There is often an awkward moment when someone asks either of us what our crystal ball says about the markets. Unfortunately, we don’t believe such a thing exists. Certainly one can have ideas about trends, trade ideas and general outlooks, but in terms of “where is the market going?” we may as well be asked, “where is the ocean going”?
Early in each year strategists and analysts trot out their forecasts, their reactions to the first quarter, and their prognostications for the rest of the year. It’s tired and repetitive for us to repeat that these forecasts, measured pretty much any way, are rarely more than half right.
One of the forecasters’ favorite words used to describe markets is uncertainty, as in “the level of uncertainty is heightened in the first quarter”. This strikes me as weird because unless we are talking about t-bills (shortest government bonds), the market is pretty much always uncertain. For it to be anything else, it might cease to be the market as we know it. So this feels a bit like a weather forecaster saying “the forecast calls for air, some oxygen, and the rise and set of the sun”. Accurate, but ultimately unhelpful.
I like to think the market is filled with crazy. And I am using crazy as a noun, because investment professionals refer to it often enough, it ought to be measured in quantities.
We hear things like “Did you see what [asset class] did in the [recent time period]? It was crazy.
Here is some YTD crazy: (through April 30, 2016)
- Almost every single asset class beat stocks, often by rocketing off a depressed level.
- Commodities returned +9.1%, after being down -25% at year-end.
- MLPs (energy limited partnerships) rose 6% after being down -33% at year-end
- Perhaps the most hated asset of all, for nearly a decade, U.S. bonds rose 3.3% YTD, after only 0.5% in all of 2015.
- Inflation protected bond funds rose nearly 5% after being down almost -2% for all of 2015.
- But stocks were pretty meh: Global stocks only rose 1.7% after falling -2.4% in 2015.
- The S&P 500 rose 1.7% also, on the back of a 1.5% rise in 2015.
Year-end crystal balls would have suggested that some of these assets were dead money; investors certainly headed for the exits based on the price declines. And yet, there is an old saying about buying when others are selling. There are many old sayings on this topic, in fact. But they are easy to remember and hard to implement.
One difficult aspect of investing is the idea that there are no natural laws that govern the activities. We generally have $0 price lower boundaries unless we use borrowed money, but on the other direction, price paths, upper limits, directions and outcomes can be widely varied. If Mark Twain was talking about anything when he said “history doesn’t repeat, but it rhymes” he may have been talking about investing. It is easy to see a price go up, then down, and either assume the down trend will continue forever, or to look just a bit farther back and assume the old high price will certainly come back in the future. It is just a matter of how far back into the rearview mirror one wants to look. The upshot is that by using either of these approaches, one can be nearly assured of being 100% wrong.
We are often surprised at how markets move, but it is exactly the uncertainty embedded in markets, the unexpected and unpredictable nature, that calls for a measured, disciplined approach that is not predicated on having an “information edge” or being ahead of trends or moves.
It is a tired old saw to say that anyone who has anything approaching perfect prescience of a market move need make only one trade…and retire. We readily acknowledge that we lack that ability, and we encourage our peers to acknowledge the same.
At KH we stick to our process, remain patient, contrarian, disciplined and willing to trade near-term gains for protection of our investors’ capital. We focus on steady compounding over time. So far, we have been rewarded for this approach, in terms of absolute return but, perhaps more importantly, in terms of a smoother, less volatile ride. On the Global Growth side our portfolio composite has been about 40% less volatile than a comparable global stock index. Our Capital Preservation portfolio has exhibited 15-20% less volatility than a comparable bond-index. We like the ride, and hope our clients do too.