The over arching thesis behind money management discipline is that at any given moment some parts of the world economy are doing well (rising) and some parts are doing poorly (falling). It rarely happens that everything rises or falls in unison. Therefore, the true measure of any portfolio strategy is to try and quantify the relationship between the sum of the parts, and to be sure to overweight, on a risk-adjusted basis, those sectors that are succeeding and to underweight those sectors that are doing less well.
Obviously,
each client's tolerance for risk is different and factors into the overall
asset allocation weighting by asset class.
But the goal nonetheless is to be alert for anything and prepared for
the worst of everything.
Linear
(straight line) trends are the most onerous.
Parabolic influences are much more preferable.
Given
all this, as we look back "post election”, and forward towards year-end,
it is clear that the surge in stock prices is welcome relief for portfolios,
but also problematic for its linear composition. This is not to suggest that we are ready to
abandon our allocation to stocks. To the
contrary, we have been preaching for several months about the necessity for
long term secular demographic investing, focusing upon silos of opportunity in
selected themes. Global markets are
experiencing a post-recession recalibration that will be hard to reverse
indiscriminately, no matter the risks of holding equities.
However,
some of those accelerating sectors are running on empty at the moment. Financials and Cyclicals, for example,
register extended relative strength integers (RSI) and are too expensive for us
to chase at the present time.
As
our initial thesis implies, there are, however, sectors that are not running
excessively. In those sectors one might
find opportunity to begin positioning any sideline money for future potential
growth. Although not as exciting as the
current crop of winners, there is back-end opportunity in Utilities, Consumer
Non-Cyclicals, and Technology shares.
Same
questions.
Investors
are constantly faced with difficult decisions:"Is the market too expensive?"
"Can I afford the risk of loss in my portfolio?"
"When is the right time to sell out of my winners?"
While
the answers to these questions sometimes depend upon the optimism or pessimism
of each person's makeup, we know that for
every up there is a down, and vice versa.
There is always something in which to invest if we have the patience to
sift through the data and make an informed decision.
The
easiest thing to do is to do nothing.
Acknowledging that there is also reason for caution, our macro view finds
that by any reasonable analysis basic fundamentals are uncovering a myriad
number of companies that create good product with high consumer demand and
which generate qualified profits for their stakeholders.
Usually,
fear of the markets is spurred on by a kind-of anecdotal approach to investing
rather than a scientific method that produces consistent results. Consider, for example, that our planet will
require potable and replenishing sources of water, strong agricultural
harvests, scientific innovation, medical and biotechnological research,
modernized transportation and infrastructure, communication interconnectivity,
and renewable sources of energy. That
looks like a pretty good list from which to create any new portfolio, if one
had to choose.
I
always try to look for earnings accretion and acceleration patterns as
potential sources for new portfolio candidates.
The list above is a compelling starting point when looking for
profitable portfolio allocation in the next several years.
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