My One-on-One With Michael Holland: Opportunities And Challenges In Today’s Market
I’ve interviewed Michael Holland many times and have tremendous respect for his analysis. Mike is the Chairman of Holland & Company, which he founded in 1995. He is also the President and Founder of the Holland Balanced Fund and has held many distinguished positions throughout his career. I know you will appreciate hearing his insights as much as I do.
Maria: Mike, thanks for talking with us. Let’s start with what everyone is wondering about, and that’s where you think we are in the in the economic and market cycle. Obviously, we've had a pretty good run from the bottom on March 9th, with the Dow and S&P 500 both up more than 30% and the Nasdaq gaining 45%. How do you see the markets today?
Well, Maria, I think the markets have reflected in the short term the fact that companies have “outperformed” in the face of lowered expectations. After the first quarter, we had companies reporting earnings more than 20 percent above the much reduced expectations, and the stock market moved up accordingly.
I think that's OK for the short term, but longer term, I think it means that we may be getting a little bit of a replay of the bear market and economic doldrums of the 1970s when the stock market actually did surprisingly well in the face of really nasty economic and political news. That was caused by – back then perhaps as well as today – really major declines in securities markets around the world, particularly in the U.S. where the markets are so real time. Every piece of information is funneled through CNBC and the Internet, and you end up with stocks going down dramatically before a bad event, bottoming out well before the economy and the news gets to its worst. It looks as if stocks may well have found their bottom.
Maria: Let’s talk about the whole idea of long-term investing, putting your money in and not worrying about it for 10 years or some period of time. Doesn’t that notion seem up for debate given what has gone on over these last 10 years?
That is a hallmark of every bear market bottom, Maria. Fortunately or unfortunately, I've been through enough of these that I can tell you that it's very much like the bestseller lists. When you read about Dow 36,000 and buy and hold investing is the hallmark of the day, you know we're at a market top. But at market bottoms, people say buy and hold investing is dead and it's a traders' market because you always have to be ready to sell.
Well, it's somewhere in between. Neither end of that spectrum has all the truth in it.
Warren Buffett gets derided at market bottoms and then sanctified at market tops, and I think he's a great example of someone who says that his preferred holding time is forever. But he's very happy to sell when he buys a stock and it goes down. Or if something goes up way too much and gets crazy, he sells it. He's supposedly the epitome of the buy and hold investor, but if you see his activity over the last 20 years, he's very happy to sell things for the reasons that we think make sense.
HOLLAND ON FINANCIAL AND TECH SECTORS
Financial and Technology Sectors
Maria: Let’s turn now to some specific investing ideas, starting with the financial services area. This was, of course, the leadership group on the downside and recently has been a leader on the upside. Do you believe it has legs?
Yes. These were the leaders in the bad news. They helped to get us to the bottom in terms of the stock market, and as you say, they have been leading to the upside. That’s important. I don’t think we can have a good stock market without the financials participating and leading.
Maria: So are there bank stocks that you would buy right now?
Yes. Full disclosure, I own JPMorgan. Other financial stocks that I own are Berkshire Hathaway and Chubb. I recently added to the Chubb position. I think that the best managed companies in financial services – not just the banks but financial services generally – will be companies that, when we look back years from now, we’ll say, “Wasn't that a great time to buy?”
With great trembles here, I would actually put GE in that category because, at market bottoms, GE always turns into a financial stock. At the top, it's the world's greatest conglomerate, but at market bottoms, it's a financial stock. I think recent action in GE has been another indication of how, when we turn from the crisis levels in financial services, we make a tremendous amount of money in the strongest companies with fortress-like balance sheets.
The biggest and the best. The Darwinian survivors have always been places to go in a time like this, and that's where I'm focused.
Maria: Where else in the market are you finding opportunities? Any other sectors or stocks that you particularly like?
I would follow close behind with technology, and I would use the same sort of strategy: find the biggest, strongest, companies with fortress-like balance sheets, the ones who can gain market share in a very difficult time and whose managements know how to do this. I would include in that category companies like Microsoft and Intel, both of which I own. I would throw Google in there as well. These are companies gaining market share in this environment, and they're eating the weaker competitors.
Maria: How about the rest of the world and the recession? Do you think the U.S. will come out if first, given that ours started earlier?
We started down first, and it seems like a decade ago, but it was just several quarters ago that we were hearing the word "decouple." We were going down by ourselves and the rest of the world was going to be just fine. Well, that didn't quite happen. The rest of the world needs the U.S., and the U.S. needs the rest of the world.
I spend a lot of time in other countries and in Asia, and having traveled over there recently, I can tell you that they are experiencing just what we're experiencing. In China even, with a 6 percent growth rate now (and I think it's actually slower than 6 percent), people just a year or two ago were talking about how they would never get down to these kinds of levels. But they are doing somewhat better because of the government stimulus and the totalitarian way that they can address these things without a Congress or a regulatory structure that impedes it. They're just throwing a lot of money at it.
I think what's happening in places like that, Maria, is that the lack of global economic growth is affecting them, but it's being masked by the massive stimulus — particularly in the financial sector.
But to go back to your question, yes, I think that just as the U.S. led into this we will probably be leading out of it.
Maria: So should we stay away from international markets for a while, or do you find opportunities there as well?
I think there are enormous opportunities outside the U.S. as well. I'm on the board of two companies listed on the New York Stock Exchange, the China Fund and the Taiwan Fund . Both of those have been investing for U.S. investors for many years and both of those markets are up dramatically, but I would be wary of charging into those places right now.
However, a lot of the rest of the world is looking relatively attractive. I think, for example, one of the ugliest markets in terms of headlines over the last year has been Russia. Russia has all kinds of problems, but I think that, once again, the markets have been totally wiped out because of the crisis. The stocks had gotten down to levels that were laughable, and it's been one of the leaders to the upside.
HOLLAND'S "NO BRAINER" INVESTMENT
A “No-Brainer” Investment
Maria: What would you tell our readers to avoid right now?
Despite all the craziness in Washington, I think some of the huge programs that have been initiated will actually be successful in terms of our avoiding the current concern of deflation. I think there will be less success at avoiding inflation somewhere down the road. So anything that requires deflation or stable prices is to be avoided, and you start with U.S. Treasuries.
On the flip side, I think that TIPS (Treasury Inflation-Protected Securities) are just a no-brainer investment. You know, we as taxpayers insure that anyone who buys TIPS is not going to lose. If deflation continues to be the problem in the future, you're still going to get your money back with some interest rate. If inflation does come back, as I think might well happen, you're insured against inflation with a real return. It's one of the best investments for anybody, and I think that's a place anyone has to start building a portfolio.
Maria: If you’re looking at inflation down the road, what about commodities? Wouldn’t inflation be a positive there?
I don’t think commodities need a lot of inflation. I think we will get global economic growth in the future, and there will be demand for commodities. And I think that the emerging markets will be a place for making money. The global stuff that we've been talking about for the last several years hasn’t gone away, so I think there will be demand for commodities.
Now, if you said to me, “Holland, you don't know anything about commodities but you have to pick one,” I would pick natural gas. It fits the current political demands for all the reasons that the Obama administration has been talking about, and I think it's something that's politically safe.
Maria: What about the mining companies? They have seen lots of action. Any interest there?
Yes. I don't own them right now, but I think that the mining companies are going to continue to be active participants in consolidation, so you're going to make money with the companies that are getting bought out. But I think that the consolidation is also going to bring about really strong companies that, when the economic upturn occurs, are going to make a ton of money.
Maria: And when do you expect that economic upturn to occur?
I’ll go with whatever guess you have.
Maria: So you’re telling me that nobody knows at this point.
Right. And the one thing I do know is that, while I wouldn’t pay attention to anyone who makes a firm statement about when it's going to end, I do want to own companies who are prepared for the upturn. That's where I want to be as an investor because, when it comes, I think it will be significant. This has been a long recession and a long bear market, and it could last longer. But when this thing turns, I think you have to be there. Since nobody knows when it's going to be, you have to have some exposure now.
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