ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years, and currently owns property in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth show. This is your host Jason Hartman, and this is episode number three hundred and fifty-one. Our guest today will be Kevin Armstrong, who has got an extensive background in the investment market, ANZ Group’s Regional Investment Committee, where he was former chairman, and anyway, he’s got a big huge resume, and I’ll tell you about it in a minute, but the most interesting part about it is he’s going to talk about—he’s the author of a book that talks about the remarkable and revealing relationship between golf and the investment markets. So we’ll get into that in a few minutes here. But Steve is here to join me on a very late evening to talk about a couple things before our guest. Steve, how are you doing?
STEVE: Well, it is late Jason, I’m doing well, but I can’t promise much quality to what I have to say. I might fall asleep.
JASON HARTMAN: Well listen, I heard you yawning a couple of times, and you know how contagious yawning is.
STEVE: It is—yeah, it gets around.
JASON HARTMAN: It’s funny how that is. It’s like an ideavirus, as Seth Godin would say. [LAUGHTER]. Yawning, is like an ideavirus. Well hey, let’s just talk about two quick things before we go to our guest. Your recent trip to Houston, and looking at some of our great properties there. Houston has been a perennial favorite with us. We’ve done lots of business there for many, many years. Tell us what your thoughts were on your visit, what, last weekend?
STEVE: Yeah, yeah. About a week ago I was in Houston, and it’s gigantic. I didn’t know it was going to be that big. I don’t think it’s as big as Atlanta, but it’s large. It takes a while—I landed at George Bush International Airport or whatever it is they call it there, and I was going out to Katy, Texas, on the west side.
JASON HARTMAN: Yeah, I love Katy! I’ve owned some houses in Katy, I own one now there!
STEVE: Yeah! Yeah, and it was 12:30 AM before I got my rental car and I plugged my hotel into my GPS and it said an hour and ten minutes, and I thought oh jeez. And I drove clear out to Katy, and I went all over that area in the next three days. And was very impressed with what I saw—all the growth on the outskirts there, in Katy, up in Conroe in the woodlands, and some of the new developments that our local market specialists are doing there. We’re doing new properties in Houston right now, and it’s very impressive. I went to one, and actually, I don’t know if you’re gonna—I mean, Jason might kill me for this, but—we haven’t released it yet. The builder is just about to release this project. It’s actually in Houston. If you go up I-45, on your way to the woodlands, which is the north side of the metro, and you head west for a little ways, you’re still in Houston, it’s a new development going in out there. I drove all through it and was very impressed. I decided, you know, I’m gonna go through some of these older neighborhoods that border it. And by older, I mean built in the 1990s, maybe. But they were very well maintained still, solid middle class neighborhoods, and the jobs are just pouring into Houston right now. I met up with a friend that I hadn’t seen since college. He is a mid-level executive engineer for Chevron. And I was just very impressed with what Chevron and the other big companies are doing to bring in talent. And very impressed with what that does for the housing market and the rental market, there in Houston. It’s just very good for it. You know what’s funny—I don’t know how this necessarily applies to the listeners, but I think it speaks to how committed these companies are to bringing talent in. But when they relocate you—this is one company in particular—they will pay, if your house doesn’t sell—
JASON HARTMAN: Oh yes, the insurance policy—
STEVE: Yes. The private insurance is the company. If your house doesn’t sell for at least 95% of what you paid for it, they will cover the difference. I mean, they just want to bring in talent. Into the area. It’s just crazy, I mean, new builder signs everywhere, traffic just flowing everywhere. Commerce. Very impressed with Houston and what’s happening there. It’s not just energy. It’s medical too…
JASON HARTMAN: Yeah, medical and energy are the big deals in Houston. I’ve gotta tell you, when you look at those two fields, Steve, neither of those are going out of business. Those are just insulated from economic woes. Granted they all have their changes, like any industry, like any business, but wow, you can’t do too poorly with energy and healthcare.
STEVE: Yeah, exactly. And we like the other areas of Texas a lot too; an advantage that Houston has, though, is that it is cheaper than the others. So you can still be in Texas, you can be in that top state, in many opinions, and in a big metro area for a lower cost. And I think that’s why a lot of jobs are flowing to Houston, too. So, very impressed, everybody, with what I saw there, and also with the actual properties and the team. So, high marks. I’m giving Houston A’s right now.
JASON HARTMAN: And I want to mention something, you just alluded to it, Steve. But folks, you gotta remember—and I’m gonna say this this way. I would rather have a mediocre marketplace with an outstanding team, than I would have a mediocre team and an outstanding market. Okay? Because the team, the support system you have there is so critical to your investment success. And we’re getting—we’ve been disappointed before. This is not all roses, in our different markets. But our expectations are higher than any of our so-called competitors, I’ll be the first to admit that. And in Houston, we’ve just got a really good provider.
STEVE: Yeah, we do.
JASON HARTMAN: I just like him. He communicates well, he returns calls quickly, he responds—his responses are detailed, he’s got good product, what else do you want to say about the provider there?
STEVE: Well, I think that says it all. We get asked as investment counselors a lot about where should I invest right now. And we’ll answer people, we’ll say, here’s a good property in Houston. Or in Memphis. Or Atlanta. And people will say, well I noticed this other market on your website, and it has better economic data for this reason or for that reason. And we have to respond to them, yeah I know, but I want you to cash flow. I want you to have a good experience. And I think that the team is probably 70% of your ability to succeed as a buy and hold investor like this. And the market is 30%. Obviously I’m not telling you to go invest in Marin County, or Long Island or something. I think even a great team can’t overcome those areas. But, when you ask for those kinds of recommendations, we’re not just thinking about jobs, or this for that. Those are great, we absolutely want them, that’s why I gave the glowing review on Houston. But we’re thinking, what happens in two years when you need a new tenant? Or what happens in five years when there starts to be some maintenance on the property? You have to have a good team with longevity and a proven track record.
JASON HARTMAN: Yeah, and you’ve gotta have someone that’s gonna make it easy for you to get into that market. So, I tell you. This is our constant challenge, in our business, is just really, really getting control of these providers, and making sure that the local market specialist is doing their job, keeping their promises, and it is a—it will be an ongoing, never-ending issue. And you know, we gotta fire a few bad apples here and there as well. So that’s about the size of it. It’s like any business, there’s no difference, it’s not immune to any of these ups and downs. We have supplier issues, we have vender issues from time to time, and I just, I really like our Houston team. And I’ve always loved that city as a market. You know, my rentals in there, they stay rented. The checks are big, the rents are $1600 a month—more than offsets the higher property taxes. And you can buy—just give us an example of a typical property and the typical rent and what that’s kind of like, Steve? From your visit? Of course anybody can go to www.jasonhartman.com and see a whole bunch of them, but we’re just talking here.
STEVE: You’d have a property, it’s a single family home, probably around 1600 square feet. You could buy that for about $135,000. And you’re gonna get $1350 to $1400 a month in rent on that property. And it’s going to have a cheap HOA like you said, that maintains the quality of the neighborhood but does not harass the owner.
JASON HARTMAN: HOA Lite.
STEVE: HOA Lite, that’s correct. So you can get that. You can even do something where, let’s say you want to go a little bigger. I have clients that want to leverage more Fannie Mae money, right? They want to get a little more expensive of a property if it cash flows—that’s the caveat—because they believe in the inflation-induced debt destruction. They want a bigger principal balance for the chairman—who is it, Yellen? I can’t even remember. Whatever madman they’ve hired. Or woman, in this case.
JASON HARTMAN: Janet Yellen? Yeah. It is late, Steve. You are a little punchy.
STEVE: Yeah, I told you! I warned everybody. You could have turned this off, but you chose to be here, so. But yeah, they want that principal to get eaten away by inflation, so they’re gonna go for maybe a two story property closer to 2,000 square feet, $150,000 or something for that. But generally that 1% rent-to-value holds pretty firm in Houston. It’s not going to forever. In fact, I talked to our local market specialist this morning, and we’re looking at about a $2,000 price increase on January 1. On the Houston area properties. Because there’s more building, there’s more competition for land, and builders’ costs are going up. So, people who purchased theirs 6 months ago have been getting cash flow all this time, but they’re getting growth in their values. Obviously that’s not the main thing that we advocate doing, but we’ll take it when it happens!
JASON HARTMAN: Hey, absolutely. Listen, I’ll take the icing on the cake when I can get it. Good stuff. Okay, good. Let’s switch gears here. Before we get to our guest, I want to talk about one more thing. And you folks listening have probably seen this in the news. But it was just out today, and you know, I’ve always talked about how people are constantly asking about commercial properties, and the reason why I like housing so much—it’s because housing never goes out of style. It’s just not disrupted, it’s a universal need—everybody needs three basic things: food, clothing, and shelter, right? And I like housing, because no matter what happens, at the end of the day, or maybe in the middle of the day, while working, people will need a place to live. They need a roof over their head. And people ask about retail properties, and I talk about how retail can be outsourced to the internet, lessening the need for retail properties. So if you were an investor who wanted to buy strip shopping centers, or those net lease deals on the little retail stores, or dollar general store, or whatever they might be, right? And I know you can make money in these things, I get it. But I just still like housing the best. It’s my favorite. And office properties—they can outsource the call centers to India. These law firms are now outsourcing a lot of their legal research work to India. They’re outsourcing radiologists now, many of them are in India reading your x-rays, because it’s all done visually now—
STEVE: That’s crazy.
JASON HARTMAN: Oh no, they’re outsourcing like crazy. You know? Medical tourism is a big thing too, we’ve all heard about that. And so, this kind of stuff lessens the need for office space. So, you’ve got the internet in competition for retail property space, lessening the demand for it. You’ve got the outsourcing of office workers, lessening the demand for office properties in the United States. And Fortune 1,000 companies telling their employees to go work out of the house. And the employees usually like it the best, right? And you’ve also got industrial properties, the manufacturing that’s being offshored and outsourced to places like China, although I did make a caveat with a small industrial and the 3-D printing advent that I have talked about on prior episodes. But today’s big news—I woke up, and I saw Amazon.com is now—and I bet they’re gonna pull this off. This is not a pipe dream, as crazy as it sounds. But they’re now working on using drone helicopters to deliver anything you order from Amazon.com to your doorstep via drone helicopter—small drone helicopters. In half an hour. And wow. Steve? What do you think?
STEVE: I’m totally geeking out about this. I just can’t believe it. I can think of so many things that could go wrong! But I’m going, Amazon’s not stupid. I’m sure they’re thinking about all of this. I’m of course thinking about liability, and how do you manage the airspace, but I guess they’ve been speaking to the FAA, who was already thinking about how they can manage private drone airspace, and how that’s all going to be regulated, so to speak. In the not-too-distant future, you could walk out your doorstep and see little drones cruising all around the city delivering things. Pizza, probably! I mean, this is gonna…that’s gonna do it for food, and groceries, and this is just the very beginning of what could happen.
JASON HARTMAN: Right. But the important thing to understand, and this is interesting—it’s easier, technologically, to have a drone aircraft, like a helicopter, than it is to have a drone automobile, as many states have now legalized the Google drone automobiles. An automobile is a much more complex thing. A dog could run out on the road, a pedestrian could get in the road…there’s just a lot more going on when you’re on the ground. When you’re in the air, there’s a lot of cubic airspace out there, okay? And a lot of paths where these things can fly safely. And you know, folk? I predict this is going to happen, this is going to be reality. A company as well-managed and incredible as Amazon.com…this is not a pipe dream. It will happen. We will have drone helicopters delivering our packages in a short time. So, you might want to short retail properties. You might want to short UPS, and FedEx, and the post office. Well, I think the post office already shorted itself. I’m using the metaphor of shorting like the stock market, right. And go long on Amazon and home delivery.
STEVE: I’m getting my couple of long call options on Amazon.
JASON HARTMAN: Exactly. So, it’s interesting, but, again, this lessens the need for retail space. And I hate to say it, but the mom and pop retailers, they’re gonna feel this. Because shopping online is so much easier. So much better. The prices are better. Almost everything is better.
STEVE: You know how—I live in a master-planned HOA community, and our mailbox is down by the park at the end of the street, and it’s a community mailbox. And I’ve been wondering how Amazon will do this. I mean, just with architecture and everything. I mean, these drones—where are they going to land, or drop things? I could see it being where people have to build or install something where the drone can deposit the package near. Or in big apartment buildings, maybe they’ll put something on the roof that’s a community drop zone? For these drone packages.
JASON HARTMAN: I don’t think you have to worry too much about it. These things are incredibly precise. I mean, our military can put a missile right through a window of a house. It’s just incredibly precise…
STEVE: So are we just gonna have some kind of fleet of dorks flying these things around all day?
JASON HARTMAN: The computers fly them around. And when your package is delivered, your app on your smart phone will just immediately tell you, and you go out and pick it up. Or you can probably tell it, oh don’t deliver it yet, I’m not there yet. Or wherever you are, the drone will just bring it to you, if you’re at the restaurant down the street…there’s all kinds of possibilities here. We are living in an amazing time. And as bad as the government is screwing everything up, as much debt as this world is in—like I said before, technology may save us. It’s really an exciting time.
STEVE: It’s cool, I think it will. The darker side part of me—
JASON HARTMAN: Oh, there’s a darker side, no question. And the government is going to use this for ill and criminals will use it for ill, but that’s always…the arms race of technology is that you’ve always got to stay a step ahead of all these evils. It’s an ongoing struggle.
STEVE: That will be the day. I saw that, and my jaw hit the floor. Like, you’ve gotta be kidding me. And started thinking of all the—all the ways that it’s gonna be great. What are they gonna have to fix, what are the hurdles. What would it be like to be a fly on the wall in that room, planning how this is going to happen? That would be amazing.
JASON HARTMAN: I say this will come true in just a couple of years. It’s not far away. It’s going to happen, and it’s going to be a revolution. And right now, I mean, I’ve been amazed before. I live in Phoenix, and there is an Amazon.com distribution center here. And I remember I ordered a backup hard drive—computer hard drive—and I ordered it at about 10 AM, and it was here at about 2 o’clock in the afternoon.
STEVE: That’ pretty great.
JASON HARTMAN: It’s amazing. Yeah.
STEVE: Depending on what part of town it was, it’s faster than if you got it on your own.
JASON HARTMAN: Totally. And it’s amazing too, because in many cities now, they’re doing something called Amazon Fresh, where they’ll deliver groceries to you. Fresh groceries!
STEVE: That’s interesting, because I was thinking, they’ll probably roll this out a lot like Google Fiber is rolling out. Google Fiber has Kansas City and Austin—they actually have it where I live now too, and they’re just rolling it out and testing it in cities. Amazon will probably—San Jose, Orlando, whatever, try a few places and you’ll see these drones flying around. And within a couple of years as you say, they’ll be everywhere. That means everyone else will want to use them. And they’re going to have to race to keep up. Wow. Nuts.
JASON HARTMAN: And there will be accidents. People will die. Just like they do with aircraft now.
STEVE: Drones will crash into neighborhoods…
JASON HARTMAN: Crashes occur. That’s just part of technology. There’s goods and bads with everything. It’s gonna be interesting, it definitely is, and it’s a pretty darn exciting time to be alive. It really is.
STEVE: Coming soon to a law school near you: a new class on drone litigation.
JASON HARTMAN: And drone insurance policies. And everything that goes with it. Drone regulations, and all of this stuff. Yeah, it’s really amazing. Well hey, let’s get to our guest, Kevin Armstrong. Steve, thanks for coming on and talking to me about this. If you haven’t already done so, join us for the Meet the Masters event coming up in mid January, in Irvine, California. And oh by the way, I should mention, the hotel—the Hyatt Regency Hotel—their franchise was not renewed, and now the Irvine company, the largest land owner in Orange County, and one of the largest in the nation—I know that company very well, have done a lot of business with them over the years—they have now converted the hotel to what is it called, the Hotel Irvine, I believe.
STEVE: I believe so, yeah.
JASON HARTMAN: And it’ll just be one of their high-end hotels. They did this with the Four Seasons Hotel in Newport Beach a few years back, and now it’s just called the Island Hotel, but it’s stunning, and they do a great job of managing high-end things, whether it be real estate or hotels or commercial properties or whatever. So, just know that the name of the hotel, the sign has already changed on the hotel, so for those of you attending, just notice. The cab driver may still call it the Hyatt Regency Irvine. But the sign on the building may say Hotel Irvine, or they may have changed the name. So, whatever, there’s kind of two names right now for that. So note that. And be sure to join us for that. Get the tickets at the early bird price. And we’ve got some cyber-Monday specials that go on, I think for about a week, on the website at www.jasonhartman.com. 40% off on all of our products, and take advantage of that. We’ve still got a few of our physical products left that are deeply discounted. No additional discount on those. We’re already losing our shirt on them. So, check out www.jasonhartman.com, take advantage of all that stuff. And Steve, thanks for talking about these things with me today.
STEVE: My pleasure, Jason. I’m going to bed.
JASON HARTMAN: Alright, well, I have Kevin Armstrong in just a moment.
[MUSIC]
JASON HARTMAN: Be sure to call in to the Creating Wealth show, and get your real estate, investing, and economics questions answered by me personally. We’d love to have you call in, share your experiences, ask your questions, and a lot of other people listening have those very same questions. So be a participant in the show, at 480-788-7823. That’s 480-788-7823, or anywhere in the world via Skype, JasonHartmanROI. That’s JasonHartmanROI, for return on investment. Be sure to call into the show, and we’re going to enter all of the callers in a drawing for some nice prizes as well, so be sure to call into the show, and I look forward to talking with you soon.
[MUSIC]
JASON HARTMAN: It’s my pleasure to welcome Kevin Armstrong to the show! He is the former chairman of ANZ Group’s Regional Investment Committee, and former Chief Investment Officer for ANZ Group’s private bank, but he’s also the author of Bulls, Birdies, Bogeys, and Bears: The Remarkable and Revealing Relationship Between Golf and Investment Markets. Now Kevin, how are you, first of all?
KEVIN ARMSTRONG: I’m very well, thank you Jason.
JASON HARTMAN: Good, good, and you’re coming to us from far away, down under, you’re in New Zealand, right?
KEVIN ARMSTRONG: That’s correct.
JASON HARTMAN: Yeah, beautiful place. Beautiful place. I remember my trip to New Zealand about 8 years ago, and I didn’t realize what a tree hugger I was until visiting there, because it’s so gorgeous, and there are so many beautiful beaches and trees, and just what a great part of the world. Do you do a lot of golfing there?
KEVIN ARMSTRONG: Yes I do. Actually, New Zealand’s got more golf courses per head of population, or fewer population per golf course, than just about any other country in the world, apart from Scotland.
JASON HARTMAN: Fantastic. That’s quite a good testament and relating to the title of your book. So Kevin, what is the basic relationship between investment markets and golf? I mean, a lot of people might say that’s a bit of a stretch.
KEVIN ARMSTRONG: Well, it’s not something I really considered until about 12 years ago. My entire professional life’s been spent following the US equity market, prior to emigrating to New Zealand 17 years ago, I spent 16 years with Merrill Lynch in London, running the US institutional equity business throughout Europe, so I’ve followed US equity markets for the past 30 odd years or so. And I’ve been a golfer for 12 years longer than that. So they’ve been two deep obsessions of mine, and apart from the fact that people obviously do business golf, they talk about business on the golf course—I hadn’t really thought there was a remarkably close relationship. Until probably 2001 or 2002, after the dotcom bubble had burst, and the catchphrase that was on all of the media’s voices was corporate malfeasance. We’d seen the dotcom bubble burst, we’d seen Enron and WorldCom collapse, and there was outrage about the egregious salaries that were being paid to corporate executives, some of whom were involved in companies that by then no longer even existed. And the sums that were being paid to executives seemed to have rocketed over the previous 5 or 10 years with the bull market that occurred ahead of that. At the same time, Tiger Woods had come on the scene, and for the first time in my recollection, golfers were the highest paid sportsmen in the world, and the sort of sums that Tiger was earning, both on the course and off the course, were analogous to the enormous sums that corporate executives were being paid. So I just decided to look back at the history of professional golfers’ compensation. I didn’t know what the history was, and I knew that professional golf had existed since well into the 1800s. But I didn’t really know what the source of the records would be. So I looked through all of the files that I could find online at the PGA, and the only continuous record of earnings I could find was how much money the leading money winner on the US tour, which obviously Tiger had been in 2000, was almost $10 million, far more than anyone had ever won before. What the record was going back—now, the history goes back to 1934, and the very first leading money winner was a little fellow called Paul Runyan. He would have been the leading money winner the year before, had they kept records, probably, but they didn’t, because he won several times. But in ’34, he won six tournaments including the US PGA, and the amount he won for that amazing achievement was $6,767.
JASON HARTMAN: What year again?
KEVIN ARMSTRONG: That was in 1934.
JASON HARTMAN: Okay, so 1934 versus take us to present-day and give us the comparison there.
KEVIN ARMSTRONG: Well, Tiger in 2000 won $10 million, and Tiger this year is the leading money winner with a little less than $9 million.
JASON HARTMAN: Yeah, and see, back in 1934, it probably wasn’t a game of these huge endorsement deals like Tiger has today. Or, well, he has fewer of them, admittedly. But he still has some. But his deal with Buick? And Nike? I mean, those are just giant. I mean, they’re such a huge part of it. So…okay, so tell us what you’re getting to with this. This is very interesting, Kevin. Is it—it’s sort of like a winner-take-all type of game?
KEVIN ARMSTRONG: Well no, what it was was, what happened then is, I saw that Paul Runyan had $6,767, so I just decided to download how much the leading money winner had won each year thereafter through to the early 2000s. And I plotted a graph of it, and when the chart came up on my screen, it was almost a eureka moment, because having spent my entire career following the US stock market, I recognized the picture that had come up. The graph was the US stock market. All the surges upward, and the wiggles, and the consolidations and the collapses, coincided with where I recalled the same wiggles and collapses and surges occurred in the stock market. Now, I didn’t know what the scale was, so I then downloaded the total return of the US stock market over the same period, superimposed the chart on top of the chart of the leading money winner, and that I guess really was the eureka moment. Because they’re identical. The slope’s the same. What it meant was, had Paul Runyan invested his $6,767 at the end of 1934 in the US stock market, every year thereafter it could have grown to the same sum that the leading money winner had won, so that by 2000, his $6,767 would have grown to $10 million.
JASON HARTMAN: Very interesting!
KEVIN ARMSTRONG: That’s sort of spooky. I wondered whether it was just the fact that golf has thrived over a long period of time, and like the stock market, it just goes up over a long period of time. So I tried to think about another sport that was analogous to golf. It had to be a white-collar sport rather than a blue-collar sport. And it had to be an individual sport where the leading exponents were world celebrities. And the only sport that I could come up with was Tennis, which is sort of comparable to golf in the individual nature and the sums they seem to play for. And so I wondered whether the same picture was true of tennis. Now, you can’t go back as far with tennis, because tennis has only been open since 1968. But if you think about the biggest bull market that most of us around today can remember, it was the decade of the 1990s. That was when the NASDAQ surged, and stock markets all over the world surged until that amazing peak in 2000. At the beginning of that decade, in 1990, Stefan Edberg won Wimbledon, and his prize for winning Wimbledon was £233,000. A month later, Nick Faldo won the British Open at St. Andrews. His prize for winning the British Open was just £80,000, so about a third of what Edberg had won. 10 years later, after stock markets around the world had risen about 6 or 7 fold, Pete Sampras won Wimbledon, and he won £477,000. So about double what Edberg had won. A month later, Tiger Woods won the 2000 British Open again at St. Andrews, and he won £500,000. So not only was it more than Sampras won, it had risen 6 or 7 fold from Faldo’s win, just as the stock markets of the world had rocketed higher as well. And in the book, I just explore all the decades that tennis has been open and comparable, and it seems that tennis seems to thrive when the stock market’s struggling, whereas golf clearly flourishes when the stock market’s rising and struggles when the stock market’s falling. The reverse seems to be true for tennis. And there really doesn’t seem to be another sport where the relationship is anything like as close.
JASON HARTMAN: That’s pretty amazing, really. So, I mean, over that period of time, 1934 to the present day, hasn’t the stock market pretty much followed the official inflation rates, by and large? I mean of course it gives and takes in different years. I remember I had Peter Schiff on the show, and he was talking about how the only real returns from the stock market since about 1930—so you’ve got the Depression in there, so it’s a little tricky, because there are some pretty big swings, obviously, but—have been dividends! Once you adjust for inflation, that’s really it: dividends. So if you have non-dividend-paying stocks, all you’ve done is treaded water. Maybe you disagree, because that’s your background, you’re a financial guy.
KEVIN ARMSTRONG: No, I don’t disagree with it at all, and the longer you go on, because of the compounding effect of dividends, two-thirds of all the return of most markets comes down to having been the income that’s being paid. If you look at what $10 invested grows to over a long period of time, in just the capital value or the total return, obviously the difference is enormous, because of the compounding effect of dividends. Over the very, very long run, all markets do reflect the underlying earnings of the companies in the index. What varies over time is the multiple that the market pays for those, the P/E ratio. And that expands and contracts for a whole host of different reasons, and I think that gets to the heart of what’s actually driving this relationship between golf and investment markets. A lot of people have asked me, what does the golf industry at the moment tell us about the stock market? It doesn’t tell us anything at all. It’s a snapshot in real time, just as the stock market is a snapshot in real time. There’s no cause and effect here, I don’t believe. What’s actually happening is that golf, for some reason—and we explore some of those reasons in the book—is a wonderful instantaneous barometer, if you like, of aggregate social mood. And that’s what the stock market is as well. Once you x out the earnings factor, which do tend to rise over a very long period of time, what drives the changes in stock markets is the multiple that people are prepared to pay, and over my lifetime I’ve seen the average multiple as low as eight, and as high as forty. And earnings don’t move anything like as much as P/E ratios. So what’s driving those P/E ratios to expand or contract is aggregate social mood. Optimism, if you like; sentiment. Expanding and becoming more effusive, or contracting and becoming more depressed. And so, the stock market is an instant barometer of that, because if people are feeling better about things, then they’re prepared to pay a higher price for a company or a share; it seems that the same thing manifests itself in golf. And golf, rather than tennis or other sports—it’s another barometer of aggregate social mood.
JASON HARTMAN: Yeah, before you go on—so no question about that, people go out into the marketplace and into the world, they share their emotions, and their emotion—there’s no real zeitgeist for how the population will feel at any time, and that reflects in all the investment markets and the economy as a whole.
KEVIN ARMSTRONG: Well, just on that point about the economy—one thing I would say is that it does reflect itself in the economy, but with a huge, huge lag. Which is why economists struggle to forecast the market; it’s because the market’s already reflected it. If social mood’s rising and people are feeling generally more effusive, they can instantly manifest that enthusiasm by buying a share of something. If you’re running a business and you’re feeling better about things, the sort of things you can do that will have an effect on the economy somewhere down the road is that you could hire more people, or you could buy another company, or build another plant. That all takes a very, very long time, which is why there’s such lags, for the economy. So, economic numbers, unfortunately, aren’t an instant (unintelligent) of aggregate social mood; it takes 6 months to a year before you really see those things coming through.
JASON HARTMAN: Very interesting. Did you find any difference in your research when you compared one country to another? Because certainly that social mood is different in different countries at different times. What did you find there?
KEVIN ARMSTRONG: Well, what I wondered was, as you say, social mood, levels of stock market, returns of stock markets and currencies do vary over time. I wondered whether that manifested itself in the relative performance of golfers from one country to another. Now, the longest running international professional event which pits one country against another is the Ryder Cup, which golfers in your listeners would know has now become one of the most watched sporting events in the world. It’s an amazing spectacle. Actually, you can break the history of the Ryder Cup down into three periods. There was the originally period from the ‘20s when it began through to the Second World War; there was the period after the Second World War through to the late ‘70s early ‘80s; and then there’s the most recent period where the matches have all been very close. Over that period, through the pre-war period, the returns of the British stock market and the US stock market were almost identical. And the intriguing thing is that the performance of the relative, or the respective golfers from America and Britain, were almost identical in the Ryder Cup. The record was that they shared the matches even down to the individual matches, the number of matches won was almost identical by both sides. Now, then after the Second World War, the situation was quite different. Through the Second World War, many of the American professional golfers who did see—who did get called up, actually ended up teaching generals to play golf at military camps, rather than seeing active service. And there was a (unintelligible) in 1943, a professional tour that still continued to take place. That wasn’t true for the British golfers. Most of them saw active duty, and when they came back to Britain after the war, Britain was virtually bankrupt; America had become the global economic superpower as well as military superpower, and the relative positions of the different—of each side’s golfers was quite different as well. Now from then on, the Ryder Cup became an incredibly one-sided affair. The American superstars cleaned up virtually every time the match was played. Over that period from 1947—the first match after the war—through to 1983, there was only one win to the European, or to the British as it was at the time, and one draw. Every other match the Americans won. And over that same period, an investment in the US stock market made a total return, and they’re just different currencies, five times greater than a similar investment in the UK stock market, which is a huge, huge difference over that sort of period of time. But it was reflected in the relative performance of the golfers. Now since then, in the late ‘70s, Europeans were included in the Ryder Cup. Initially it didn’t have any material effect on the outcome of the results. But then from 1983, the matches became incredibly close. In the book, I’ve tracked what the return of the European stock market was compared to the return of the US stock market over that entire more recent history, and obviously there have been periods where the European market was outperforming, and there’s periods where the US market was outperforming. I then looked at which market had done best in the two years prior to each of the Ryder Cups that took place, and throughout that history, broadly speaking, the markets only got it wrong twice. The markets have had an 83% success record in forecasting who would win the Ryder Cup by indicating which side had had the more ebullient social mood, if you like. So, people have asked me whether you can make money in the market from the observations in the book. Well, you probably can’t. All the golf does is tell you pretty much where the market are. But if you’ve got an account with a bookmaker you can make money betting on the Ryder Cup, because there’s an indicator telling you what’s going to happen more than 8 times out of 10.
JASON HARTMAN: I mean, do you think that any of this, Kevin, could be a coincidence? I mean, it’s amazing.
KEVIN ARMSTRONG: It could be a coincidence. I’m not a statistician, but I think when some things worked over 90 years, as the Ryder Cup record has, and worked with such precision when the matches have been so close, I think there has to be something to it. And I think the fact that aggregate social mood is measured—is indicated by the stock market, and clearly the team with the more optimistic social mood is probably going to be coming into the Ryder Cup feeling better about things. The intriguing thing is that the two Ryder Cups where the markets got it wrong. The first one that the markets got wrong was in 1997. That was the first time that the Ryder Cup moved to continental Europe. The markets, all the experts, everybody, forecasted that the American dream team, led by Tom Kite, was a shoe-in to win the Ryder Cup. The thing that Europe had in its favor is the team captain was the incredibly inspirational Seve Ballesteros. And Seve, through that Ryder Cup being played in his home country of Spain, seemed to somehow lift the spirits of those Europeans to get more than 120% out of them, and somehow they won the Ryder Cup. The other Ryder Cup that the markets got wrong was the one last year, which was an incredible spectacle, but a huge disappointment to Americans, because again, the markets indicated that America should win the Ryder Cup. Going on Saturday night in Medinah, outside Chicago, everybody thought America would win the Ryder Cup. But somehow the spirit of Seve was evoked in those European players, and all of their shirts and sweaters had the logo, which was Seve Ballesteros’ silhouette, and the team captain was Seve’s longtime protégé, José María Olazábal. And again, somehow they managed to lift themselves to defy the odds, to defy the experts, and to defy the markets. But apart from that, those two occasions, the markets seem to have got it right. I guess there’s a message there for captains of European Ryder Cups; when the market’s going against you, you need to pick a Spaniard—preferably one who played golf with Seve—to ensure that you can win the Ryder Cup.
JASON HARTMAN: Amazing. Hey, a couple of your chapter titles that I want to ask you about. Number one, America gets and becomes a tiger. Is that talking anything about the outlook, because you have another one talking about golf and the global financial crisis. I wanted to get some of the interconnections there.
KEVIN ARMSTRONG: Well, the tiger one, definitely is a coincidence, but it’s a pretty neat coincidence. If you think back to what it was like to be an American investor in the late 1980s, after the crash. After the crash occurred, the US market did eventually recover. The Japanese market recovered very, very quickly. And at the time, lots of people lamented that America should be more like Japan. And after the 1990 peak in the Japanese market and the horrible collapse that occurred after that, you probably didn’t want to be. But then the US still in the early ‘90s wasn’t the market that people wanted to be involved in. They wanted to be involved in those emerging markets of Asia and Latin America, the so-called tiger economies that were growing at a fantastic rate. Well, just as they were becoming the favorite market for people to pursue in the mid ‘90s, so did Tiger Woods appear on the scene. Tiger Woods turned pro in 1996. And the interesting thing is, just as Tiger turned pro and started winning prolifically; won his first major in ‘97, and then continued winning majors through to 2000 when he secured his first grand slam, that was when suddenly America did, from a stock market perspective, start overshadowing those—well, firstly the Japanese and the emerging markets stock markets, because it breezed through the Asian crisis of ‘97, ‘98, continued to surge higher, and by 2000, or 1999, the US was the market everyone wanted to be involved in. So, the US had got a tiger in Tiger Woods, and it had become a tiger at the same time. So there is undoubtedly coincidence there, but the intriguing thing that I then go on to explore is that Tiger Woods is obviously being likened to Jack Nicklaus and his career, and the battle between Tiger and Jack’s record with Tiger pursuing those 18 majors, it’s interesting to compare the evolution of their two careers, if you like. Because from a stock market perspective, there is a remarkable coincidence there. Tiger turned pro in ’96 with four years left in a great bull market. The bull market peaked in 2000, and since then the markets have moved, broadly speaking, in the US side, whereas they’ve halved, they’ve doubled, they’ve halved, and they’ve doubled again. Well, Jack Nicklaus turned pro in 1962, and there were four years left in a great bull market. Market peaked in 1966, and broadly speaking after that for the next 16 years the market halved and doubled several times. And if you track, as we do in the book, the highs and lows of Tiger and Jack’s performance, there’s a remarkable correlation with a 34 year gap, if you like. That doesn’t tell you whether Tiger is or isn’t going to break Jack Nicklaus’ record, but it’s fascinating to see that with the stock market booming, with four years left to go, it seems to be coincident with a great golfer emerging.
JASON HARTMAN: What about the global financial crisis?
KEVIN ARMSTRONG: Well, the global financial crisis gave some hints as to why the relationship is so close. Because if you look at who the biggest sponsors of professional golf in America were prior to the global financial crisis, it was automobile companies and it was financial companies. Globally brokerage firms and big banks. And through the GFC there was huge outrage about banks entertaining people at golf tournaments when they were laying people off and losing billions of dollars, and obviously the CEOs of automobile companies all went (unintelligible) out to the government, and did actually end up pulling a lot of their golf sponsorships and ending one of their contracts with Tiger, really just because they couldn’t really justify such an enormous amount of money. So, the amount of money that was on offer did contract with the GFC. Another fascinating coincidence that I highlighted in the book is that the GFC obviously continued through from late 2007 through to some time in mid 2009 when the economy started recovering. But the stock markets of the world all bottomed on March the 9th or 10th 2009, almost coincidentally. There’s an incredible spike, often, as we saw, and then they started rocketing higher. Through all of the second half of 2008 and 2009, Tiger had been absent from the tour, because of his knee injury, and the surgery and reconstruction that he went through. Almost coincident with that incredible bottom, Tiger came back to golf. He very quickly won the Bay Hill Tournament, Arnold Palm’s tournament in Florida, and went on a winning streak. And one of the corporate liaison people from the PGA tour described Tiger Woods as being the economic stimulus plan that golf needed. And the world was looking for economic stimulus plans. But interest in golf surged again, and the money started to come back in. So, undoubtedly there’s a huge coincidence there, but it’s another of the spooky or remarkable coincidences.
JASON HARTMAN: Those really are remarkable. What do we have to look forward to, just in wrapping up here, Kevin? Can we make any predictions based off this? I mean, I had Harry Dent on the show the other day, and he’s predicting another collapse. I don’t know if that’s too out of the question, frankly; I think a lot of this recovery is rather fake. But it’s sort of easy to have a recovery when you print a lot of fake money. I mean, is that really a recovery?
KEVIN ARMSTRONG: I mean, from my investment background, I have a huge regard for Harry Dent. And I sympathize with an enormous number of his views. Whether things are going to be quite as dire as Harry Dent is obviously predicting, I don’t know.
JASON HARTMAN: Dow 3300, gold 750, on and on and on. But go ahead.
KEVIN ARMSTRONG: Gold 750 is not that difficult to see. It languished at $250 for a very long time before this amazing run that we’ve seen. And the Dow falling down to similar low levels as it was back in 2009, I could see another bear market of that sort of magnitude over the next couple of years or so. The intriguing thing from a golfing perspective is that, I mentioned at the start how from ’34 to 2000, the leading money winner pretty much tracked the performance of the stock market. If you think about what the stock market’s done since 2000—as I said earlier, it’s halved and it’s doubled, it’s halved and it’s doubled again. That’s almost exactly what the leading money winners’ total’s done over that same period. Tiger won $10 million in 2000, he won it again around 2007, and then this year he was the leading money winner again with just a fraction less, just under $9 million. But if you went back three years, Matt Kuchar was the leading money winner with only I think it was $4 and a half million. So, the markets have a bit more than doubled over the last few years, and the leading money winners’ totals have doubled. But it’s not quite as much. My feeling would be is if we are going to continue to be in a more challenging investment environment. It’s likely the leading money winner next year won’t win $9 million. Maybe they’ll only win $7 or $6 million. But from an investment standpoint, I probably wouldn’t be looking to invest in golf at this point. One final point I’d just love to make though, because there is a reverse side to this as well. You have seen one of the chapters in the book is called the gender gap.
JASON HARTMAN: Yeah, I was going to ask you about the gender gap, sure.
KEVIN ARMSTRONG: And the study of social mood is a field—a relatively new field called socionomics. And some of the research that’s been done in socionomics shows that when aggregate social mood is falling—so, markets are falling—females do far more better in achieving elected office. When social mood is rising, they struggle against the men. Taking that observation on board, I decided to see whether there was anything similar to that inverse relationship, if you like, of widening and narrowing of the gender gap in golf. And so, taking that data I had of the leading money winner going back to 1934, I wondered what history there was for female professional golfers. Now, there’s only been female professional golf, really, since 1950. Which is still 60 odd years of data, so that’s not too bad. And I took how much the leading female exponent won, compared it to how much the leading male won each year, and produced a graph of it. And the ratio there is between almost parity, where the leading woman makes as much as the leading man, to the men making six times what the leading female. So, it expands and contracts several times over those 60 years by quite a large degree. And again, it was another one of those eureka moments, because through periods when the stock market’s falling, women closed the gap. When the stock market’s rising, the gap widens again. So, one thing you could take from that is, if we are going to go through another period of declining social mood and markets again fall, you should probably, if you were looking to invest in golf, think about looking at the female side of the game, because the females will probably narrow that gap again. And just as one final point on that inverse relationship, I talked about how the markets forecast the outcome of the Ryder Cup. The female version of the Ryder Cup is the Solheim Cup. It’s only been going since 1990. But markets have had the same success rate, 83%, in forecasting the outcome of the Solheim Cup, with the difference that in the Solheim Cup, which is again between Europe and America, the country, or the side of the Atlantic, whose market has been doing the worst over the prior two years, has gone on to win the Solheim Cup. Now, a month and a half ago the Solheim Cup was taking place in America. The pundits, the bookmakers, the experts, all forecast that the Americans would win. Europe had never won on American soil. The stock markets gave quite a different picture. Because as you appreciate over the last couple of years, and as the Euro weakened against the dollar up against that tournament, the European markets have given nothing like the return that the US markets have given. So, the social mood in Europe was understandably more depressed than it was in the United States. I still produce a newsletter that I send to all the readers that I had, and followers, when I was with ANZ, and I sent a note out to them, because I hoped all of them had bought the book. But also just to highlight that there was a very strong signal that the Europeans would win the Solheim Cup, and the bookmakers were giving odds of nearly three to one against that outcome. And what happened is, the Europeans did against the odds win the Solheim Cup off the back of that very depressed social mood.
JASON HARTMAN: Very interesting. When you talk about the gender gap it reminds me of the skirt length theory, which you’re probably aware of, saying that the length of women’s skirts can predict the stock market’s direction. When they get shorter, times are getting better, and—
KEVIN ARMSTRONG: I think it’s just another manifestation of—I don’t trivialize it, but I don’t think it forecasts the stock market, it just tells you—it’s a coincident indicator, just as golf is. With rising social mood, people feel friskier and gayer and skirts get short, and with depressed social mood, skirts get longer. They certainly did in the ‘30s and ‘40s, and they did in the ‘70s as well.
JASON HARTMAN: Well you know, that’s interesting. When people are getting friskier, when the economy is going better. It’s kind of interesting, because I remember after 9/11, marriages just increased. Maybe that was anecdotal, but I saw a lot about it on the media, that the marriage rate increased pretty dramatically after the September 11th events. People were fearful, maybe they want to shack up together, save money, it’s cheaper to live together than apart, certainly. I don’t know. Sort of…it’s a contrary indicator to this skirt length concept, I guess. I don’t know. I guess my theory is, I’m kind of expanding it a little bit, but, if you want to attract a man, the skirt should be shorter, right? [LAUGHTER]. So, I don’t know. Any thoughts?
KEVIN ARMSTRONG: Probably wouldn’t want to go there and talk about that, because it’s certainly not something I’d be an expert [LAUGHTER]—
JASON HARTMAN: [LAUGHTER] but I’ve seen them talk about the skirt length theory on CNBC. When the skirts get shorter, it’s a prediction that the stock market is looking better. So….
KEVIN ARMSTRONG: It’s almost certain that the stock market’s been doing quite well up until then as well.
JASON HARTMAN: Well, it’s funny. Who the heck knows. Well hey Kevin, give out your website if you would, and of course the book’s available on Amazon and all the usual places. But tell us about your website.
KEVIN ARMSTRONG: Well, the website is www.bbbb.co.nz. Four ‘B’s for bulls, birdies, bogeys, and bears, and on there you can read about the book and excerpts from the book. And there you can put your name down if you’re interested in my thoughts on investment markets which I produce each month as well.
JASON HARTMAN: Fantastic. So, that website’s a little difficult, because it’s a New Zealand website. So it’s www.bbbb.co.nz, and there you can find out about the book, and a whole bunch of other great stuff. Kevin, thank you so much for joining us today!
KEVIN ARMSTRONG: Thank you very much, Jason.
[MUSIC]
ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected]. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively. (Image: Flickr | jurvetson)
Transcribed by David
* Read more from JasonHartman.com
How to Live and Lead in the 21st Century
Did Severe Winter Weather Hurt Housing?
The Jason Hartman Team
