Another week is history and we’re another week closer to the
“fiscal cliff.”
You can’t turn on the TV or surf the internet without some
reference to the fiscal cliff. But, consider this. Remember all the fuss about
Y2K back in 1999? Everybody was worried about planes dropping from the sky at
midnight, ATMs freezing up, and the power grid shutting down on January 1.
Well, the clock struck midnight and, poof, like Cinderella’s glass slippers, nothing
changed.
Perhaps it was all the preparation ahead of Y2K that ensured
it would be a non-event. In fact, one could argue that all the upgrading of
equipment and intense preparation that went into the buildup toward Y2K helped
propel the economy and fan the tech bubble that culminated at the turn of the
century. Then, as you may know, it was right after Y2K that the stock market
went over its own cliff and fell into a bear market.
Now, here’s where it gets interesting. While the overall
stock market has been weak during the 13 years since Y2K, corporate earnings
continued to rise. As a result, the Shiller PE10 ratio, a measure of valuation
of the overall stock market, has dropped from 44 at the end of 1999 to 22 at
the end of September of this year. In other words, the overall stock market is
a lot less “expensive” than it was 13 years ago.
This could mean a couple things:
1. If
we go over the fiscal cliff, the stock market may not fall as much as it did
after Y2K because the overall market valuation level is much lower now.
2. Investor
psychology and Federal Reserve policy are still wildcards. How investors and
the Fed respond to whatever happens with the fiscal cliff could have a significant
impact on the markets – good or bad.
No matter what happens with the cliff talks, we’re keenly
focused on the situation and we’ll make adjustments to your portfolio as
appropriate.
THE OLD SAYING “THERE’S SAFETY IN NUMBERS,” may work in some settings, but not
necessarily in the financial markets. Doing what everybody else is doing in the
markets might make you feel more comfortable, but it’s not a way to get ahead. Famed
investor Howard Marks pointed this out in his recent book titled, The Most Important Thing: Uncommon Sense for
the Thoughtful Investor.
Marks said,
“Unconventionality is required for superior investment results, especially in
asset allocation.” Further, he said, “You can’t do the same things others do
and expect to outperform. Unconventionality shouldn’t be a goal in itself, but rather
a way of thinking.”
To frame this way of
thinking, Marks developed the following matrix:
|
|
Conventional Behavior
|
Unconventional Behavior
|
|
Favorable
Outcomes
|
Average good
results
|
Above-average
results
|
|
Unfavorable
Outcomes
|
Average bad
results
|
Below-average
results
|
Source: Howard
Marks
The matrix says conventional behavior will get you average results – either good or bad. By contrast, it’s only through unconventional behavior that we can be in position to achieve above-average results. But, do you see the rub here?
At times,
unconventional behavior may lead to below-average results and, since you’re not
part of the “safety in numbers” crowd, you could stick out in an uncomfortable
way.
As it relates to
managing investments, striving for a mix between conventional and
unconventional behavior seems like a good strategy. You don’t want to always go
against the crowd because the crowd is often right. But, there are times when
it makes sense to take a stand, perhaps a more conservative stand than the crowd,
and be a little unconventional.
If our portfolio is
at times a bit unconventional, it’s because we’re trying to look out for your
best interests.
Weekly Focus – Think About It…
“If everyone is thinking alike then somebody isn’t
thinking.”
–
George S. Patton, U.S. military leader
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