Q&A: J. Rush Vann on investments

Texas money


J. Rush Vann on investments

Many analysts feel that the U.S. stock market is overvalued. What do you think?

There are many tools to evaluate the over or undervalued nature of the stock market. For long-term investors, meaning those with a time horizon longer than three to five years, it makes little difference.

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My analysis, which tends to focus on relative strength, trends, momentum and sectors, shows that, indeed, the market is 200 percent overbought short term. This level is the most overbought since 1961.

However, studies also show that just because a market is extended does not mean it must collapse. “While the 1-month returns following extreme overbought conditions are no better than any other day, on average, the longer time periods all favor continuing to invest in strong markets despite overbought conditions.” (Dorsey Wright & Assoc.).

The performance numbers back that up. Stock markets have corrections and the occasional bear market. That is a normal part of the ebb and flow of market capital. We must remember that calling a correction or bear market is very difficult and is often wrong.

Yet, analysts continue to pound out opinions based on PE ratios, sentiment indicators, length of the current bull market, earnings, etc. None of these predictions works very well. If we can look back at history a bit, the three major shocks to the U.S. financial system were just that – shocks.

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Nobody except the occasional newsletter writer drumming up business claims to have predicted the 1987 crash, the World Trade Center terrorist attack in 2001, or the collapse of the sub-prime mortgage market in 2008. Other than those three instances, most of the retreats in the last 30 years have been quite orderly.

Will the pending rise in interest rates affect the equity markets?

Money goes where it is treated the best. Rates have been at all-time lows for many years now. Some think too long. Raising rates along a predictable and measured curve implies that the economy is improving over the sluggish malaise we have been experiencing for the last 15 years.

There is ample evidence to support good equity markets in both rising and falling rate environments, but for different reasons. It does not look like the Fed plans to raise rates far enough to risk making fixed income assets a real threat to the stock market.

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What’s the difference between passive and active investing? Your opinion?

Active investing is the typical historical method of allocating money. Mutual funds, buying and selling of individual stocks and bonds, 401(k) plans, IRAs, etc., and managing those assets – usually through a licensed financial professional – to achieve a desired goal has been the norm.

This type of investing requires paying a professional a fee for his or her expertise and guidance along the way. In the last 30 years or so, we have seen the rise of discount firms that, for a reduced charge, let the investor manage his or her own money in the same assets.

Passive investing is nothing more than buying an index and mirroring the gain or loss of that benchmark. This strategy requires minimal skill and, as a result, the cost is extremely low.

The current argument over active versus passive investing centers around studies that show that the majority of active managers cannot consistently beat an index. That argument is undeniably misleading and is easily disproved.

In the short run – one or two years – passive investing can beat actively managed mutual funds and exchange traded funds (ETFs). At the same time, with the proliferation of these active funds and ETFs, there are bound to be many funds that don’t beat their benchmarks.

Yet, it is quite easy to find many actively managed investments that, clearly, outperform their respective index over a 3-year, 5-year and historical time frame.

The key is knowing which ones outperform and which ones do not.

There is nothing imprudent in allocating some assets to strictly mirror an index. However, in my opinion, this path fails to take advantage of all that the investment community has to offer in the way of market research, trend analysis, proper allocation, diversification, temperament and experience.

I project that indexing will be around in the future, but that active investing will continue to be the tool of choice for most investors.

J. Rush Vann is the owner of J. Rush Vann Investment Management, a firm licensed under broker-dealer and investment adviser Rhodes Securities. A Fort Worth native, Vann graduated from Trinity Valley School and Austin College and holds a master’s degree in financial management from the University of Dallas. He has worked in investment management for 36 years and also taught a course on technical analysis at Texas Christian University for seven years. www.vanninvestments.com