“A cheap asset presents an opportunity for increased future returns, but if your goal is minimize your drawdowns, then wait for those assets to stabilize.”
In my 2013 thesis I used the following: “On a relative value basis… emerging markets face secular headwinds they do appear cheap.”
If you read my commentary and/or listen to Warren Buffet you
buy assets when they are cheap. The
price you pay is as important as the quality of the asset you are buying. This increases the likelihood that future
returns will be higher. The logic is
simple, but I do think comes with a caveat.
I noted later in that thesis the following on Emerging
Markets: “while there are opportunities for upside until the trend reverses
it’s hard to have much conviction”.
Trends in major asset classes start quickly, but play out over a longer
time period. As result, if your goal is
to get reasonable returns over a longer time horizon and reduce your risk it
makes sense to wait until the trend appears to have bottoms and more than
likely has moved into an uptrend. Thus,
while you miss some of the upside, maybe even the bigger moves, you also avoid
the large moves down in that asset.
Which brings me to Emerging Markets, here is what they look
like as of 02/03/14 close:
What I see:
- YTD down 7%
- Trend is moving down, doesn’t appear to be stabilizing
- Valuations are now cheaper, but they were cheap to start the year (i.e. just because an asset is cheap doesn’t mean it will reverse)
Thus, while enticing on a value basis patience can help you
avoid any further drawdowns before adding to this position, or any other asset
class in a downtrend.
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. The
material presented is provided for informational purposes only. Nothing
contained herein should be construed as a recommendation to buy or sell any
securities. As with all investments, past performance is no guarantee of future
results. No person or system can predict the market. All investments are
subject to risk, including the risk of principal loss.
