- Emotions are running high due to political “what-if’s”
- But very little has changed in terms of market fundamentals
- Thinking as a long-term owner and buying pessimism when possible
Look at any newspaper, television channel, or social media app and the intensity of politically supercharged emotions becomes apparent. The old saying that good news doesn’t sell is probably worth repeating here. Regardless, the rhetoric and actions of the Trump administration is front and center everywhere one looks, with talking heads often ascribing current market action and future forecasts to the recent political winds of change. We think this is a mistake.
The general economic mood has certainly been strongly positive. On Friday, the closely followed University of Michigan consumer sentiment indicator reached the highest levels in 13 years. Not since 2004, have consumers been so optimistic about their financial situation. Richard Curtin, the director of the consumer survey said that consumers “reported much more positive assessments of their current financial situation due to gains in both incomes and household wealth, and anticipated the most positive outlook for their personal finances in more than a decade”.
In contrast to this level of optimism and the cacophony from the news media, markets have been quiet. Similarity, fundamental valuations and long-term outlooks for most asset classes have remained much more stable than many investors might guess. What should we make of this? Probably not too much.
Being a relaxed long term owner
Long-time Wall Street analyst Lucian Hooper wrote “What always impresses me is how much better the relaxed long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much’”.
Contrast this sound advice with the wonderful double self-contradictory “advice” delivered by Will Rogers in one-liner fashion. “Don’t gamble. Buy some good stock. Hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it!”. (For extra credit, can you spot both contradictions?) We are convinced that many “investors” foolishly try to follow Rogers’ “advice”!
Buying pessimism when possible
While we certainly want to think as long term owners and avoid hasty decisions, the other component of our investing strategy is to take advantage of market opportunities that come from other market participants’ emotional decisions. We seek to identify periods of both overwhelming fear and panic and also of wild optimism and euphoria. In the first case, we can benefit from the resulting bargains and in the second, we can lower our risk by steering clear.
Famous value investor Sir John Templeton remarked “People are always asking me where is the outlook good, but that’s the wrong question. The right question is ‘Where is the outlook most miserable?’” He expands on the thought noting that “There is only one reason a share goes to a bargain price: Because other people as selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic. Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
So buying pessimism and selling euphoria is a great plan! Just figure out where the market is trading on the handy chart above and buy or sell accordingly. Of course, as Mike Tyson famously quipped, “Everyone has a plan until they get hit in the mouth!”. We try to moderate our expectations regarding our ability to measure and determine where in the cycle a given asset class is at any point in time. In fact, as long term investors we are doing well if we can merely tell whether we’re closer to pessimism or to euphoria and then over or underweighting a given position accordingly.
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