Advancing...by retreating
Over the past many months I have
written extensively about the need for investors to focus their horizons away from the immediacy of micro managing daily news
events and looking towards macro themes, particularly in socially
responsible investments, which benefit both the economy and portfolio long-term
performance. Having a strategic
perspective is helpful because it changes the emphasis from reacting to emotion and anxiety of
everyday news to pro-action and methodology applied to science and
measureable data.
But not in today's missive.....
Instead, I want to reflect upon last
week's virulent activity in the markets whose gyrations reflect a downshift in
economic activity for the near term caused by the great uncertainty wrought by
the Covid pandemic. I will begin,
however, by reaffirming two primary tenets of the marketplace: (1) it always makes sense to plan for the worst
because the panic caused by failure to anticipate can be catastrophic to
portfolios and (2) asset allocation plays a greater role in the
probability of generating portfolio capital gains than does any individual
security within that portfolio.
Having said that, it is important to
review where we are today and from where recently came.
Recall that over a decade ago the
markets were roiled by a global collapse of the credit markets. Some of the problem was “man-made” while some
was inevitably predictable given the half-decade prior of unbridled optimism
and abuse of the system. More
noteworthy, though, was a total obliteration of consumer confidence as homes
were taken away, jobs lost, industries closed, and competition thwarted. Recall the era of chaos, confusion, and
despair which permeated the financial tapestry.
As nearly always happens in the bizarre world of parabolic quantitative
analytics, the “bottom” of that crisis represented the most opportune moment to
plot and strategize for the probability of a rebound turnaround. And, in this instance, the last twelve years
have been, without interruption, a near-linear upside spike in valuation and
wealth building.
The premise of quant science,
however, is that straight lines are anathema to creating probability and cycle distributions. I believe that there are always zeniths and
nadirs; phenomena are always traversing a certain direction at measureable
wavelengths (magnitude and amplitude); life is not a series of straight lines,
but rather a grouping of phases heading towards a final objective, up or
down. Unfortunately, a graphic depiction
of financial bourses over the last 5 years looks like a linear (straight line)
progression, manic in its ascent.
Be careful to note that the stock
market is not the same thing as the economy-at-large, nor is everyone's
investment experience/result identical.
Some have netted a remarkable rate of return during the past decade,
others less so. Others, even still, have fallen behind immeasurably. There is no denying that the income gap is
widening and opportunity favors the wealthy.
The determining factor in most all those outcomes was the amount of
capital a person had to invest and the amount of speculation (gambling) they
wished to take on. Stock picking alone is not a methodology nor a strategy. And for those who can afford to play the
investment roulette wheel...be grateful for your bounty.
Without question, the past two years
of suffering under a global pandemic has created question marks out of every absolute
we knew to be true. Today, there is a
heightened probability of chance, change, and reevaluation for almost all
financial metrics in our toolbox.
Forecasting the future velocity of trends will be more difficult unless
we can defeat the ravages of illness and virus.
Annual and recent quarterly sales figures are waning, inflation is
accelerating, supply chains are dwindling, and emotions are fraying. Indeed, day-to-day challenges are manifest in
almost every activity we undertake and likely to challenge even the strongest
of theories, causing collateral damage in the short term to portfolios and
gains hard won in the past.
We are a generation of instant
gratification. The more our expectations
for immediate success are thwarted the greater the likelihood of panic or
contraction in portfolio valuation. It's
not anybody's fault. It is a necessary
cycle phase that we need to be aware of before resuming “normal” patterns of
expanding opportunity. At this moment,
lethargy and laziness are traits no one can afford to accept.
