Market Commentary

I frequently get asked, “What do I think about the economy?” or “What do I think the stock markets are going to do?”.

Depending on the person doing the asking and what they are invested in or thinking about investing in, the conversation can get quite involved.

Sometimes the discussion turns to real estate, gold or other commodities. But overall it tends to be a general discussion of my current views and why.

Now, I don’t pretend to have all the answers when it comes to investing, in fact whenever I find someone who thinks they do, I tend to only half listen. Investing is an art more than a science.

I can say I have been at this game close to twenty years now and I have managed to achieve a good degree of success in it. I have managed close to 1.5 billion dollars for individuals and Institutions worldwide. And I have successfully managed my own money for many years after leaving the Global Asset Management business in early 2000.

I successfully avoided the internet crash in 2000, I did not get badly hurt in the Real Estate debacle (I did lose a few bucks) and I have continued to stay away from all the major downward trend shifts in the various marketplaces.

Investing, being an art form, in my opinion, will always have periods of loss connected with it; but I live and breathe by one hard and fast rule…”do not make an investment decision that has the potential of taking you out of the game”. In other words, stay alert, diversified, and always assess the risk involved in the investment. Then if you decide to make the move, do it in such a way that you have calculated what the downside could be and its overall effect on your entire portfolio and your life.

Investing in my opinion is one third opportunity assessment and two thirds risk analysis and abatement. I consider myself more of a Risk Manager more than I consider myself an Investor.

So, with that as a backdrop to the questions I get asked and the purpose of my Blog today here is my answer. I believe this answer will hold true regardless of current or future market conditions. I have never written it down before, so hopefully it will make sense.

On one hand, my answer could easily be…”Who knows” or “It’s anyone guess”, these are actually true enough and intelligent answers. But, not highly workable answers if you are trying to put your money to work or trying to decide if you should take profits or not.

In short, my viewpoint is this; the economy is based on agreement, the stock market is a reflection of the current agreements that exist surrounding a particular company or the world in general. These agreements shift from time to time, sometimes quickly and sometimes slowly. The important thing to remember is that they SHIFT. The agreements will not stay in place forever. It is the nature of man to change, evolve and adapt.

Therefore, a company becomes a living organism. A sector of the marketplace, such as energy or defense, is a larger organism. These organisms all revolve around the central theme of survival. In that everyone is seeking to survive and survive better, evolution will occur. And yes, sometimes devolution will occur — when something grew too fast or the infrastructure was not in place to support it. The internet is a perfect example of that, the over-expansion in the beginning got punished and when the industry matured there were more realistic opportunities to invest in this sector.

Any answer to the above questions, are as good as my ability is to observe the current state of the existing agreements, as they relate to stocks and market sectors. I have sometimes called our economy an “Illusion Economy”, because it is based on how much agreement can be generated. How many people can be “sold” on what is happening. I believe that people will always strive to create new and better things, that man will find a path towards expansion and that people go to work every day hoping to build a better future.

My current observations lead me to believe that we are in a “Hopeful Period”. After coming through the mess created by the banks and the governments which nearly collapsed the economy and the markets, people are “hopeful” that things in the world are coming under control and things will be better. While this is good, it is not much to hang your hat on, let alone invest a lot of money in it. I would rather sit out and wait until things actually get better and miss the first 10% move up than take the risk that this is “the time” to invest.

Additionally, I look at interest rates being offered by banks. It is tempting to say the least, borrow money for 30 years at 3% to buy a home. When I look at that from a slightly different angle I consider this, if the banks are willing to put money out at these rates for that period of time, they must not have a lot of confidence that they will be able to charge higher rates in the future. Basically, I believe they are trying to get enough money working at lower rates to stabilize their balance sheets and have a chance at long term survival.

Also, I see that there is enough turmoil in other parts of the globe to warrant a cautious eye and I anticipate more sort-out yet to come. I cannot say what that sort-out will bring, but I can assume it is not going to be a fast sort-out. Another reason not to make big bets and to invest more cautiously.

The presidential election will continue to bring more hope and should give a bit of protection to the downside in the markets, but we are pretty tightly balanced right now, any upset has the potential to knock the general agreement and send people running for the hills.

It is my belief that one has to invest and view things different from the group at large, if one is going to produce a consistent return and avoid group agreement that results in a downfall. That being said, I often will invest with the group agreement for a short period of time, to take advantage of the upswings that occur. But, I will also set my own return target and play for that, then close up shop and go somewhere else. I do not want to be in at the end when the music stops.

Currently I am finding opportunities to invest and make a good return, and I am staying at the low end of the risk spectrum. I am comfortable playing in this environment overall, but not in stocks. I am doing deals in the private sector that are not connected to global shifts or the group agreement of the stock market. There are and always will be real companies doing real things. I am investing in these types of companies that are producing real valuable products and that will be able to tolerate a protracted global slowdown should it continue. And, yes, I think it is very likely to continue. We will see some upward moves for sure, but it is going to take some years, my guess is 3-5 more before stabilization occurs, which is what I am “hoping for”….

Markets trade in advance of the changes they tend to anticipate. I use this an indicator more than anything. I do not mind missing the first moves upward. I would recommend not stressing out about being in at the exact right time, the move should be sufficient to still be profitable, if it is a true market shift, so don’t worry about being late to the party.

Lastly, I have been asking this question for almost 10 years now; “what is it that is going to create the next major evolutionary shift?” If I find the answer to that question then I believe I will have something in which I can put a lot of money to work. In the meantime, I am happy making a good return with low risk. And, even if I find the next big thing, I will not go all in on it. I will put an acceptable portion of my overall capital to work and be happy to make a nice profit.

Please let me know if you find this Blog useful and what other questions you might have… it is my pleasure to be of help!