The
need for greed
Popular
media always finds a way to glorify the positive cycles in the economy, seemingly portraying that nothing could
possibly go "wrong". To them,
everyone's got it right, the big stuff outweighs any potential negatives on the
horizon...or so they tell us.
You
and I must ask, though, that if everyone has it "right", how do you
account for unforeseen events, peculiar twists and turns, market crashes, and
protracted slumps?
The
media has trained us to buy into all their misleading exaggerations, that
"ordinary" is unacceptable, particularly for market investors. It isn't glamorous to be the tortoise in the "tortoise versus the hare” allegory. Being shy or reserved are not characteristics
that one usually associates with Wall Street takeover magnates. Isn't the successful guy always the most
gregarious, the most flamboyant, the most cock-sure? Of course, in the media, those titans of
money are always very "smart", as if they know a secret we
don't, and their human frailties don't
really matter all that much.
By
no means is everyone portrayed that way in the media during
extraordinary boom times, but you get my point that, to them, there exists no
evil, no watershed event which might derail the scenario. "Happy talk" and quick banter is
encouraged; gloom and doom is frowned upon because it doesn't make for good
ratings. Everything is just fine, thank
you very much.
But
some of us know better. Under the
market's surface lies a myriad number of possible scenarios, events which, by
their very unpredictability, make the market the volatile game it is. That's where I come in, why my clients pay
me. I'm the one who worries about things
that others take for granted. While I'm
not a "bear" by nature, I know that when complacency takes hold...and
it can last a long time... good times typically end with great difficulty. As the
popularity of stocks increases in today's climate, history and cyclicality has
shown us time and again that extreme consequences are often likely to follow.
Priorities
The
reason this is important is that as investors pump up stock valuations,
perceiving less risk, they are actually taking on more risk, particularly trying to maximize
(leverage) returns while the time is ripe.
Therefore lower risk/more stable portfolio strategies lose their media
luster...until things start to go wrong, of course. When markets go bad, or underperform, that's
when methodology and discipline usually get the most attention. Did you know that, despite last year's
phenomenal success, the net return in the S&P index during the past decade
was virtually "zero", while the "tortoise", bringing up the
rear, generated positive alpha for the same period? One of
the strengths of having a market agnostic discipline is the ability to
customize any portfolio for risk-versus-reward, and to generate positive
returns during down markets.
Money
is always in motion. The lessons of quantitative
market theory is that portfolios must constantly be adjusted for risk,
allocation, time horizon, and probability of performance. What the "talking heads" most always
seem to forget is that markets exist in a very complex world, not a black box,
and are constantly bombarded by events and circumstances which might affect the
probability of performance. It's not
necessary always to glorify "fast money" opportunities, or to
sugarcoat current events.
As
it becomes more commonplace for portfolios and markets to achieve big gains,
some might see volatility as an unnecessary intrusion into the norm. We know, though, that there is no
"norm" in the science of quantitative statistics. There is up, there is down, there is
magnitude, and there is duration. What
we do from there is simply artistic interpretation.
As
today's market cycles become more extended, it is important not to diminish the
significance of structural global consequences, historical data which tends to
repeat over time. It's fine to be calm,
complacent, satisfied, and rich. There's
also the calm before the storm.
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