June 22, 2023
Cameron Crise, Bloomberg’s Macro Man, wrote a piece a couple of weeks ago that bears consideration. Even if we know what is going to happen in the economy (rarely do we know), we don't know what the markets will do.
“You don’t know what you don’t know.”
Stay invested through time:
• When we invest our savings, we essentially employ others to make money for us. This happens through:
o Buying ownership in companies within the USA and globally. o Loaning money to companies and governments that will pay USA fixed interest rate.
o Buying essential assets in scarce supply and holding the mover long periods of time (this is slightly different than the first two points).
However, when you invest, your net worth will fluctuate because the prices of ALL companies, bonds, assets, and money fluctuate all the time. As I have mentioned many times before, if you cannot assume an appropriate degree of volatility, you should not be investing.
People get scared and act on emotion:
News is mainly negatively biased; negativity sells better than warm and fuzzy. Opinions and soundbites of experts are often negative as well. For example, the debt ceiling story was one of those scary topics that many clients inquired about. This story was somewhat amusing because politicians on both sides were incentivized to scare their voters, but at the same time both sides of the political spectrum had almost NO incentive to default on government interest payments. Of course, stories like this do in fact describe a relevant market risk, but this was only one small risk among many that require constant monitoring.
People sometimes express concern about an opinion from a prominent expert. People hear an investment luminary say something negative about the market, government debt, or some other long- term concern, and they become nervous or emotional. People often make decisions based on emotion, and this rarely results in the positive outcome they desire. One of the experts people naturally listen to is Stanley Druckenmiller. He is one of the most successful portfolio managers of the last 40 years. Many people want to hear from him in interviews. However, people often take a soundbite from an interview, and are inclined to make a change in their own portfolio. Of course, the problem with changing your own behavior based on a comment, is that Mr.
Druckenmiller (and other well-known investors) might change his mind very quickly after his interview, and you won’t have any idea.
It is better to study and learn the process that Mr. Druckenmiller (and others) applies that make him successful instead of reacting to something he says.
Having a process and a personal investment plan that works for you and your situation is important for long term results.
Last week, I listened to a Bloomberg interview he gave. Two comments from that interview stayed with me and taught me something about his process. He basically said that he has had 40+ years of positive annual performance. Wow! Then he said, he doesn’t think he ever made money being short equities in any given year. Wow!!! He said he likes to short the market, it’s part of his process, but he admitted that he probably wasn’t very successful at it. Timing is hard (think 2000 tech bubble and 2008 mortgage crisis); so even if you’re ultimately correct, you still end up losing money.
What does this tell me?
Like most great hedge fund managers, his biggest strength is likely risk management skill, and his lack of ego. He finds asymmetric risk/reward opportunities.
If he tells the media, that he is “short” the equity market, perhaps I should be buying more stocks based on his admission above?
I have had many people ask me to put them in cash during uncertain times. I have convinced many to stick with their long-term plan, but others have felt compelled to seek safety based on their own analysis. Over many years, I have seen very intelligent people miss out on opportunities, and it has cost them. Even if they get it right and avoid near term losses, they almost never get back to their plan. In my experience, it is a rarity, except for the most talented professional portfolio manager. Even then, it is imperative that the manager deploy a long-term consistent process to be successful, and there just aren’t that many people capable of that. I often see talented hedge fund managers miss out on longer term investments because they are unwilling (or perhaps too clever) to allow short term volatility in their own personal wealth. The opportunity costs are real; I speak from experience!
Over the last few years, many investors have been scared and shaken out of their plan due to emotion. Covid, Fed rate hikes, ESG mandates, the Russia war, etc. But there were opportunities amid all that danger. The market continually presents opportunities for growth.
The observations and potential opportunities now:
The rate of inflation continues to come down as we expected, and it looks to us as though it will continue for the time being.
Recession risks are increasing in the USA based on the indicators we follow. The simplest being that monetary policy operates with a lag, and the Federal reserve only started its historically aggressive rate hiking cycle less than 18 months ago. Additionally, the pause on student loan repayments is finally ending in September.
If recession risk is rising, inflation rates continue to come down, then the Fed may start cutting in 2024.
The government continues to spend without much concern for future obligations. The issues can be solved, but right now they are not even being seriously debated.
Covid policies are likely to continue to disrupt historical economic relationships. Boom/Bust cycles are more likely to arise in our opinion.
Currently housing supply is tight, and this supports prices in many areas. If mortgage rates come down in 2024, will this increase the supply of housing? Homebuilders are busy right now, but what will happen if supply jumps? Maybe lower rates won’t help house prices?
If rates come down, the reinvestment risk seems high for those holding money market funds or US Treasury bills. These products have been in high demand in the past year.
In the portfolio, we continue to maintain a well-diversified portfolio to navigate the changing conditions. We continue to buy companies which we believe give us a high margin of safety, and we continue to hold fixed income in most portfolios. We added exposure to Japan, Mid and Small Cap USA, and we have added companies to our stock baskets we deem as valuable because of their cash flow.
Half of 2023 is behind us, and thus far I am pleased with the way most portfolios have performed given our relatively defensive approach. We are making small changes, but we continue to maintain flexibility by holding some cash and fixed income which could be deployed when and if the opportunity arises.
As always, thank you for your trust and confidence in August Wealth. It is truly our pleasure to serve you.
Joe
Important Disclosure Information: Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; Stratos Wealth Advisors, LLC and August Wealth Advisors are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Moreover, you should not assume that any discussion or information contained in this commentary services as the receipt of, or as a substitute for, personalized investment advice from August Wealth Advisors. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence. Past performance is no guarantee of future results. Investing involves risks including possible loss of principal. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but August Wealth Advisors makes no representation as to their timeliness, accuracy, or completeness. Stratos Wealth Advisors is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
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