valuations, as we are at now. There are plenty of metrics in the stock market, which will tell you that they’re at all-time highs.

Douglas Goldstein: Before we get into the metrics, because I speak to a lot of people on the show, some of them are more optimistic while some are more pessimistic.

It often feels like there are so many different metrics that people use to look at the market, that depending on if you’re talking to, whether it’s a Republican or a Democrat, or an optimist or a pessimist, or someone who doesn’t know or knows too much, you are always going to get a different view on it.

At the end of the day, how can a normal person begin to dig through this?

How Can the Average Person Dig through All the Noise?

Grant Williams: If you want to boil it down, it’s about risk.

Every person has their own bugbears, their own risk that will hurt them more than other risk. You have to take a pragmatic approach and instead of being an optimist or a pessimist, just be a realist.

If you find yourself invested in a way that could hurt you if there is a recession or a stock market fall, let’s not say crash, you have to understand how to best mitigate the risk.

If you think it’s a risk worth taking, then fine.

But as expansions continue for longer, the risks of a recession, for example, increase and there comes a point in time where you have to think to yourself, “Okay, the chance of a recession and a correction in these markets is now sufficiently high that I need to take action.”

Whether that’s to raise cash or switch from equities to bonds, it’s up to every single individual person.

I think people get caught up in listening to so-called market experts instead of sitting down themselves and taking a realistic approach. “If something bad happens, what does that mean to me?”

That’s the most important question everybody has to answer.

Douglas Goldstein: Yes, that is a great point.

People have to realize that they are different from their neighbors and they’re going to all have a different tolerance for risk.

What about the model of investing, which I hear a lot?

My day job is I am a financial advisor, so I get to speak to people really nuts and bolts about what they hope to do in the future, and what their dreams are and their goals.

We have to convert that into, “What are we going to do today?”

A lot of times, and I feel the same way too, I’m optimistic.

I say, “Look how cool the technology is, and look how much better medicine is, and life expectancy is. The trajectory is so good.”

Do you think it’s enough for someone to say, “I’m not going to worry about it. Let me put my money in the market - money that I don’t need in the short term. I can handle the volatility and let the wonders of the world carry me to wealth over the years.”

Is that a model or is that just naivety?

Handling Market Volatility Depends on a Person’s Age

Grant Williams: I think it’s a model, but I think it depends wholly on your age.

If you’re a millennial right now, and you’re in your 20s and you want to invest in markets, and you have money you can put in there gently each month, and you’re not to touch it until you’re 60, that’s great.

You’re right. Put the money in the markets and don’t worry about it.

If you’re a boomer, and we’ve got the largest generation in history to ever retire; they’re starting to retire now.

Unfortunately, they have the highest allocation they’ve ever had to equities, which is around 70%, so then a correction stock market is a meaningful problem that you have to try and mitigate.

Yes, over time markets generally tend to go up.

We are evolutionary creatures and markets have an inflationary aspect. They’ll tend to go up over time but it really comes down to the time frame.

Anyone near retirement needs to think very carefully about the next five years, rather than the 20 years ahead of them, which a millennial can.

Douglas Goldstein: Grant, you spoke about the baby boomers. Many of them certainly have a lot of money in the stock market, and now they’re beginning to think A, about protecting their portfolio but B, about the fact that they might live 10, 20, 30, 40 years or more.

They realize they need to have some growth in their portfolio just to stay in front of inflation. How can someone in that situation begin to think about protecting his portfolio?

How Can Baby Boomers Think about Protecting Their Portfolio?

Grant Williams: That’s exactly it. It’s about protection and about understanding the risk as we spoke about earlier on.

Right now, we have the third-longest expansion in history going on in the United States, and as the United States’ markets move, so go the rest of the world in general terms.

If you look at every recession in the U.S. since 1980, the average draw down in the stock market’s been 37%. That’s a set of parameters and a set of problems that you have to think about.

You are about to retire, you have 70% of your money in equities, and there is an above average risk of a 40-odd percent draw down.

That’s something you have to take very seriously.

Ordinarily, you would be switching into bonds so you’d have some income for your retirement but obviously, bond yields are at all-time lows or thereabouts , so that’s a problem and cash, you’re getting no return on cash.

If you have cash in the bank, yes, you’re going to lose money over the next year in real terms, potentially, a ½%, 1%, but if you think the possibility of losing 10% or 15% in the equity markets is high enough, then paying 1% premium to own that option to buy things 10%, 15% cheaper makes a lot of sense to me, particularly if you are coming up to retirement.

Douglas Goldstein: I really like that strategy. It’s different from the much more complex strategies that a lot of times people try to sell.

Things like options strategies. They say, “Well, you could buy puts on the market or you could hedge or you can buy this alternative investment.”

So often, these are illiquid, complex, expensive investments, but people are desperate for yield and they are desperate for a solution.

As they are entering their retirement, they fall victim to a lot of these, I don’t want to call them scams because they may not be scams, they may just be inappropriate investments for someone who’s in their retirement years.

The expression on Wall Street often is ‘cash is king,’ and the ‘cost of liquidity,’ because everything has a cost. If you want to be liquid so you are nimble and able to invest when things look better.

You’re going to pay the cost of having the cash sitting there, doing nothing, but at least it’s available to you and not losing, at least in nominal terms.

That’s the model that really seems to work. Do you think that’s reasonable for most people, or does that just make them market timers? Market timers tend to be people who often lose.

Buy at the Right Price Rather Than Sell at the Right Price

Grant Williams: I think as markets increase, you can raise cash on the way up, and once you get to a level where you start to feel a little nervous, gently raise cash.

As things go a little higher, sell a little bit of your positions off and take the cash.

If you’ve invested money in the U.S. stock market in 1982, when nobody wanted to own stocks, they were trading at a 6% dividend yield and only six times earnings.

When you bought those stocks, you knew that buying them at that price would allow you to forget them and you’ve been able to do that.

You’ve been able to sit with those stocks for the last 30 years, and they’re going up and you’re in great shape.

Whereas if you buy stocks now, that’s not a comfortable position to be on.

You certainly can’t take your eye off the ball and leave them for 20 years like you could back in the ‘80s.

It’s really about buying at the right price rather than selling at the right price. If you buy things at the correct price, it takes care of a whole lot of problems for you.

Douglas Goldstein: You sound just like Warren Buffett, who said, “You’ve got to look at what something is really valued at.” Are you also a multibillionaire?

Grant Williams: No.

Douglas Goldstein: We’ll save that for next time.

Grant Williams: Only between midnight and three in the morning when I’m asleep.

Douglas Goldstein: But the advice is very good. Listen Grant, we are just about out of time, but I know you share a lot of your ideas and advice elsewhere.

Tell us in the last few seconds, how can people follow you and follow your work?

Grant Williams: In a couple of places, I write my letter Things That Make You Go Hmm… The website is ttmygh.com, I’m on Twitter @ttmygh, and then there’s Real Vision Television, which is another project that I’m involved in and very proud of, realvision.com where we interview, like you do, some of the smartest investment minds in the world.

Douglas Goldstein: And you are one of them. All right, Grant, I really appreciate you coming on to The Goldstein on Gelt Show. Grant Williams, thanks again.

Grant Williams: Thank you Doug, I appreciate it.