As unbelievable as it is, but we are well into the second half of the year. Asset allocation decision-making can become very focused on the day-to-day noise and emotion of the markets, politics and economic indicators. Our weekly meetings and comments attempt to make sense of it all and let all our intermediaries and clients know how we interpret and manage such short term noise. As always, however, it is the big picture trends and cycles that need to be called correctly to ensure one delivers target returns and keep ahead of the pack.
As Warren Buffett is often quoted, “One needs to be greedy when others are fearful, and fearful when others are greedy”, with the latter always being much harder to spot and call correctly.
A couple of weeks ago, another legendary investor – Howard Marks, founder of Oaktree Capital – published one of his client memos with many big picture ponders. He is often considered a natural worrier when it comes to markets and cycles, but has written historical memos about the tech bubble on the first business day of 2000 and “the mindless race to the bottom” in Feb 2007 about investors taking way too much risk when putting money to work with leverage at the time. Both of these client memos raised doubts about investment trends that soon turned out to have been big mistakes.
I won’t republish the memo, however, I do wish to highlight his four main observations on the investment environment today:
- The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long term impact of technology.
- In the vast majority of asset classes, prospective returns are just about the lowest they have ever been.
- Asset prices are high across the board. Almost nothing can be bought below is intrinsic value, and there are few bargains.
- Pro-risk behaviour is commonplace, as the majority of investors embrace increased risks as the route to returns they want or need.
I encourage you all to try and read a copy of the memo and read it closely. It’s titled “There they go again… again” and takes inspiration from a May 2005 piece by a similar name. Marks makes no bones about the fact that he is generally early in his warning calls, is in no way predicting a significant correction will happen tomorrow, but concludes that a number of conditions required to form the late cycle of a bull market bubble are currently in play.
Fear of Missing Out (FOMO) is also raised in the memo. When all of the noted elements of a bull market bubble become widespread, optimism prevails, and no one can imagine a glitch. That causes most people to conclude that the greatest potential error lies in failing to participate in the current market darling. The super stocks of FAANGs (FaceBook, Amazon, Apple, Netflix and Google – now Alphabet) can do no wrong.
Finally, the memo touches on passive investing and ETFs. I was asked at a presentation I gave a couple of months ago to a large group of intermediaries if I felt that indexation was causing an equity bubble. In reply, I suggested not, because if the passive options didn’t exist, money would be channelled through an active manager who would also be deploying cash into the market and pushing prices higher. Having read Howard Marks’ comments, however, I think I may be changing my mind. While we at MitonOptimal take a pragmatic view of both active and passive stock selections styles, we should not lose sight of that fact that a Trillion Dollars have been moved into value-agnostic (passive) investing and now is more than likely the time to be focusing on active styles where valuation matters (or at the very least is being considered!).
At MitonOptimal we can find pockets of value in places of the market and in certain geographical regions. However we must always ponder the big picture and not lose sight of the fact that overall valuations are high, complacency is at all-time highs, fund raising by private equity is at record levels, and we have a group of “can’t lose” stocks dominating the market. All of which are all tell-tale signs to be fully invested but be careful and more diversified than ever.Pondering the Big Picture