And where do we go from here?
Which is the way that's clear?
Still looking for that blue jean, baby queen
Prettiest girl I've ever seen.
David Essex - Rock On 40 years ago this is what music videos looked like, cool.
This can be a tough business at times. Managing other peoples money often involves a dichotomy between getting and keeping clients happy, and telling them the truth. Almost all investment firms put "career risk" ahead of the clients asset risk. By this I mean the main job is keeping your job. You keep your job by getting and keeping clients, and by not being wrong alone. It's OK to be wrong, as long as you are wrong in the company of your peers. When I started in this business we used to say, "No one ever got fired owning IBM." Today the phrase would be, "No one ever got fired owning Apple." Apple is a great company, but like all great companies, there will come a day when they stumble and the stock will go down significantly, maybe even permanently (see Research In Motion (RIMM) the Blackberry makers). But for professional investors, that's OK, since all of their peers own Apple there is no career risk.
Limiting "career risk" has two interesting side effects. First, when professional investors spend an inordinate amount of time focused on what their peers are doing, we often have what is called herding. Herding often drives prices of individual securities, or asset classes, far above or below a fair price. This herding process explains much of the volatility in the market versus a much less volatile GDP.
The second side effect is a consistent bias towards bullishness. Keeping clients often involves telling them things are going to be all right, just stay the course and everything will be fine. Tell the client what they want to hear. One of the side effects of this glass-half-full mentality is that inevitable corrections are much more dramatic than upward moves. In other words, downside volatility is more extreme than upside volatility.
The beauty of managing my own money is that I don't have to worry about "career risk," I'm not going to fire myself. I don't have to follow the herd just so I don't stand out from the crowd. And I don't have to lie to myself about how rosy the future looks. I have one focus, preserve, and protect my net worth. When I started Rockhaven my clients were told that their money would be run right along side of my money. Whenever I do a trade for the Wiles family, I'd be doing an equal trade in their accounts. We are all united in the common goal of preserving and protecting our net worth. As far as I know most of my clients are very satisfied with this approach.
Some of my friends/clients often ask, "Why are you so bearish, things aren't that bad, rates are low, stocks are climbing, and the economy is improving, lighten up some!" I often chuckle, and mumble something about my job is to always watch the downside. It doesn't mean I'm bearish (we're currently 93% invested), but I have to continually look for what could go wrong. I may not have "career risk," but my lovely wife has often told me in no uncertain terms, "I don't ever want to be poor again." That's the beauty of growing up poor, you know what its like, and you know that you never want to go back there.
So, where do we go from here? Which is the way that's clear?
Here's where we stand today in our Global Tactical Asset Allocation Portfolios:
Unprecedented - Often an overused word, but apt when it comes to explaining our global markets. The unprecedented printing of fiat currencies in the trillions has seen government deficits grow to a level that makes sovereign debt suspect. In the old days we used to use government debt as the risk-free rate, how quaint. Today there is no risk-free rate. The Feds blatant manipulation of the credit markets (ZIRP, QE1, QE2, TWIST) has totally disguised the bond markets normal pricing mechanism. This allows our reckless/clueless Congress and Administration to ignore looming problems until they explode. The Fed has also forced savers out of safety and into risk assets in order to show the appearance of a healthier economy. This manipulation of the pricing mechanism has caused junk bonds and many other assets to be priced at levels that don't fully reflect their risk. Gold continues to be the only asset that is the reciprocal of the worlds confidence in central bankers.
While I worry, and I believe there is a lot to worry about, I am also a technician, and currently most of the assets we invest in are in bullish territory.
We will continue to diversify and take what the markets are giving us:
US Equities -- 20% Bullish,
we are now at our full US equity weight. The S&P 500 is only 2% away from its 52 week high.
Int'l Equities -- 20% Bullish,
both developed and emerging equity markets are bullish, but both are starting to roll over.
US REITs -- 6%
Bullish, we are now at our full US REIT target of 6%. A huge beneficiary of Feds ZIRP.
Int'l REITs -- 4% Bullish, international REITs have moved into bullish territory, again benefiting from low rates.
Gold --7% Neutral, Gold is neutral and has been trading in a rather tight range.
Commodities -- 10% Bullish, the appearance of economic stability has caused commodities to rise, but some early signs of rolling over
.
US Fixed Income -- 26% Bullish, US Treasuries sold off briefly as the economy was showing some signs of strength, but yields have moved lower again. Our full bullish weight would be 30%.
Int'l Fixed Income -- 3% Bullish, We continue to have zero exposure to European & Japanese bonds, but Emerging Market bonds are bullish.
Cash Equivalents & Currencies -- 7%, cash levels have fallen to our lowest levels in some time, and are divided between the US at 3%, 2% in China, and 2% Australia.
In Summary - We are pretty bullishly invested over a wide range of assets, but we are extremely worried about the fiscal imbalances that will come to the forefront in the not to distant future. "Still looking for that blue jean, baby queen, prettiest girl I've ever seen..."
If you'd like to sit down and talk about the markets, and your current asset allocation in more detail, please give me a call.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
For prior Rockhaven Views visit:
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
No comments:
Post a Comment