A matter of perspective
Unless your investing career started
back in the 1970’s, your level of concern and confusion about economic data
must be alarming right now. However, as
has been the case in other instances, we’ve been here before when rising prices
and weaker economic growth produced “stagflation” and recession fears. During such periods, sectors rebalanced and
reprioritized to reflect market changes.
Defensive assets, such as commodities, perform well in those times.
When both stocks and bonds are in decline rational theories of
market performance become useless, heightening the specter of
hopelessness. Against this backdrop of
uncertain macro direction investors must look at the long-term as the answer to
their uneasiness. Thematic and secular
(generational) themes always win in the long run. Unfortunately, we have witnessed a recent
spate of immediacy and impatience by too many investors in their quest to
recover from their pandemic “melancholy”.
They tend to see things as
either/or. Technologies that rearrange generational
schools of thought are hard to find, but worth the wait and prize. Industries that engage in replenishing our
social consciousness are not usually thought of as the typical “big score” that
traders look for. But every generation
must come to accept that change is inevitable and part of understanding a “new
normal”. To that extent, asset
management is sometimes described to me as “boring” or “unstimulating” when, in
fact, it is precisely the way intergenerational wealth is transferred responsibly. And if done properly it can be a force for
good governance and social care.
In fact, the synergy potential
between socially responsible and profitability
is unmistakable if one has
patience. Dollar cost averaging,
doubling down, and failing to diversify are the antithesis of fiduciary care.
My job is to respect risk. My appetite for losses is small, my
convictions are large. Our job is to
execute our discipline in the face of changing realities to create portfolios
that reflect your expectations for return and volatility mitigation. There are times to be on offense, and times
to play defense. Right now we are
definitely in a defensive posture, without guarantees that any strategy is
right for these times. However, our
40-plus year track record of outperformance demonstrates that we have played in
this game long enough to know the differences.
Keeping losses manageable is essential
to wealth creation and preservation. It
takes a 100% return to overcome a 50% decline.
So when one’s monthly statement shows a “loss” it should be noted that our
defensiveness means our thresholds are tighter and our relative position is
stronger. Make no mistake, everyone
experiences agita during down markets.
The knack is to manage the magnitude and duration of the pain to one’s
tolerances. Ours is a business of risk
mitigation as much as it is generating extraordinary rewards.
Wealth can “hurt”, too
At present we see only a handful of
fundamentally strong sectors that are fighting market downtrends. However, even for those few, their
quantitative relative strength integers (RSI) do not put them in an optimal
buying range. Trying to pick “bottoms”
is an exercise in futility. Instead, we
require an appropriate time/price relationship to create an optimal
inflection. Hoping is not a quality investment discipline.
As the seasons change, election
series unfold, and global monetary policies take effect we find ourselves in a
vortex of health (Covid), politics, and economics which impose vicious cost to
our psyches. To survive these exogenous
noises we focus instead on the opportunities and unsolved problems that the
capital markets historically have always helped us to discover…...clean air,
clean water, food, shelter, security.
This remarkably intricate mosaic
which comprises the financial markets always works best when there is a shared
sense of purpose and expected outcomes rather than a singularly ignorant
“what’s in it for me” bias. The
experiment we call “Capitalism” is about unifying opportunity for reward for the
betterment of all participants.
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