Tactics.
Global stock markets continued
their tepid advance last week, although it seems that the cyclical advance is
giving way, once again, to the longer term secular (bear) bias. While advances during this upswing (since November
2010) have been robust, they nevertheless are contained by overhead resistance,
making for little net gain during the past three years. Indeed, as we’ve stated before, the only real
bull component to the economy and markets has been pricing power in tangible
assets.
As a result, portfolio
allocations tend to become idealized and provocatively positioned to chase gold
and other natural resources. This is a
mistake for investors who remember the monochromatic theme during the dot.com
era and, as a result, paid a heavy price.
Chasing individual asset
classes might be temporarily rewarding, but can most usually be destructive to
one’s manic psyche.
Making matters worse,
dismissing traditional asset allocation provisions as “pedestrian” or
“vanilla,” disparages a nuance that our chasers don’t seem to get: asset allocation always plays a greater role in the probability of capital gains
potential than does any individual security within that portfolio.
An all-or-nothing discipline
is great when you have nothing, or everything, to lose. It is not, however, an investment strategy
that optimizes tactical fundamentals.
It is for these reasons that I
believe the markets are extended and at risk of consolidation. If one is compelled to invest, I would urge
caution, patience, and dollar-cost-averaging rather than an “all-in” philosophy
at this time. The big picture for
financial securities is long-term positive but short-term precarious.
Alternatives.
During periods of equity risk,
investors have traditionally rebalanced their portfolios according to the
“alternative investment scenario,” which takes into account a diminution in
equity exposure with a simultaneous increase in bond purchases. Unfortunately, we are at a period in global
transition where incentive-based borrowing and fiscal stimulus have taken
yields to an historically low level.
Thus, the opportunity to “park” money in bonds is equally as risky (in a
rising rate environment) as playing with stocks at their peak. Global
inflation is making bonds as speculative as buying overextended equity prices.
If we wish to be “early” in
discovering the next big thing we have to widen our aperture of perspective
and, rather than chasing the current fad, begin to look at long-term
demographic themes such as biotech,
agriculture, alternative energy, and technology. The highest frequency of names in my universe
are gathering for an upside inflection in those sectors within the next two
years.
Too often we get in our own
way trying to outsmart the markets, or taking excessive risk with
volatility. No one sleeps well putting
all their eggs in one basket, or checking the ticker hourly to see if they are
wealthy or poor.
Redesigning risk according to
longer schematics implies higher returns and less catastrophic outcomes.
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