The
Road Not Taken
The
forest or the trees? Macro or
micro? In life, we are faced with
interesting decisions constantly. The
big picture versus the many intricate details. It is not only our ability to solve complex
problems that determines our successes, but also the objective processes and
subjective responses to their outcomes that often leads to a sense of self
gratification.
Making
money in the financial markets doesn't require elaborate schemes or technical
ambidexterity. One simply has to be
patient and ready to deploy appropriate disciplines to take advantage of any
inevitable opportunity.
Unfortunately,
one must also be mentally fortified to deal with unforeseen bumps in the road.
Soaring
markets are the ultimate reward we all strive for. Bottoms are the bane of an investor's
existence. "How much better than last year's results can I expect to
achieve?" "If I could only find the secret to investing at the right time,
my riches would be boundless."
The
problem with hoping and praying for endless wealth is that prosperity is never
a guarantee; imbalances in life and one's fortune are a part of what
occurs. The ebb and flow of sector
rotation is at the essence of knowing how to compete in the financial markets.
At
their core, my proprietary models are predicated upon earnings, price, credit,
and relative strength modeling. As long
as we lead with those primary diagnostic overlays we have done most of the
blocking and tackling needed to get the job (capital appreciation/capital
preservation) done. What matters when
evaluating the process is that the leaders outperform, the laggards are
under-weighted, and the aggregate portfolio return meets or exceeds a subjective quantification of where the client wishes to be, how he feels
about the portfolio, and the longer-term trajectory of the account's alpha.
Markets
I
believe the most successful of those aggregates are alternative energy, health
and life sciences, agriculture and water, and ecology....a quartet of what is
commonly called "socially responsible investing" (SRI) silos.
These
sectors are significant because they combine the primary selection criteria of a
quantitative orientation, as well as the "moral and social necessaries"
to compete for capital gains for the next decade and beyond. These sectors provide us with planet-changing
potential both for our net worth as well as the good that these nascent
industries can perform.
The
power of an earnings-driven topography is that it enhances the growth potential
of the portfolio while addressing the need to mitigate risk when investing in
early-stage development. Remember the
dot.com era? Where were the earnings,
and why such hyperbole?
Much
of the investing public's recent focus has been upon interest rates and the
global central banks that control their trajectory. At the end of last quarter it was pretty much
assumed that the consumption boom of the previous decade was reversing course
or, at least, slowing down. While there
likely will not be a continuation of rate hikes to stem an inflationary tide,
attention must also be paid to fostering a belief that stimulus and development
are vital to geopolitical inclusion.
Developing nations must be prioritized in the expanding global economy,
or else the inequality gaps that are at the source of so much social upheaval
and discord will widen even further.
Sure
enough, the landscape of potential purchase targets today is diminishing
because the markets have run so far and for so long. Another "flight to quality" epoch is
erupting right in front of us, spurring the sell-off in equities that occurred
in the past quarter. All of our balanced
portfolios include bonds of short duration, growth (earnings) equities, and
cash, and that is where our focus will be in the next three months. Using a multi-tiered approach also helps to
allay the confusion, fear, and potential for disaster that panic-based
investing fosters.
The
planet is experiencing rapid changes.
Some of these changes are bountiful and some are catastrophic. Some conditions are politically (man-made)
induced, some are organic. Personality-driven
trade disputes...particularly between the world's superpowers....and other
regional territorial conflicts sour the taste for consumer sentiment and future
corporate capital expenditures.
Our
analysis points to a fabulous potential for growth and capital gains in the
"emerging markets"... a context that can be a breeding ground for
innovation in land capacity, biotech advances, water usage, ecology, and
technological aptitude.
However,
to thrive in a world of change we must enlist the help of all of our
resources....corporate, institutional, personal. All along the way, we must be careful to adhere
to "rules" for prudent governance...rules of the road, if you
will. We must also account for
differences by region, culture, territory, politics, morality. What works in one place might not be
appropriate in another. What is
commonplace here might be abhorrent elsewhere.
The footprint for success will differ significantly in different parts
of the world, but future generations will depend upon our ability today to get
these answers right.
Our
institutions and norms must also be evolving.
What once was an accepted business practice might inexorably be changed
tomorrow. Instead of trying to protect
what they once had, businesses must try to galvanize their resources and their
brain power to offset current inefficiencies and learn how to profit for good
tomorrow. Admittedly, some of today's businesses
will not survive, while other kinds of trademarks will emerge to take their
place. Some of those innovators are not
even born yet! The future lies before
us, embrace it.
Politics,
morality, culture, all play a role in weaving that tapestry. We know, though, that science and technology
are at the core of society's next great discoveries. Living better; living longer; eradicating
hunger; building security....the component parts might be up for debate, but in
the end the goal is to bridge the gaps that divide people from each other and
which place barriers to a more prolific life.
Conclusion
The
markets, today and always, are an extraordinary study in contrasts and
opportunity. The recession of a decade
ago is well in the rearview mirror. Yet,
there exists a horrific disparity in the way wealthy people perceive their world
and how the poor feel about their plight.
The markets do their fair share of harm by ping-ponging investor's
senses when gyrating as wildly as they did late last year and earlier this first
quarter. As I wrote recently, I don't
view the integers of the stock market as a performance
barometer, per se, but rather as directional indicator of what is likely to come subsequently. Stocks do not always directly correlate to
our attitudes, expectations, or behaviors, although each in their own way
influences our financial security.
It
is noteworthy that the transfer and centralization of wealth is becoming more problematic,
and that our ability to solve communal problems will depend upon a more equitable
distribution of opportunity. The ratios
are becoming so one-sided that lives are being lost for lack of resources, vision,
and hope. We must be more tolerant of
each other and recognize that the "other guy" is trying as hard as we
are to march forward.
Last
year, at about this time, we were approaching the apex of a ten year run-up in
stocks and economic productivity. One
year later, we are still near some of those parabolic highs, albeit with
significantly less momentum and perhaps a wider skepticism about its
continuation. There are significant
geopolitical and personality-driven factors that enter into our present day portfolio
analytics.....war, regional diversities in affluence, class polarization,
monetary and fiscal policy.....enough so that pools of capital become attainable
only to a handful. Sometimes, the
divergence between reality and perception requires us to make compromises for
the good of the community. In the course
of conducting their affairs business and politics need to step back from
misleading the public to understand that solutions extend beyond self
promotion.
Suggested
balanced account asset allocation, Q2, 2019
Equity: 47%
Fixed
Income: 42%
Cash: 11%
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