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Playing the Trends: Lessons From a Decade's Worth

September 10, 2000|TOM PETRUNO

They turned off the National Debt Clock last week.

The electronic billboard near New York's Times Square had since 1989 dutifully recorded the gross federal debt--which for most of the last 11 years--and most of 20 years before that--had known only one direction: up.

Real estate developer Seymour Durst's idea in erecting the odometer-like clock was to make us think about the terrible legacy our borrow-and-spend society was leaving our children.

But today, amid budget surplus projections that stretch as far as laser-improved eyeballs can see, the kids must be thinking they can shift from focusing on how to repay our profligacy to how they're going to spend their future windfall.

A National Debt Clock whose numbers are getting smaller? The sense of drama is certainly lost. Hence, the clock had to go.

The story of the rise, and now fall, of the U.S. federal debt is an interesting tale of how a trend in motion can continue for far longer than even the most astute forecasters can predict--and then, suddenly, shift into reverse.

But it's also a story of how the expected side effects of a major trend may not develop as logic would seem to dictate.

Trend-following is, of course, a key element of the game of investing. Many investors naturally seek to bet on companies that would appear to be the beneficiaries of a particular trend--say, the rise of the Internet-based economy.

Likewise, it makes sense to stay away from investments that appear likely to be victims of a sustained trend. The disinflation cycle of the 1990s, for example, suggested bad times for the price of gold, and indeed that's how it turned out.

Recognizing bona fide investment trends, however--that is, those that will have some longevity to them--often is only easy in retrospect. Today's "hot new trend" in something may be seen months later to have been little more than a blip.


A beautiful thing about the last decade was the bumper crop of true long-term trends it hosted:

* The current great U.S. stock bull market began, conveniently enough, in 1990, and has proceeded with relatively few significant interruptions--at least, until this year.

* Japan's stock bear market also began in 1990 and, by many accounts, still isn't over.

* Interest rates spent most of the decade in decline, enriching investors who bought bonds early in the period and held on to their spectacular yields.

* Southern California home prices, on average, declined for most of the first half of the decade, a period that must have seemed like an eternity to people who bought homes here in the late-1980s.

* The public's excitement over Internet-related stocks, though perhaps now a has-been among major trends, began about 1995 and gathered steam for several years before exploding in late 1998.

In each of the aforementioned cases, many investors doubted at the outset of the trend that it could continue for very long. A 10-year stock bull market on Wall Street? Seemed too far-fetched to imagine in 1990. Ditto for a 10-year bear market in Tokyo.

In each case, recognition of the trend--and a willingness to be patient with it--bore rich fruit.

That's contrary to the way many investors think about trends. It's often assumed that to be a successful investor you should aim to buy at the bottom of an investment cycle and sell at the top of the cycle.

But picking the absolute peaks and valleys is far too difficult a game for most people. What the 1990s taught us is that, once a positive trend gets underway, there is usually plenty of time to get on board and make money.

Being there at the beginning of a trend is wonderful, but it isn't critical. Getting on board later, then staying there, is the challenge for most people.

The flip side also often is true: When a market trend has turned, just because you failed to sell at the peak doesn't mean it's too late to get out. The Tokyo market's decline began in 1990, but the initial wave of the downturn took more than two years to bottom.

Now, all of this simplifies the idea of playing investment trends. As I freely admit, hindsight is always 20-20.

Even getting a long-term trend right doesn't mean you'll correctly pick the winners and losers that will be generated by the trend.

We saw that in the surge of the federal debt in the 1990s. At the start of the last decade, many an economist predicted that unchecked growth of the debt would be ruinous for financial markets and for the economy.

Logical analysis suggested that mounting borrowing by Uncle Sam would drive market interest rates sharply higher because the government would be competing for funds with all of the private borrowers that were desperate for money.

But long-term interest rates fell in the early '90s even as the federal debt rose, amid $200-billion-plus annual budget deficits.

True, the Treasury was aided and abetted by the Federal Reserve, which pumped up the nation's money supply--and drove short-term rates dramatically lower--amid a slow-growing economy.

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