There Are No Shortcuts
I read a quote in National Geographic this morning and it got me thinking. This is not an alert type update but rather a timely reminder for all of our clients.
“We can’t save the people who want to take maximum shortcuts”
Matt Gerdes
Founder of Squirrel Wingsuits
The backstory is the fact that the makers of Squirrel Wingsuits are discovering that too many of their customers are flinging themselves off of cliffs without any training, relying on “the suit” to make them stars in their own home movies. Of the 37 base jumping related deaths last year, 24 were wearing wingsuits.
Thankfully, there are new companies loading up some much-needed curriculum for progressing from skydiving to wingsuit flying. What does this have to do with personal finance and investing? Glad you asked.
There Are No Shortcuts to Wealth Accumulation
At this point in my career, I think I’ve almost seen it all. Investors come to the table wanting what they can’t have. Specifically, they want all the return the best stock market has to offer, but none of the risk. Of course, the prudent part of our brain says that’s not possible but there are times when we seem to forget after long streaks of gain without pain.
Times like now.
In the month of July, the markets rose marginally higher with some of the lowest recorded levels of daily and weekly volatility (according to the VIX). Volatility is a nice word for down days or losses. So we just experienced a historic month of gains without pain.
Subsequently, our tiny and reactive lizard brains tell us that investing is just a game of gains. How much did I make? How much did you make? How much did the market make? Questions and discussion of downside risk or potential losses are so… out of date. I read another story today about how the current era of investing is really just a game of the Tortoise and the Hare. Both are moving forward but it’s really about who is moving quickly, and who is moving slowly. Investors are now beginning to make those bad decisions again like chasing returns, building oversized positions in “safe” things like Facebook, Amazon, Netflix and Google (FANG) or shifting to 100% stock index funds. The effort is based on some sense that we might accumulate our wealth faster, get rich more quickly, reach retirement a few years early if we just cut that corner.
What could go wrong?
I’ll say this again for the one millionth time. There are no shortcuts in investing as a means of building personal wealth. When it seems just so easy to make money in the markets and we feel that tug to take a chance, cut that corner a bit, load up on this or that stock, we need to avoid temptation. This is the message of the day, as we approach the ninth year of this bull market with a market that is just simply too quiet and rewarding to investors.
Risk Management Hurts – At The Top
In our shop, we talk a lot about risk management, which does not promise all the return and none of the risk by the way. We promote the slow and steady consistency of investing with a constant eye to net exposure, selection and position size. Adjustments are made regularly in an attempt to keep investment assets in the right place, factoring in both risk and return prospects. While many are looking for that shortcut to wealth accumulation, piling on more and more into overbought and wildly overvalued securities, we’re quietly looking to take profits in many of our positions. In the process, we aren’t going to make big numbers in the final months and quarters of an aging bull market as we prepare for the downside. We are going to keep pace, make a decent and respectable return, but you won’t get really excited about any of it. In fact, this is about that time when you question the logic of needing risk management (or a risk manager like us). We’ve been here before, twice actually. Once in 2000 and again in 2007 just before the next bear market really started. Know that your slow and steady patience will be rewarded when the markets do finally buckle, correct and ultimately embark on the next cyclical bear market as we’ll be actively taking steps to limit losses and keep your profits and your capital intact.
Economy Still Getting Weaker
In our Quarterly Statement Insert, we suggested that the second half of 2018 might easily see a recession in the US. What? Yes, and there is plenty of evidence. Bespoke has a matrix of economic indicators and they aggregate those that improve versus those that get worse each month. Here’s the chart for data ending in June. As you can see, the US economy peaked in February of this year according to the net number of indicators score (at 10) and is heading swiftly toward negative territory. A negative number would mean that a majority of indicators are getting worse. But it’s not until we see readings of -5 to -10 that we might expect a formal US recession to become recognized. So we have some time and of course, this data set could bounce higher as it has many times in the last eight years. But now that the Fed is raising rates and the economy is at full capacity and full employment, we should be especially watchful (read critically).
source – Bespoke Investment Group
From a market perspective, if the economy continues to show more evidence of weakness, we would look for a more serious top around October, at least in the US market. Currently, our Net Exposure model is stubbornly sitting at +1 on a scale of +/-20. That’s about as neutral as it gets even as prices are working hard to make more new highs. Our playbook says that all is not as it seems. A slip into a negative reading would dictate a move to our first level of target cash (~20%) and we might be close to that event.
Three-Part Series On Major Investment Opportunities – Coming Soon
In an effort to close on a happy note, we are working on the details of a three-part series, which will highlight several significant investment opportunities in the next 12-24 months. These have been developing for many years. Each requires an active hand in shifting assets to new leadership, which we are perfectly willing and able to accomplish. Timing will be everything as always. These will be our investment themes and focus looking forward so clients should pay special attention.
Have a great week
Sam Jones
