Mutual funds

Good thing we’re diversified.

We haven’t (yet) responded to recent market turbulence by altering our portfolios. We’ve simply been maintaining our current very diversified allocations, which aren’t fully invested in the U.S. stock markets. As I wrote in my last posting, long term holding is a very decent tactic. And right now we’re a little bit allocated towards safety. From this position, it’s OK to ride out short term news.

However, this weekend’s blog on “Wolf Street” is interesting. Read it here.

While we watch financial markets surging today, in an apparent relief rally from not being blown up by North Korea over the weekend, it’s also true that earnings in the S&P 500 are not as good as they seem to be. Quote:

“Aggregate earnings per share (EPS) for the S&P 500 companies on a trailing 12-months basis rose for the second quarter in a row. That’s the foundation of the Wall Street hype. But here’s the thing with these EPS: they’re now back where they had been in… May 2014.”

Thanks to the Fed, the S&P 500 has gone up anyway, and the money we’ve made is real. But good thing we’re diversified.

The Ten Year Anniversary of the day the world changed.

Ten years ago today, French mega-bank BNP Paribas announced it couldn’t place a value on its US-created collateralized debt obligations, complex toxic “derivative” investments, and thus was suspending client withdrawals from the funds which held them.

That was the first indication that the most gigantic financial panic since the Great Depression in 1929 was about to unfold.

The world has changed a lot since then. But many of the same structural flaws remain, patched and propped but not repaired by governments or by central bank intervention. Vastly greater debt loads are even more of a potential problem than they were in 2007.

The greatest lesson of the 2007 Financial Panic was that central banks transformed the investment markets by intervening. Perhaps they helped, perhaps they hurt, perhaps in a variety of ways they did both. But there’s no denying that the central banks are now involved in our financial markets in ways that would have been unthinkable before August 9, 2007.

Another key lesson of the 2007 Financial Panic was that many sophisticated investors did just fine, thank you, while others got hammered.

Yet another lesson was that we all muddle by. If you stayed invested through the carnage of that awful event, you have probably done well, despite it all.

Read more here.

Everyone expects to be a winner (and all children will be above average)

I’m reposting this here from the Heisenberg Report. According to this study, essentially everyone thinks the stock markets will finish higher in one year.

Such a high level of optimism is some kind of record.

My guess is that we got here because EVERYONE expects the central banks to intervene forever. Having painted themselves into this particular social expectation corner, it’s going to be interesting to see what the central banks do next.

Way back in the days of free markets, we were taught that extremes of market consensus are danger zones, and that “the consensus is often wrong”. But as I wrote on August 1st, traditional diversification has been proven unnecessary for so many years that investors could be forgiven for it’s just gonna stay like this forever.

My plan is to stay diversified and keep searching for bargains.

A problem with reality

Is that sometimes it is so irrational. The financial markets are currently radiating “market bubble” and I’m reading a very well written quarterly update by the managers of the Forester Value Fund. It captures all the data which suggests that we are currently at market highs and we are at risk of a coming downturn in both the bond and stock arenas.

But there’s a problem. Forester Value Fund TOTALLY ROCKED our stock market declines in 2000 and 2008. And they also lagged horribly while markets recovered. Why? Probably because they are rational, intelligent, insightful managers who have managed their mutual funds with thoughtful awareness of market indicators. In other words, they’ve done everything courageously, and right. We don’t own the fund now, because we couldn’t lag like that. Instead we’ve used asset allocation mutual funds and international mutual funds to successfully participate at least partially in growing markets.

Yes, Virginia, the financial markets are bat-spam crazy, and many of our politicians are beyond incompetent. But the lower interest rates delivered by central banks have trumped everything else, so markets have continued to rise. By staying diversified and partially invested we’ve accrued a substantial part of the financial markets’ gains. But even as I watch us making good money, I have to shake my head.

Read Forester Value’s superb quarterly update here.

We’re doing great! Now let’s stay cautious.

I’m reviewing clients’ portfolios this afternoon, and given that most of us are relatively conservative I’d say we’re on track for a nice finish for the 2nd quarter. I’m saying this while crossing all digits and holding my breath.

Our international holdings, especially our emerging market holdings, have done great so far this year, which is quite emotionally rewarding since after we bought them last year they laid down like raccoon road kill for some months, and were mostly a drag on our portfolios. Now, however, they have recovered, and more.

Likewise our decision to double down on health care has been rewarding, and our decision to stay in tech has been profitable as well.

However I remain nervous like a cat in a room full of pit bull dogs. As I wrote last week, this has been a very thin market especially domestically. Political risk remains high. Markets are overvalued.

So let’s stay cautious, please.

Read more scary stock market predictions here, hopefully with a small glass of oak-aged rum. Predictions do NOT all come true. However they ARE evidence that we should be careful.

Meanwhile we’ll stay invested and stay diversified. It’s a marathon, not a sprint.

Legendary Investor Jim Rogers Predicts A Stock Market Crash, And The World Yawns

Legendary investor Jim Rodgers has often been right, and often been wrong, about the future of U.S. financial markets. He’s completely bullish on the future of Asia, and in fact now lives officially in Singapore.

Now he’s calling for the worst stock market crash in our lifetime. Read more here.

He may be right. Or not.

It’s worth noting that when the stock markets first began flashing indications of overvaluation, they were at about half their current levels. Had we gone to cash in 2013 as the statistics suggested, we would have missed out on at least 1 of every 4 dollars in our diversified portfolios.

Why didn’t the financial markets crash after 2013? The unexpected happened: the Fed and other central banks of the world intervened to support financial markets.

I have my own emotional reservations about that: when governments intervene in markets as the mood strikes them, then markets become unquantifiable. But the money which has been made is quite real.

So now Jim Rogers says that the biggest stock market crash in our lifetime is imminent, he may be right. Stock markets ARE very overvalued, and have been for years. My response for all of us has been to stay very diversified and be a bit cautious. The result has been that our investment returns haven’t beaten the stock markets, but we’ve at least participated while remaining realistic about genuine dangers out there.

I also remember that the Financial Panic of 2008 was followed by a market boom.

Genuinely, we don’t know what will happen. Let’s also keep in mind that we want to buy low, and sell high, and we want to persist. Investing is a marathon, not a sprint.

An even bigger bubble?

So I’m reading this morning that Snapchat, after yesterday’s booming IPO, is larger financially than American Airlines, CBS, and host of other established businesses. This is the moment when clients call me and tell me that they want to go all-in on the stock market. They may be right. But according to this chart, we are in a bigger bubble than 2000. And that ended so well….not.graph of comparative indicators

What is different about the S&P 500’s longest losing streak in 8 years…

…Is that it’s a paper cut. Most days the market has barely declined at all. We don’t know what will happen. So far, not much.

To prevent becoming too concerned about day-to-day price volatility, check out this ultra-long stock market chart here.

Fascinating! Investing works. Stay the course…even if it gets a bit bumpy.

12345