Lack of Evolution Leads to De-Evolution

"I've never sent an e-mail and I never will." -- Bud Selig

Bud Selig is the commissioner of Major League Baseball.  He made those comments a few weeks ago, was the butt of a few jokes, and now it’s gone away.  Bud (I think) is going to retire in a year and baseball will move on.

I point this out, not to make fun or pass judgment, but to shine a light on its symbolism.  What this represents is baseball’s inability to evolve.  Our nation’s pastime, baseball is stuck in the past while its competitors - football and basketball - are proactively moving forward.  

Pick your issue - steroids, instant reply, player marketing, speed of the game, etc. - baseball moves at a snails pace. Baseball has a history of being reactive, rather than proactive.  The evidence of baseball’s relative decline are in the ratings. 

Become complacent, stop making positive progress, stop evolving, stop growing and the gradual decent to extinction begins. This is true of any business including wealth management, portfolio management, and the delivery of client advisory services. Whether it’s a company, economics, or an advisor, the key is to be reasonably progressive.

Change for change sake is not what I am talking about: that is silly, futile and empty headed.  But, rather evolution to improve productivity and services to the end user is that to which I refer. Give the customer/client not just what they want, but give them that which they didn’t even know they could have. Set the bar high and then exceed it. Baseball could take some lessons from companies, who strive for excellence, something we attempt every day. Our website contains a page entitled, Guiding Principles, which are some general principles, which MLB could afford to adopt.

Certainly I am not suggesting baseball change the game, no more than I would suggest a successful investment manager tearing up their strategy and starting from scratch.  What I am suggesting is that in order to maintain that success, the focus must be on the future and not the past, on how it represents itself to the public and on those who it seeks to serve.

When looking at a stock, a manager, an advisor, or what sport will have the highest likelihood for a favorable outcome moving forward, the safest bet is the dynamic one.

Stock Market Risks – Investors Tendency to Get Ahead of Themselves

In the near-term there appears to be little risk to the equity market, which alone is reason for investor concern.  From a macro standpoint, there appear to be two outcomes:

1. The economy is stable and continues to grow, albeit slowly.  Top line revenue improves.  Earnings look good.
2. The economy is slows and growth looks like it is coming to a halt.  Fed easing continues.  Bottom line improves + valuations expand.  

It really seems like a no lose proposition with short-term valuations at reasonable levels (though those can be be distorted).  Let’s consider some of the known risks.

• China property bubble pops.
• Europe in recession.
• Middle East trouble.
• Other - flash crash, natural disasters.

The last two bullets are always going to be on the list.  When hasn’t the Middle East been on the verge of erupting?  You can’t use that to justify not investing in equities or you would always be in cash.  Same with “other”. As for China and Europe, you can simply underweight those positions to mitigate risk. The US stock market has shrugged those off.

Back to the original point, aside from those unknown risks, which by definition I can’t list, I can’t seem to find a whole lot of risk in the stock market in the near-term.

The risk, as I see it, might be a few years out where various intermediate valuation and trend measures are less favorable (note: these have been confirmed by our own independent research).  And unless this time is different, as in the past, they will revert to the mean.  Though still this says little to nothing about the next 12 months, and leaves us in a precarious position.  By example, a 40% loss reduces a 140% gain to a 44% gain.  Still, as mentioned earlier, nothing in the near-term causes me to think it will happen soon and those valuation measures are meaningless over a shorter time horizon.

Further, we appear to be about at the average of most bull market cycles, as Jon Hussman notes:

Bull market advances [since 1940] have averaged a 123% price gain, a 162% total return, and a duration of 4.4 years.

Thus, while we may be long in the current bull market tooth, nothing YET indicates an immediate move into bear territory.  Further, while sentiment has been improving, at least in my mind it doesn’t seem to have reached “all in” mood yet. (note: this is subjective based on my research, experience, and conversation with clients and retail investors).

Ultimately I am comfortable with a cautious approach to equities.  Investors should recognize the unfavorable intermediate-term signals, but not base their buy/sell decision totally on those.  Investors can do this by current bull market run with allocations to higher quality equities and pumping the breaks when appropriate. 

I don’t know whether market complacency, Fed tightening, China, Europe, a flash crash, our own recession etc. will start the next bear market, but I am willing to see where the things go and scale back exposure when the market signals to do so.

Past performance is no guarantee of future results.  Diversification does not guarantee a profit or protect against a loss. International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties. The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  Nothing in the above writing should be taken as an investment recommendation. 

Too Good to Be True?

If an investment sounds too good to be true, it usually is.  If you don’t understand how the investment or the market in which it exists, that only amplifies things.  Still, neither of those means it’s a bad investment, it only means the following:

1. You probably don’t understand the risk
2. It’s time do some research

I bring this up as we were just pitched by an investment firm which is waist deep in experience and credentials on an investment strategy with:

1. High yield
2. Low risk
3. Non-correlation to the assets in the portfolio
4. Non-correlation to other asset classes

What an investment!  Frankly, I came out of that meeting, and my only concern was the title of this commentary.  So I dug a bit deeper…

1. High Yield – Yes, the yield was nice, but has also come down as other investors took a liking to this asset class
2. Low Risk – Kind of, but it remains unclear if the models used to price these investments are accurate.  Further, the now lower yield enhances this risk (i.e. you aren’t compensated enough for the risk)
3. Non-correlation to other assets in the portfolio – In theory, yes; however, it’s possible these assets all move together if everyone tries to leave the same broad market.  Hard to gage the likelihood of such an event
4. Non-correlation to other asset classes – Yes, until it isn’t.  By this I mean there are instances when this asset class would move with equities, and only at the time when you would need them not to do so

I don’t want to divulge the asset class because we are still doing our due diligence.  I just wanted to give an example that there is always more than meets the eye, and it is critical to dig and dig deep when presented with a possible investment.

However, just because we uncovered some risks doesn’t mean it’s not a good opportunity.  It just means we need to be aware of all of the downsides, weigh those against the possible return, and if it passes our screening process, explain all of this to the client where is fits accordingly.

Past performance is no guarantee of future results.  Diversification does not guarantee a profit or protect against a loss. International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties. The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  Nothing in the above writing should be taken as an investment recommendation. 

The Freak Out

Mitzi, my mom’s dog, doesn’t get on the couch except when there is a thunder.  One clap of thunder and Mitzi jumps right up for the comfort of my mom.  As soon as the thunder subsides, Mitzi goes right back to sleeping on the floor. Not unlike Mitzi the dog, the markets get spooked when the equivalent of thunder causes alarm.

Bespoke recently highlighted the similar reaction the equity markets have had to the Fed Minutes release:

Another sell-off happened on July 10^th as well:  after the minutes release the S&P 500 shot up and then sold off roughly 0.60%.  Where are we since the last Fed sell offs?

Despite the initial reaction, the S&P 500 is up since each of those Fed Minute release parties. 

Like most of the items in my commentary, I use this as an example – an extreme, short one at that.  It doesn’t tell you to invest or not to invest in stocks; however, it does show that markets can move quickly without fully digesting what is presented.

At times this can be a signal (times are changing) and at times it can be noise (a blip, but the trend doesn’t change).  The key is to try and distinguish between the two, but that can be difficult.  Thus, the most important takeaway is not let emotions dictate your investment decisions, which can lead to buying at the top and selling at the bottom. 

Having a plan in place and executing that plan is the best way to keep yourself in check, minimize risks, and subsequently gain long-term returns.   

Past performance is no guarantee of future results.  Diversification does not guarantee a profit or protect against a loss. International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties. The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  Nothing in the above writing should be taken as an investment recommendation.