Who’s fault?
The stock markets took us on a
frustratingly confounding ride in the last two weeks. Remember this, though, that despite being
down for the year, there has been a virtual bounty of gains during the previous
decade. It shouldn’t be a surprise that
stretching the boundaries so far could be perilous. But more on that in a moment. First, picture this:
“Your child’s third birthday
party. All her young friends are there,
gathered in the backyard. Burgers and
hot dogs on the grill. A cake with three
candles sits on the large picnic table.
There’s a pony ride for the children.
A balloon man has the kid’s rapt attention. As he fills the balloons with air the
children implore ‘more, more!! A light pink
orb expands to its limits, nearly (but not quite) ready to explode. Your young toddler is so proud as she parades
around the yard with her inflated new toy.
Suddenly, a stiff breeze. Her
balloon is tossing in the air. Without
warning….it bursts!! Loudly. A hush
falls over the youngsters, then your precious little baby starts to cry. “Why did it burst, Mommy?’ she sobs. Was it the wind? Her carelessness? Was the balloon too full?”
Now imagine this:
“The stock markets are making record
highs. Your shiny new car sits in the
driveway, a conspicuous symbol to all the neighbors that things are going
well. That spacious new outdoor swimming
pool in the backyard was recently financed by the bank with a low interest
loan. Your suitcases are all packed for an
impending family vacation you had been promising them. You just got a promotion and a bump in
pay. The country club dues are paid off
for the year and the kid’s college tuition…although a stretch to the household
budget...was finally approved by the bank.
And without warning...the market bursts!! Loudly.
A hush falls over the household. You
bravely hold back your fears and tears.
You call your money manager. “Why
did it burst, Paul? Was it all an
illusion? Was I careless? Was the market too full?”
Paying a price
No doubt, the markets have been very
good to many of us, setting new records and outperforming (overperforming)
against all benchmarks and expectations.
But straight line anything is always an aberration in a sine wave kind of
universe. In this case, an unyielding
unwillingness to acknowledge that the “game” is always fraught with danger made
buying financial assets and counting on “forever returns” a fool’s
mission. As quickly as these things can
end, one must always plan for the unexpected…which in this case was mostly
anticipated. How far can you stretch a
rubber band?
Look, I am an optimist by nature and
an investment Bull. My weekly
commentaries are full of information telling you how my “left side of the
parabola” bias lends itself to being “long” financial assets. The crux of the matter, though, lies within
three factors: discipline, expectations, and reality (data). Currently,
I believe that investors are lacking a healthy dose of all three.
The gain in financial valuations over
the past few years has been a remarkable achievement. Relish in it, appreciate it, enjoy it. But please don’t be surprised or upset when the
tide turns. Even a modest capitulation
in valuation at this juncture should leave you with more than you started
with. You must be able to manifest a
certain gratitude about your privilege and rewards and recognize that the resource
bubble raised your lifestyle and net worth along the way.
I am often accused of being too
conservative, not aggressive enough in packing portfolios with “hot ideas” when
the markets are percolating. To the
contrary, our 40-plus years of representing high net worth clients is replete
with asset allocation rebalancing and sector/trend analytics that capture a
dexterity in mitigating risk and growing assets that many “gamblers” do not
possess. Unfortunately for the
uninitiated, playing the asset game is simply not a straight line proposition,
despite a compulsion to add risk in the face of adversity.
The promise of “getting rich” must be
tempered by a calculated approach that recognizes humility, gratitude,
methodology, and patience all at the same time.
Beyond the bubble might lie tears, but always…always an opportunity for economic resurrection.
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