We are not armadillos
This morning, under the bright sunlit
skies of Texas (United States), an armadillo awoke. She stretched her limbs, she poked her head
out of her lair, emerged, and began another day of foraging for water and food,
exercise, relaxation, perhaps a nap, and, of course, surviving the
elements. She didn’t inquire, nor
particularly care about, the Federal Reserve, the stock market’s previous day’s
close, inflation, the cost of butter, fiscal policy, the danger of troops
aligned along the border of Ukraine, tuition for her pups, or political
investigations into document shredding and other conspiracies. No, she existed only for the tasks at
hand…and if I may be so bold as to anthropomorphize her feelings….have a good
day while surviving until tomorrow’s sunrise, after which it all begins anew.
But you and I are not
armadillos. We are human beings. We obsess over the Fed’s interest rate
policy. We shudder at last week’s
inflation report that year-over-year core costs to business and households rose
more than double digits. We (legitimately)
worry about the price of gasoline, education, housing, eggs and butter. Perhaps we’re depressed over the outcome of
the Super Bowl. Is Tom Brady really calling
it a career, we wonder? And of course,
who is on the “right side” of today’s political scandal? Are the markets up or down. Can we afford to retire to Vero Beach on what
we have in our 401-k? Inexpensive stocks
look even more attractive. But why are
some of the “greats” in our portfolio receding?
The economy is overheating.
Inflation is already wreaking havoc upon, and baked into, the
economy. And, most importantly, I will…or
I won’t…. wear a mask because of Covid.
Free choice, you know?
Cost versus benefit
Yes, it is much more complicated
being human than being an armadillo.
However, despite the markets gyrating
in union with the day’s headlines, the economy goes on and looks, to this
observer, to be bountiful. Despite
record highs, and often punishing sell-offs, opportunity in Technology and
Basic Materials abounds. It is important
to remember that trends rise and fall, and that each nadir represents a new
opportunity. Hotter than expected economic reports about inflation, jobs
growth, GDP, and sector rotation actually make the markets look inexpensive
compared to historical price-to-earnings
valuations in sectors like agriculture, biotech, housing (and materials),
computer hardware, and (alternative) energy.
The difference between us and the armadillo is that we can sense things
about the future, use intuition to prioritize actions that need to be taken,
and cultivate instincts that last longer than the next 24 hours….at least, some
of us can. Worrying is reasonable, I
concede, but not incapacitating.
Part of the human instinct is
learning to manage fear of the unknown, that our future might collapse right
before our eyes. Many of us have lived through such disasters, double digit
percentage declines in valuations that made our head spin!! Dot.com, anyone? These capitulations are painful and traumatic. But, as noted above, we have the capacity to
plan for them. That is why I always urge
clients to go slowly, commit to a strategy, and strive for point A to point B
type advances in their investments.
The best way to mitigate risk is
through process and methodology. In my
case the science is called quantitative analysis, the ability to measure
trend duration and magnitude, determine entry and exit points along the sine
wave, and to create realistic expectations based upon risk mitigation and
growth forecasting. For sure, it is
foolish to jump feet first into shallow, or deep, waters without an evaluation
of an exit strategy first, or without knowing the consequences.
Our best efforts can only forecast
trends, not fight them.
When the Great Recession hit in 2008 wasn’t it clear enough that the
economy was hyperventilating and that banks were indiscriminately handing out
money? Did you believe that dot.com
valuations were consistent with any earnings metric you previously had used? Ah yes, it was “different that time”…really? No doubt those stocks were profitable and
made people a lot of money but, later on, at what cost? Inflation today is measurable, yet
problematic for many households and corporations. But it is also emblematic of a pent-up
demand/supply cycle that had lain dormant because of Covid and a global
transition in production and employment.
The sheer disconnect today is that we
know what requirements must be met by the economy and our government and the
fair value needed to be paid to innovate businesses that can solve them.
