Lately with more free time under the stay-at-home mandate, we have been able to engage in neglected tasks. While cleaning her home office, my wife Jan discovered an old Fortune Magazine from March 1996 buried amongst the clutter. I knew immediately that it would provide a treasure trove of interesting nuggets for an article. It’s fun to look back with nostalgia, but there are also lessons to be learned from the past.
The year of 1996 was a pivotal time in my life. It was the year that I became a Certified Financial Planner and transitioned from the corporate world into my career in personal financial planning. I had enjoyed my prior career, but the opportunity to help hundreds of individuals and families secure a better financial future has been far more satisfying.
Also in 1996, my wife and I were about to have our first child as well. At the time, I could not have imagined that becoming a father would have such a profound effect on my life. The last twenty-four years has been quite a journey for me – and I’m sure for you as well.
The changes in society and lifestyles are easy to forget without this type of a reminder. Windows 95 had just been released with great fanfare, but only 68% of US households had a computer. Just 23% of US households had dial-up services provided through names like America Online, CompuServe and Prodigy. Web-based services like Google and Facebook had not yet emerged (even Myspace was years away)!
It would be a few more years before I even purchased my first cell phone, although as an early adopter Jan had a plug-in car phone for a few years at that point. The tech bubble was just starting to inflate, so the tech bust was still a few years away. The events of 9/11 were not yet part of our consciousness and there were two more stock market meltdowns ahead including our present Covid-19 pandemic.
Alan Greenspan, the former chairman of the Federal Reserve, was the cover story of this March 1996 Fortune magazine. The profile piece was resoundingly positive about his performance with four years still remaining in his term. From the start of his first term in 1987 to the present, there have been just four chairpersons of the Federal Reserve. That’s impressive stability for such a critical position in our financial system. It helps that the chairperson, while appointed by the president, is largely autonomous and non-partisan.
Ben Bernanke later succeeded Greenspan as the Fed Chair and was at the helm during the 2008 Financial Crisis. Especially in 2008 and more recently with the monetary actions during the pandemic, people frequently take potshots at the Fed and its chairperson and lambast its policies and practices. I’ve noticed over the years that criticism of the Federal Reserve Board and its chairperson is practically a cottage industry. I think it is fair to debate the long term implications of the Fed’s actions. When it buys trillions of dollars of assets, bails out certain companies and industries and injects a massive infusion of liquidity, there must be some scrutiny as oversight. That said, it’s difficult to prove or disprove the counter-factual. What would have happened in 2008 had there not been bailouts? What will be the implications of the massive stimulus this COVID 19 time?
Since I tend to look at things more simply, I may not be smart enough to make such a determination. It seems to me it worked out pretty well last time and quite frankly, I don’t see an alternative this time. Two of the primary roles of the Fed are to maintain order in the banking system and to promote full employment. Instead of wading into the weeds, sometimes it’s better to just look at results. Overall, I’ve been impressed with the quick and decisive moves that the Fed has made in times of crisis.
Inflation was a separate topic in the same Fortune issue. In an article “Fun and Games with Inflation”, the author notes that the movie E.T. – the Extraterrestrial was not really the top-grossing movie of all time as many believed, Gone with the Wind was instead, when adjusted for inflation. The article rightly points out that inflation has adverse effects beyond just the obvious loss of purchasing power over time, citing tax bracket creep and a hidden tax on capital gains when taxes are based on inflated numbers rather than real (inflation adjusted) numbers. Fortunately, the ordinary tax brackets are indexed for inflation, but there are still plenty of provisions in the tax code that have not been updated, thereby benefiting the tax collector at the expense of the tax payer.
The other primary role of the Federal Reserve is to control inflation. While trending down between 1982 and 1996, we know in hindsight that inflation would remain low for the next 24 years. In this regard, the Federal Reserve has been a huge success.
Even so, the threat of inflation is always with us. According to this 1996 article, the average cost of an automobile was $20,000. A quick web search today shows that the average today is about $34,000. These numbers are not exactly apples-to-apples, but they suggest an average inflation rate of just over 2% per year, which is about what the government has reported for general inflation over that same time period. This highlights that even with historically tame inflation, purchasing power erodes over time. Since 1996, the same dollars would buy about 40% fewer goods and services today. For example, if someone retired in 1996 with a $2,000 per month pension, it would be like retiring today with $1,200 per month. This can be problematic on a fixed income, but potentially devastating to a retiree if inflation runs out of control like in the 1970’s when prices climbed 7% per year. At that rate, the same $2,000 per month pension would shrink to the equivalent of $400 per month in buying power. To guard against this threat, I’m been a long-time advocate of growth investing so that people have a rising income during retirement.
Taxes are an evergreen topic for financial publications and were featured prominently in this 1996 Fortune magazine. Tips for cutting taxes is always a favorite subject because people hate to pay taxes. There were several articles offering tax advice to the reader, including “Four Sure Fire Tax Relievers”; “Be a Tax Savvy Investor”; and “How to Leave the Tax Man Nothing.” The Roth IRA had not even been born yet, but the article suggests funding a SEP if you have self-employment income, which still is a good idea. Reminders to take a deduction if you live in a disaster zone or to give clothing to charity were worthwhile if not terribly impactful. For sure, I want to take advantage of any reasonable tax break that I can, but from my experience most of the ideas presented in financial publications don’t matter all that much. Sometimes they are too impractical for my taste. For example, today’s equivalent tax advice might be to “bunch” charitable deductions in alternate years to get around the new higher standard deduction. While a legitimate way to potentially save a few dollars, such a strategy might not be worth the trouble.
Noteworthy to me was that the capital gains tax rate in 1996 was 28% compared to just 15% today and people with modest income receive a special zero tax rate. From 28% to zero, that’s quite a difference. Similarly, the estate tax exemption was only $600,000 back then, compared to $11.2 million today. Very few people pay estate taxes anymore. These changes make me think that a better way to enjoy lower taxes is through legislation, rather than tax cutting tips from the media.
From this issue from the past, I enjoyed reading about the Fidelity Magellan Fund again. Like other prominent names of the past, such as General Electric, it has since been superseded by competitors that have executed better. It was featured in a story that questioned whether it was time to bail out of the fund as the performance had faltered under Jeff Vinik for the previous 2 ½ years following the tenure of the legendary Peter Lynch. Vinik’s performance was actually mixed. He started out great, but then faltered after making big tactical bets that didn’t pay off, such as moving stocks into cash and bonds during a rising market. He left soon after that and there have since been several managers of the fund. The person at the helm hasn’t made much difference, as the fund has trailed its category average and the benchmark S&P 500 index substantially for the last 3-year, 5-year, 10-year and 15-year periods.
What’s notable to me is that the Magellan Fund was the flagship fund of Fidelity and the company has had the resources to draw from the best and brightest minds to find a manager. Yet it has returned an astounding almost 3% less per year than the index over the last 15 years. This fund, which was once lauded as a 5-star fund by Morningstar, sunk as low as 1-star status before rebounding to its present 3-star ranking. I’m not trying to pick on the Magellan Fund, as it’s not much different than many celebrated active funds of the past brought down to earth by the weight of management fees and judgment errors . That said, this type of example should be a wake-up call for anyone who still believes in the virtues of active management. If Fidelity has this much difficulty, what chance do other active strategies have?
In a separate article, featuring Warren Buffett, I noted that the stock price of his Berkshire Hathaway A shares (BRK-A) was $32,800 per share at the time. It recently traded at about $253,500 per share for an average gain over the last twenty-four years of almost 9%. Mr. Buffett is widely considered one of the best investors of all time, yet his performance over that time is only a little better than the S&P 500 index. What it does highlight is that buying and holding good companies can produce great results over time. Although an active investor, Buffett’s style might have more in common with an S&P 500 index fund than with active fund managers like Mr. Vinik. His disciplined, low cost and tax efficient investing methodology never goes out of style and is a great way to build long-term wealth.
It can often be fun to look back in time, especially when there are fond memories. There are also many lessons to be learned from the past. I’m glad that Jan found this old Fortune magazine. It was a nice reminder of some interesting times. Normally, I throw old magazines out after I’m finished reading them, but I might just hold on to this one.