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Thinking Man's Investor --- Bob Wilson Takes the Long View of This Bull Market 10 August 1987, 3726 words

I READ THIS IN 1987 AND STILL REMEMBER THE "STEALING STUFF" QUOTE SO I HAVEN'T COMPLETELY LOST IT YET

ROBERT Wilson is an old and valued friend of Barron's, the subject of a number of interviews over the years, long a member of our investment roundtable and without question one of the finest investors ever to buy a stock or short one. Bob started from scratch -- or at least with very little of it -- and by sheer smarts built a considerable fortune (not, alas, the $1 billion worth he had his eye on, but one that we suspect equals the gross national product of several quite respectable countries). As he explains in the following Q&A, he retired from the field of battle a few years ago, his remarkable intelligence, lively wit and unfailing grace still completely intact. He still keeps a close and thoughtful watch on the world and Wall Street, and is still possessed of opinions that are as arresting as his point of view is incisive.

BARRON'S: Bob, we're coming up on the fifth anniversary of this great bull market. And we wondered. Is there any vast overarching significance to the remarkable rise in stock prices? You've always been the thinking man's investor, so we're after your thoughts. Big, little, irrelevant, irreverent, whatever.

Wilson: Well, my first thought is you've got the age wrong. You say five years, but it seems to me the bull market started in 1974.

Q: You think that the decline that began in 1981 was merely a reaction in a bull market, then.

A: Nothing more, really. The product of a severe credit crunch, deliberately created by the Federal Reserve to strike a meaningful blow against an intolerable inflation. Basically, the bull market started in '74. Between '74 and '81, the oil crisis came and went and the political climate in the country improved dramatically. And I think it's important to consider whether we should not be talking about the world bull market. I am not sure that the U.S. market can be identified separately any longer.

Q: Reasonable point. But, in any case, in your view this bull market began, not in August 1982, but in the final months, even weeks, of 1974, when the averages finally hit bottom.

A: Exactly. I would prefer to think of this market as a bull market that is now almost 13 years old, rather than one that is five years old. Now, certainly since the end of '82, the market has been monetarily driven. And instead of an inflation in the cost of living, as we had in the 'Seventies, in the past five years we have had an inflation in asset values.

Q: In 1982, you had an acceleration of the decline in commodities prices that started in early 1980 after the Hunt fiasco. And you also had a wobbly Mexico and a very sharp turn, as you imply, in monetary policy, from tight to easy.

A: Yes, and to set the stage a little more, you must remember that basically during the 'Seventies, because of the inflationary thrust, manufacturing capacity and mining capacity all over the world was built to excessive levels. By '82, the world was awash with excess manufacturing capacity, and manufactured goods, if anything, experienced a deflationary trend. Yet money was being printed like crazy all over the world.

Q: Which perhaps was the only way the world could pay for the increased price of oil -- that is, by printing more and more paper money.

A: Perhaps. But, in any case, what happened is the inflation switched in '82 from the things we live on to financial assets.

Q: Because . . .

A: Once excess capacity was built up in the manufacturing sector, world-wide, the increased supply of money no longer pushed up prices of goods that we consume. Instead, it started pushing up prices of assets such as stocks and bonds.

Q: Okay. Suppose, just because you're such a nice fellow, we agree that the bull market was born in 1974. What started it off?

A: The bull market started for two reasons. One: The bad news was out. Thanks to the vicious bear market that culminated in 1974, stocks had gotten to very low levels relative to asset values and cash flow. And two: The political environment throughout the world began to change. Particularly in the United States and Britain. Essentially, the leftward drift in both Britain and the United States was reversed in the late 'Seventies.

Q: That certainly was one of the great global themes of that entire era. The discrediting of socialism, the concomitant discovery or rediscovery of the joys of capitalism.

A: I must say that between '74 and '78, I was not bullish. In other words, I missed the first leg of our bull market. But I became very bullish in '78 when a Democratic Congress reduced the capital-gains tax, over the objection of President Carter. I felt that that represented a major change in the attitude of people.

Q: A change how? Can you be more precise?

A: In other words, before '78, I felt that the American public wanted to take my money away from me. And after that the people wanted me to get richer because they saw my net worth as a source of productive investment.

Q: Maybe, in truth, you grew on them. Maybe, they got to like you.

A: That's not possible because they would have gotten to know me better over that period.

Q: In any event, they were suddenly more tolerant of your getting rich.

A: They were killing the goose that laid the golden egg, and they began to realize it. They began to realize that economic growth was slowing down, inflation was accelerating, that the redistribution policy was not working. And the reduction in the capital gains tax in '78 was sort of a watershed in this regard. So I think that one could say that move in the stock market from '74 to '78 was just a recovery from a rather extraordinary depressed level. From '78 to '81, by contrast, stock prices rose in response to the change in the political environment. And then, after our minibear market in '81-'82, stock prices responded to the diminution of inflation, the decline of interest rates and the flow of funds into investibles from consumables.

Q: To coin a cliche, the 'Eighties have been the era of financial assets.

A: Yes.

Q: And even corporations have been busily investing in stocks rather than bricks and mortar.

A: They are buying in their own stock, you mean.

Q: And each other's, as well. We assume this is basically in reflection of that enormous overcapacity around the world you alluded to earlier.

A: In the beginning, what happened is that corporations curtailed investment, much of which was uneconomic, and bought in their own stock. Now, we are seeing the leveraged buyout, where basically managers of bureaucracies are being motivated like entrepreneurs. So there has already been a change from disinvesting to a kind of re-entrepreneurializing, if you pardon the expression.

Q: We will, but barely.

A: That change is taking place in a bureaucratic segment of the economy. In other words, the leveraged buyout is a good thing. Basically, we have in the United States a mature economy and an economy which has gotten encrusted with a lot of uneconomic investments and a lot of undermotivated managers. And Wall Street has done a very inventive job of changing a lot of this.

Q: So you feel that the trend toward consolidation and LBOs is all to the good. Sounds like you must have owned a lot of companies that were taken over.

A: Yes, I think it is healthy, and not necessarily for such crass materalistic reasons as you suggest. You know I'm rich enough to be modestly disinterested.

Q: Fair enough.

A: While, as I say, the takeover trend and the increasing number of LBOs, in my view, are positive developments, at the same time I think the country is in a period of decline, relative to a lot of other countries in the world. And I'm not claiming any profound or original insights when I say we have a lot of problems. But I don't think that they are Wall Street's problems; I think Wall Street has made the problems less severe than they otherwise would be.

Q: That's the nicest thing we've ever heard you say about Wall Street. We're sure you don't mean a word of it.

A: I was always very sweet about Wall Street in general -- it is just some of the products that it creates that have pained me.

Q: Do you see any particular non-investment implications in this long bull market? Is it a harbinger of a revival of civic spirit and economic buoyancy in the nation?

A: I don't think so.

Q: Too bad. More pragmatically, then, in view of the length and extent of the bull market, are you worried that the end is near?

A: The stock market is selling at the kind of price/earnings multiple it sold at for many years, in the 'Sixties. It shows no signs of excess. Incidentally, I may have given unnecessarily short shrift to your previous question. Although I don't read any great national or social significance into this bull market, aside from its heralding a fundamental change in direction away from leftist policies and misguided notions of how wealth works -- and, obviously, these are not unimportant -- on a slightly less elevated level the strength in the market has yielded a general good. Stocks are high enough now so corporations that need to raise more money can do so.

Q: But you don't buy the thesis that this market is overextended?

A: Not at all.

Q: This is not 1929.

A: That's rubbish. There's no true resemblance at all. There is an incredible amount of bearishness among investors. There is a lot of evidence of underinvestment. There are considerable cash reserves. Corporations still have cash flows that exceed their internal requirements. And they are buying in their stock, or buying in other people's stock. The only thing that really worries me is Japan.

Q: You and half the world.

A: Yes, I know that here I am being very obvious. But the Japanese market, I think, has a lot of the characteristics our market had in 1929. And, in fact, the country has a lot of characteristics that we had in 1929. We were then the vigorous pacesetters of the world, and continued to be for 20-30 more years. And I think Japan is the world pacesetter now and will continue to be. In other words, I am very bullish on Japan, but I think their market has reached absurd levels. And if the Japanese market breaks -- and I think it could go down 70%-80% -- this could affect the cash flows into our market and cause our market to turn down. But I don't see anything internally, within the United States, that would cause it to really break in the foreseeable future.

Q: There is, as you say, a tremendous amount of bearishness around. You do have people like Larry Tisch and Warren Buffett who are quite sour on the prospects for the market, who either feel that it is absolutely overvalued, or that they themselves can't find values in this market.

A: Well, certainly the market is not undervalued. But the truth is that Larry Tisch and Warren Buffett like to steal stuff. And unfortunately for them, stocks are not steals now. Value players have a difficult time these days. I mean, what is driving the market upwards are deals and rapidly rising earnings among cylical stocks, neither of which is Tisch's or Buffett's cup of tea. But just because Tisch and Buffett are not interested in a lot of things that are going on doesn't mean that the market is overvalued.

Q: But what about the argument, Bob, that we have a dangerously leveraged society? That there's just too much debt at every level, that there's too much individual, corporate and, of course, government debt?

A: That's probably going to cause the end of this bull market sometime in the next several years. Henry Kaufman, of all people, had some very perceptive things to say on the subject. He pointed out that the heavy level of debt in our economy is not going to result in a panic, as, say, in the 19th century, or even the great crash of '29. But what it is doing is gradually building up more and more demand bottlenecks. For example, farmers are really not spending money on farm machinery; instead, they're paying down their debt.

Q: And they're not the only ones.

A: Consumers will reach the point where they will want to start reducing their leverage. Certainly many corporations are also in that position, where they are curtailing capital spending in order to pay down debt. So I do believe that the end of this market, when it comes -- and we are talking a matter of years, not months -- will come when we have a recession, maybe a mild one, where these various bottlenecks will make it very difficult to stimulate demand.

Q: In other words, you're saying that the calls on cash flow throughout the system will be so severe as to leave too little for consumers and corporations to buy sufficient goods and services to stimulate the economy when it most needs stimulation.

A: Exactly. In the next recession -- and I presume we will have one eventually -- the calls on cash flows will make it more difficult to move out of that recession. And maybe we will have a period of no growth and declining corporate earnings, with interest rates remaining high. This, of course, all assumes the Japanese market doesn't break in the meantime.

Q: That would pull down markets world-wide, you think.

A: Yes, because so much of the world's capital comes from Japan. And you can argue that if the market collapsed in Japan, the Japanese cash flows would not be affected. But their psychology certainly would be.

Q: Freud, schmeud. But, you're right. Psychology is undeniably critical when you've got a market like the Japanese, floating on thin air.

A: The bulls argue that if the Japanese market goes down 20%, Japanese investors will be inclined to put more money in the market because they will be sufficiently frightened to start worrying about high P/E ratios in their market and they will see ours as being relatively cheap. And that may be true. But if the Japanese market goes down 50%, at which point they would still have a price-earnings ratio of 30-40 times, then it might be a different story.

Q: Do you have a gut feeling as to when the Japanese market might start declining?

A: I don't know. It seems to be acting a little toppy now.

Q: You are seeing some rather disturbing signs. First a sharp decline, and then a big rally. This is the way markets usually top out.

A: Every once in a while one sees just ridiculous levels of overvaluation, like our dollar a few years ago, and the Japanese market now. So I am on two tracks. If the Japanese market does collapse, then our bull market is over. Our markets certainly will not collapse to the degree that the Japanese market will, because it is not as overpriced. Nor is there as much credit in it. But a collapse in Japan will probably cause some decline in our market. But barring that, I think that our market can go up about as much as corporate earnings go up, which will be quite a bit in the next two years because of the huge pickup in the cylical sector.

Q: But how sustainable is that cyclical recovery? Automobiles and housing, the two engines of the economic recovery since '82, seem to be sputtering.

A: Yes, the only thing that is holding us up is a change in our balance of trade. But meanwhile, the countries that have been stimulated by exporting to us will have less stimulus. And I don't know how much they will be able to import from us or how much they will be inclined to import from us. All of which means that maybe the time is sooner rather than later, when we have our next recession.

Q: Maybe.

A: I can't really time when our next recession will be.

Q: You're the only one in the country who can't.

A: That is why I am retired.

Q: What's your feeling, Bob, about the leadership of the market from here on? Up to now, of course, it has been dominated by familiar names.

A: I think that that will continue.

Q: You don't think the advance will spread out?

A: The reason I don't think it will spread out is that I think the public -- and I define the public, to paraphrase one of Russell Long's great remarks, as "the little millionaires" -- I think the public is made up of people who have made money and are relatively smart. I think the public realizes that it does not have a chance against institutional investors who spend full time at it, have huge computer banks and all those investment tools. And when the public gets bullish on stocks, it is more inclined to put money with mutual funds, raise their own profit-sharing contribution, put more of it with fiduciaries, in short. It cannot really be bothered with the little stocks, or many of the little stocks.

Q: So your feeling is that unlike every other bull market that we have seen, this one is not going to end with a block party.

A: That is correct. I don't think it is going to end that way.

Q: Tell us . . .

A: And there is another reason for my feeling, a fundamental reason. The smaller companies are generally marginal companies, and they prosper from economic exuberance. They haven't, by and large, prospered since we haven't had that sort of exuberance. There haven't been the fundamental earnings stories to attract people to them.

Q: Go on.

A: Alcoa's earnings, for example, are going up more than those of most O-T-C stocks. And unless you get a period of economic exuberance, which seems unlikely, there won't be the fundamental underpinnings for a broad rally.

Q: We see. Well, that makes some sense. Our own inclination is to think that logic won't obtain here, that people, when they get bitten, will start to look for stocks on their own; they'll grow convinced that they're just as smart as the guys they had put their money with, the mutual-fund managers. And, of course, they are. Which is no great compliment. And they'll gravitate to what hasn't moved, namely the smaller stocks.

A: I don't think it will happen that way.

Q: Ah, well, Wilson, you're bound to be wrong once in your life. In any case, given your view, what kind of stocks are you buying?

A: I don't buy stocks anymore.

Q: What do you do then? You give your money to lugheads to lose?

A: Some of them have done quite well. Others have not done all that well.

Q: The ones who don't work for you anymore haven't done that well.

A: I don't buy individual stocks at all.

Q: So you really are retired.

A: I really retired, yes.

Q: Oh, what a wonderful life.

A: I like it.

Q: But you never made your billion.

A: I never made my billion, and never will make a billion.

Q: And that's really sad, because you are the only man we know who deserved it.

A: I really wish I had another 10 years.

Q: You're not 100 yet.

A: Well, I think that this is a business of relatively short life expectancy. You know, athletes have short life expectancies, ballet dancers do. I think most entrepreneurs do, as a matter of fact.

Q: You are talking about professional lives.

A: Yes. There have certainly been exceptions. Warren Buffett has had a long career. But most people who make money, professional investors, seem to have short life expectancies, except for the billionaries, George Soros and Warren Buffett. And they seem to go on and on. I felt when I was 40 that I would lose my touch at some point.

Q: What unwonted modesty.

A: Well, I did. For close to three years I did not outperform the averages, and I had resolved when I was in my 40s that I would retire if I had three years of not outperforming the averages. Now, I don't like being retired as much as I liked making money in my halcyon days. But I like it better than in the last few years before I retired, when I was struggling and struggling, and not really producing much.

Q: You realize that the average professional money manager has not beaten the averages in the last five years.

A: Yes, but he can't afford to retire. I remember once talking to a junior partner of a big brokerage firm -- it was actually Bear Stearns when Sy Lewis was running it -- and in his last few years Lewis wasn't running it very well. And I asked one of his junior partners why Lewis didn't retire. Because, the junior partner said, then Lewis wouldn't have anybody to have lunch with.

Q: M-m-m-m. Strikes us as a blatant attempt to get us to pick up the check at our next lunch.

A: Absolutely. Can I order the wine?

Q: You can order the wine. Meanwhile, we'll chew over what you've said. Thanks, Robert, for rousing yourself from retirement.