Fair
exchange?
Many of you are
wrestling with the conundrum the market is presenting.....how much is enough,
how high is high?
This raises a very
relevant question for you to understand what kind of investor are you: would you willingly today cash in all your
current extraordinary portfolio gains from the stock market during the past 2
years in exchange for a base floor rate of return of 3 percent annually from
fixed income investments for the next 15 years?
Knowing that it is
impossible to "time" the market and still be a successful investor,
you nevertheless have to look at your current "gamble" as if it were
a poker game in which your chips keep growing and you have to assess the table
and ponder when the luck might run out. Could
it keep going? Of course, as might the incredible
"linear" run in equities prices.
But when does it end and, more importantly, what is your level for risk-taking
(how much can you afford to give back) and what is your time horizon for
waiting out these probabilities? Think
of it this way: these annualized numbers
are simply unsustainable, and you have to recognize that.
I believe there are no
empirical answers to these questions.
Each investor is different, everyone's time line is different, and each
has his own built-in clock to assess when the odds are dissipating. The only thing we can know is the science and
study of economics and what makes for a fair, zero-sum trade in the financial
marketplace.
The typical market
"player" is bullish when he should have been bearish, and bearish
when he should have been bullish!
While I have said
repeatedly that there are no warning signs on the immediate horizon which might
cause us to abandon stocks altogether, it is always helpful to have a
contingency plan and to have learned from the lessons of calamities past.
I would caution that it
is a matter of monitoring cycle events and cycle shifts in order to optimize
asset distribution by risk rather than betting all those poker chips on one
hand of the cards. If it's a bear market
you fear, rest assured it will come.
History, common sense, and quantitative analysis tells us so. So it would be far better at least to prepare
for one than to ignore its likelihood altogether.
Believe
your eyes
It could be that
positive reaction to the US tax cut legislation might provide additional
stimulus to the stock market rally. The
economy is accelerating and likely will show improvement in wages,
manufacturing, and profitability. We feel that a secular rise in interest
rates and/or inflation could also be positive for the stock market in that they
represent the underpinnings of rising savings rates and competitive pricing
which leads to innovation and research.
I am also extremely
excited about my Arlington Econometrics' proprietary database focus for the
longer term in areas such as healthcare, global agriculture, water, alternative
energy, infrastructure, biotech, and technology. These "socially responsible" themes
resonate as global topics of discussion, as well as sectors from which a
plethora of capital gains are most possible.
However, as we have
noted previously, nothing goes straight up...neither the economy nor the
financial markets. As long as investors
are realistic in their expectations about capital appreciation, their judgment
about the question I posed at the beginning of this missive will be logical, as
well. The biggest mistake I have seen in
my 40 years on Wall Street is that most investors, professional and retail
alike, believe that this is a get-rich-quick playing field, an all-or-none
proposition in which one has a limited amount of time and opportunities.... one
shot perhaps (?)..... to make it big.
To the contrary,
investing.....true investing.....is a matter of time, patience, methodology,
execution, and fluidity. Prepare for
cyclicality and shifts in money flow where they exist and be deliberately
strategic in modeling those shifts in your portfolio as you go.
The party is always
going on. You just need to know where to
look.
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