May 25, 2020

Of Booms and Busts

I am now in the midst of my third career bear market. I have memories of what I think I did in the past two but our minds play tricks on us. So I went back twenty years into my investment records in Quicken to uncover the truth. Here is what I found and the lessons I have learned for surviving market turmoils.

Let me first share a little of my investing habits. Since I started my career, I have saved regularly into a 401(k). That is, I dollar-cost average. I also have made no loans or withdrawals from my 401(k). Until I got older, almost all of my savings went into equities. (When I refer to "savings," I mean money that my wife and I do not intend to use until after we have retired.)

I have managed mine and my wife's life savings as a single unit, regularly reallocating our total savings to a set mix of fixed income and equity securities. Until we were in our forties, almost all of our savings were in equities.

Over many years, we have slowly increased our allocation of fixed income to over 40%. Regardless of market swings, I have stayed close to whatever allocation we have agreed to, reallocating whenever we have strayed from our goal.

Because of job changes, most of our savings are with Charles Schwab, invested mostly in indexed funds plus some individual securities. We have a joint taxable brokerage account plus separate traditional and Roth IRAs for each of us.

My first bear market was the dotcom bubble that burst in early 2000, wiping out over half of the U.S. market value over nearly three long years, based on the S&P 500 index.

My second bear market was the Great Recession, which almost unbelievably was worse yet. In exactly 15 months, the S&P 500 lost 57%. But we survived both, not because I can pick good stocks and not because we are lucky but because of how we invested along the way and how we responded when the market dropped.

(Please note that all market value and S&P 500 figures refer to the S&P 500 index, excluding dividends. All references to our returns include dividends and all securities, including fixed income. My point is not to compare how our equities did with the market but to suggest how you can invest your money without taking extraordinary risks.)

At the start of the dotcom crash in 2000, we had three small kids. We had our savings allocated into 19% bonds and 81% equities on March 24, 2000, when the S&P 500 started its slow descent.

But I continued my regular 401(k) contributions through this terrible time. I also regularly reallocated back to my 20/80 fixed income/equities allocation. This required that I sell bonds that were doing fine and use the proceeds to purchase falling equities, a tough discipline. At the market's low point, we had 82% invested in equities.

During this bear market, I averaged losing about 16% per year. But if I ignore the monthly, weekly or even daily noise, and instead only look at year-end values for 2000, 2001 and 2002, we averaged losing less than 11% per calendar year for three years, or a total of 29%. This is primarily because we maintained a set allocation of equities and continued to make new contributions into equities.

This is far better than the 51% the S&P 500 lost from top to bottom. When considering a lifetime of saving, for most of us this is occasionally acceptable.

Bear markets do end, and from the market lows of 2002 the S&P 500 nearly doubled over the next five years. During those years, our total returns, including fixed income investments, actually outperformed the S&P 500. This was primarily because of international equities that performed very well, another allocation that can help to keep your total returns from swinging widely with the S&P 500.

But bull markets end, too. The Great Recession started in late 2007, and was brutal for investors. The S&P 500 lost 57% of its value in less than 18 months and our equities did about the same. Coming into the bear market, because of our ages we had increased our allocation of fixed income. Even with these fixed income holdings, which were also pummeled, top to bottom we lost 43% of everything we had saved over decades, a sobering loss.

Again, this isn't the complete story. The market rose for most of 2007, dropped significantly in 2008, and early in 2009 started a steep rise. So if I continue to ignore the monthly, weekly and daily noise, while the market gyrated dramatically, we lost less than 1% during the total of these three calendar years.

Yes, that is correct. Rather than the huge loss that the S&P 500 experienced top to bottom, we instead did not gain or lose much over three years, which is very acceptable. Keeping a larger perspective can be critical to good investing.

And as it did in 2002, the terrible lows in early 2009 were the start of the longest bull run in U.S. history that ran into early 2020. During these eleven years, the S&P 500 went up five times (plus dividends). And although we had a higher allocation to fixed income, we still averaged 10% per year return for 11 years, nearly tripling our savings.

So, what have we learned? Based on my sample size of two, I suggest the following for this and any other bear market. First, any money you may need for the next five years should be in cash or other fixed income securities. Markets can fall fast and recover slowly.

Second, agree to an allocation that you can live with over several years, regardless of market turmoil. I also urge you to keep at least half of the money you do not need for the next several years in equities, regardless of your age or circumstances. Then reallocate your current portfolio to this allocation and stay at this allocation for years, regardless of market changes.

Third, if you are working, continue to save and dollar cost average, preferably into equities. And do this regardless of what the market pundits report with every rise or fall in the Dow Jones. CNBC and Fox Business News provide you with little useful information. If you want to know more about how to manage your investments, read an investment book.

Good luck. Stay calm. There’s little magic with investing. It's mostly a little education and a heavy dose of emotional control.

Apr 12, 2020

Investing in Turbulent Markets

Markets have gyrated wildly since the impact of COVID-19 become obvious. High to low, the S&P 500 had dropped a third before a strong rebound. You probably have to return to the Great Depression to find greater market swings in such a short period of time. I'm occasionally asked what to do in a market like this. Here is my general response.

Long before there was money and markets, the brains we live with today evolved to survive in a hunter-gatherer subsistence society. Most of these traits are still useful in a modern society (which raises another question regarding how advanced we really are). For example, following the pack provides a degree of safety today as it did nearly 2 million years ago.

However, many of our traits developed for surviving in a primitive society do not apply well to investing. For example, extreme caution when securing a food source is very applicable to pre-modern life where a month without food can end one's life. But this same loss aversion does not work well with investing where it is reasonable to make long bets with money you may not need for decades.

So in today's turbulent markets, your primitive brain may want to sell out, probably a poor long-term move. But logic that ignores some common human instincts may see new potentials in a cheaper market. Simply, buying low and selling high, a good rule of thumb for investors, is a modern investing construct but not one of our natural traits.

Also remember that market timing is mostly a loser's game, and probably even more so in today's virulent markets. Market prices are at least partially a reflection of the collective confidence of future business and profits.

There are reasonable but conflicting arguments that it will take us two years just to recover from this virus; that business will quickly return to normal; that there is no going back; that significant numbers of people will not return to their profligate borrowing, spending and busyness; that the economy will be worse than the Great Recession.

With this mix of forecasts, here are my suggestions for you. First, do not make net sales from your equities. They are relatively low and it is generally best to buy low and sell high.

If you have decided that you have taken on more risk than is appropriate, then write out what you believe your allocation should be. When the markets return to their recent highs only then make this change to your allocation. If you do wait and then hesitate to adjust your allocation, a common behavior, have a conversation with yourself as to why you are quick to sell low but then hesitant to sell high.

Second, holding is OK, and what I recommend until the markets at least stabilize. However, this could be a long wait. The 2000 dot-com market crash took nearly three years to reach its lows.

Finally, if you can do it (and this is what is probably hardest to do with our primitive brains), the best path forward is to do some periodic buying into equities while they are below their 2020 highs.

Here are some further considerations before changing your past strategies. If you can't stop yourself and you do make some transfers out of equities, I urge you to write down what you do and then check how it feels once the markets return to highs.

Consider your emotions at this time. With very real illness and death surrounding us, volatile markets are probably not your greatest fear. Excessive stress does not help us make what should be careful, long-term investment decisions.

There are exceptions to every rule. But my guess is that most exceptions are excuses to go back to bad investing choices that will probably get you the opposite of what you seek.

Finally, by historical standards, the market is still not cheap, which mixes up your options even more. Good luck and thanks for listening.

Mar 2, 2020

McCormick Lodge

In 1964, after years of wrangling between environmentalists and competing interests, President Lyndon Johnson signed into law the Wilderness Act. The act created a formal mechanism for designating wilderness, and immediately set aside several million acres of land across dozens of federal land areas to be managed by the new National Wilderness Preservation System.

The entrance to McCormick Wilderness
Under the Wilderness Act, the land is to be restrained from human influences so that ecosystems can change over time in their own way, as much as possible free from human manipulation. As the Act puts it, "the earth and its community of life are untrammeled by man."

Today, there are over 750 wilderness areas in portions of our national parks, forests, wildlife refuges and other public lands, managed across various federal agencies, primarily the National Park Service, U.S. Forest Service and the U.S. Fish and Wildlife Service. They total over 100 million acres across all but a handful of states.

The McCormick Wilderness is one of several wilderness areas in the Upper Peninsula of Michigan, where I am originally from. But when I was a kid, my aunt and uncle worked at what was then the McCormick Lodge, a lavish, mostly abandoned but perfectly maintained lodge hidden away in one of the most remote areas of the U.P., a land that itself is mostly unknown to the world.

This is the story of the McCormick Lodge, and how it came to be part of the National Wilderness Preservation System, one of America's environmental treasures, and how this allows all of us to forever enjoy one small piece of primeval northern forest.

In 1778, just after the Revolutionary War, Robert McCormick emigrated from Ireland and settled in the Blue Ridge Mountains of Virginia. McCormick made several models of a reaper but none proved successful.

His son, Cyrus Hall McCormick, studied his father's records of failed reapers and eventually developed a working version of the reaper. In 1834 Cyrus received his first patent on the reaper, a machine which dramatically altered farm production methods.

Cyrus continued working on the design until, in 1847, he moved to Chicago and opened a reaper factory which eventually became The McCormick Harvesting Machine Company. He continued developing the McCormick business until his death in 1884. He died a well-known and very wealthy man.

His son, also Cyrus Hall McCormick, was born in 1859 and at age 25, upon his father's death, took over officially as president of his father's company (although his mother actually controlled the company). In 1902, at the suggestion of JP Morgan, McCormick merged the McCormick business with several other companies that had also developed harvesters and reapers, forming the International Harvester Co.

At age 36, McCormick became the first president of the new company. Cyrus Bentley was a young attorney who represented the McCormicks in this transaction. The Bentley and McCormick families had known each other for years, and the Cyruses had become close friends.

The same year his father died, 1884, McCormick also went on his first camping trip. While at Princeton, he had become close friends with one of his professors, William C. Gray, an avid outdoorsman who often camped throughout the U.S., but especially throughout northern Wisconsin and the U.P.

One day Gray invited McCormick to accompany him on one of his camping trips. They traveled by train to Champion, Michigan, just down the road from where I grew up. They followed the Peshekee River, a river I know well, north to a campsite on the edge of a then unnamed lake.

Yellog Dog Falls
Gray had wanted to visit the Peshekee River area as much for its geological interest as for its abundance of wildlife and rugged scenery. Its lakes and swamps contained the headwaters of four river systems, the Yellow Dog, Dead, Huron and Peshekee, three flowing into Lake Superior and the Peshekee flowing south to Lake Michigan via the Michigamme and Menominee Rivers.

In the following years, McCormick and his attorney, Bentley, began to frequent this area. They would set up a temporary base camp on a small rocky island in this lake which they eventually named White Deer Lake.

Separately, along Lake Superior miles northeast of this island, community executives from the local county seat, Marquette, set up an exclusive club in the Huron Mountains, which still exists today as the Huron Mountain Club. It is a large tract of land along Lake Superior comprising thousands of acres, including several inland lakes.

In 1902, Bentley accepted an offer to join the Huron Mountain Club. Bentley was an avid hiker, and often hiked to White Deer Lake from the Huron Mountain Club. He had an idea to build a trail along the same route.

McCormick, who also was a member of the Huron Mountain Club, liked his friend’s idea, and together in 1903 he and Bentley purchased nearly 160 acres for less than $500 that included the island they camped at so often, and the west end of White Deer Lake.

Through nearly a dozen additional purchases, they established a tract of several thousand acres. In 1904 McCormick started building on the property, beginning with several cabins on the island. Soon they moved construction to the main shore.

Eventually, there were seventeen massive log lodges, boathouses and outbuildings scattered across the island and the surrounding woods, built of log and chinking, with verandas and balconies. But they still referred to this place as the “Rough Camp."

At the same time, Bentley completed his cabin at the Huron Mountain Club on Lake Superior at the mouth of the Pine River, along with his trail to White Deer Lake. This trail, and various other trails along a similar route, were referred to as the Bentley Trail.

The Bentley Trail developed into an elaborate trail system built between 1904 and 1920 by Bentley and many hired men. Most of it was made to be walked by anyone, even women in dresses with their parasols. The trail was about thirty-eight miles, the last ten miles covered by boat and wagon.

For years, the two Cyruses, their families and many hired men built trails and cabins, lodges and dams, and even a dredged channel in the area of White Deer Lake. By the 1920s, well maintained trails led to lakes and waterways, where boathouses sheltered light, swift Rushton rowboats. Some of the pathways around the main lake became level boulevards three feet wide, with hewn log walks at the water’s edge equipped with pole railings.

Cabins and more amenities were followed by sailboats, rowboats and canoes. They sank well points for water, imported a generator and installed telephones. Electricity and plumbing were installed. An entire staff of chefs, wagon drivers, butlers, cleaners and errand boys were hired to keep the lodge operating smoothly. The camp acquired a fleet of motorcars, including a Model T coupe.

Friends and business associates of both families, young and old, visited McCormick's Lodge year round. Guests often arrived in formal attire, ill prepared for the camp life of fishing and hiking. They were furnished with a trail map in a folded leather case with their initials embossed in gold on the cover. A supply of rain coats, hats, boots and other clothing, fishing equipment and other gear were kept on hand.

Chimney Cabin
Guests hiked, fished, swam and picnicked on lakes and rivers throughout the area. They drank whiskey and fine French wines. In the evenings, they would clamber into boats and canoes, sitting on the water listening to classical and popular music pouring out from one of the cabins. The lavishness of the entire McCormick Tract can hardly be overstated.

Life at White Deer Lake now was comfortable for both families, although Bentley still preferred the less stoic life of the Huron Mountain Club. The McCormicks dropped their club membership in 1920, but the Bentleys spent more and more time there.

Cyrus McCormick eventually retired from International Harvester so he could spend more time at the McCormick Lodge. Later, a rift developed between Bentley and him. Their partnership was dissolved and McCormick became the sole owner. Shortly after, Bentley’s health failed and he died in 1930.

By the 1930s, McCormick's sons, Cyrus and Gordon, made much more use of the property, including boating, swimming, ping pong and tennis on a clay court. October 1935 was Cyrus McCormick's last visit to the site. He died the next year at the age of 77. Ownership to the McCormick Tract went to his son, Gordon McCormick.

Gordon, an architect, began a renovation project of all the buildings that continued into the 40s. They built a new boathouse. Central heating was installed, roof beams were raised, chimneys rebuilt, stories added, plumbing modernized, interiors repanelled, roofs and porches extended, and balconies moved from here to there and back again.

Fanciful bridges and rustic gazebos crowned stream crossings and scenic spots. Curiosities included gnarled furniture, a floating tennis court and a driving range where guests hit floating golf balls onto the lake.

During the forties, Gordon spent little time at the lodge. He visited briefly in 1947 and never returned. For the last twenty years of his life, he would plan visits. Supplies would be ordered, and everything made ready. Then, invariably, he would fail to appear.

For years the camp ran pretty much as always, under the direction of a hired superintendent and several men. The camp stood as a beautiful museum of northwoods craftsmanship and culture, year after year, its forest untouched, the trails, bridges and walkways kept in perfect shape for the man who never used them.

In the 1960s, my aunt and uncle, Ina and Leo Wuorenmaa accepted positions as caretakers of the McCormick Lodge. Aunt Ina was responsible for feeding the workhands. My uncle had what he described as the best possible job, living and working in the woods he dearly loved. He and the other workers maintained the trails, land and lodge.

Because of our relationship, we could visit McCormick's. The old Native American trail along the Peshekee River that Cyrus McCormick first traveled was now a paved road along an abandoned railroad bed. At the turnoff to the McCormick Lodge was a narrow one-lane road that wound through the woods, ending at the lodge at White Deer Lake.

Our uncle showed us the beautiful buildings, the boat house, the hand-drawn ferry to the island, and the lodges and accommodations. He showed us drawers full of new, fine clothing - shirts, pants, underwear, sweaters - anything Gordon would have wanted on a visit.

As years went by, competing parties, recognizing the value of the McCormick Tract, and realizing the health issues with Gordon, worked on plans to assume ownership of the McCormick Tract. The state of Michigan worked with the McCormick estate to make it into a state park. About a half-dozen other groups had plans for the property, including the Nature Society, several universities, the Boy Scouts of America and the Nature Conservancy.

But Gordon had his own ideas. He considered the nature groups and strongly wanted the area to remain a wilderness. He decided, though, that it would have more protection in the hands of a government agency.

White Deer Lake
Gordon died in 1967. Knowing his health was failing, just days before his death he transferred ownership of the entire McCormick Tract to the U. S. Department of Agriculture, to be added to the U.S. Forest Service. This was his best bet that the land would be preserved much as his father had found it.

It worked. A year later, the Forest Service auctioned off the entire contents of the buildings, an event I attended. Eventually, most of the buildings were removed or destroyed, and the entire 17,000 acres that Cyrus McCormick had purchased were established as a wilderness area in the Ottawa National Forest, renamed the McCormick Wilderness.

Today, the McCormick Wilderness has returned to about how it was two centuries back when Cyrus McCormick was first tent camping there. There are very few people, but lots of wildlife, including bear, moose, otter, mink, fox, deer, pine martens, beaver, fisher, bobcat, coyote and wolves. And very rarely a lynx or cougar. Roaming through the land, you can occasionally find remains to the dozens of buildings once on the property.

The glacier-scoured hills of McCormick Wilderness were last logged in the early 1900s. There remain small patches of huge virgin white pine scattered among rugged rock outcrops. The land remains the pristine headwaters of four river systems. Its mostly rocky and hilly terrain with cliffs and outcrops contains eighteen lakes plus numerous swamps and muskegs. The few people who journey onto this land get to experience one of the country's great pieces of primeval forest.

Trails Today in the McCormick Wilderness
The Bentley Trail to the Huron Mountain Club is gone, but in place are several new rustic trails, including several miles of the North Country Trail, a 4600 mile footpath that when completed will take you west to North Dakota and east to Vermont.

There are a few ways to access the McCormick Wilderness. The most common is County Road 607 (Huron Bay Grade), 3 miles west of Champion, Michigan, along U.S. 41, just a couple of hundred feet west of the Peshekee River bridge. Go north 9 miles and the entrance is on your right. One trail follows the original road to White Bear Lake. The North Country Trail also cuts through from this same point.