Prices are important...
December 7, 2024
Last time in this space, I mentioned Howard Marks, a highly respected investment manager and market commentator. In the interview I watched, he made several notable remarks including the following: ‘There are no bad assets, only bad prices…a good asset and a good investment are not the same. Whether an asset proves to be a good investment, or eventually becomes one, is generally, and mostly, a function of the price you paid for it.’
There is such wisdom there. And it is particularly relevant in the current moment when the equity market continues to rise. Strong optimism for further market gains is very widespread – more expected interest rate cuts by the Fed, tax and regulatory cuts by the incoming administration, and trillions (literally…I think the number is 6) of dollars in money market funds on the sidelines are leading investors to expect the equity markets to continue to rise even though gains this year are already well in excess of 20%..
For individual investors with money on the sidelines, FOMO (fear of missing out) will be strong. Professionals who have underperformed may scramble to make up ground. The danger for investors, and investment advisors too, is that the equity markets are trading at very lofty valuations by historical standards. Equity market gains may continue for a while longer but, unless you are a trader, buying shares of a good company that are already trading at a lofty valuation may have at least as much long term risk as reward. A good asset is not necessarily a good investment - it depends on the price.
Donald Trump’s election has unleashed some of the proverbial ‘animal spirits’ in the markets. Expectations for tax cuts and regulatory relief have many investors excited. It seems to this observer, however, that much of that has already been factored into share prices now while the actual impact of many announced, though as yet unimplemented, policies is still unknown. And not all of them will prove to be widely beneficial. We are in a honeymoon period and, by definition, those come to an end. Don’t chase – when the honeymoon is over, the market will inevitably have a decline – we are already overdue, and when that happens, the risk reward balance will be more favorable.
Additionally, many investors, professionals and individuals alike, are sitting with a form of golden handcuffs – large capital gains and the prospect of imminent tax consequences if they were to sell before year end. I believe that January will see strong sales of some, if not most, of investors’ favorite stocks as portfolios are rebalanced and some gains harvested. Those sales will also contribute to creating better conditions for committing capital – adding to positions or initiating new ones. Patience will be rewarded…and lose the FOMO. If you missed some opportunities, so be it. There will be others…plenty of them.
The link this week is to an article about risk taking…specifically, risk taking by women. Women have long been seen to be more risk averse than men, that they don’t tolerate risk as well as men, and that they don’t perform as well as men in risky decision making. Shout out to all my female readers…do you believe that about yourselves? In fact, there is increasing evidence to the contrary. Read the attached article by Maria Konnikova about how, through playing poker, she learned to take risks and all the benefits that accrued to her, including eventually winning one of the world poker championship tournaments. She makes a strong case that women should better understand their attitudes about risk with all the potential benefits to be realized in many realms well beyond the poker table. A compelling, important story, very well told. It might make you a better investor as well.
https://archive.is/I3eNb
On a very personal note, since our last communication I lost a very dear friend. She battled valiantly through two bouts of cancer and a host of other maladies. What was remarkable was her attitude – always upbeat, laughing, engaged, you would never have had a clue as to how difficult a path she was ever confronting. She will always have a special place for me because, in addition to all the wonderful times she and her husband and I shared, she introduced me to Amy, my wife of nearly 30 years. Rest in peace, Pamela, you will be dearly missed and well-remembered.
The weather in these parts has turned very chilly. May you all find warmth in the company of good friends as we enter the holiday season.