Sometimes I wonder if the ‘cyber ears’ are listening? One day after I shared my thoughts on how investors should prepare their defense – Howard Marks – shared his latest thoughts on asset allocation. His post was the ideal follow-up to my recent post… where I talked about finding the right balance between risk and reward. Marks’ latest missive reminds us that the investment landscape has undergone a dramatic transformation in recent decades – where the popular “60/40” portfolio may not work in the years ahead… and now is the time to think more about defense (vs offense)
Why Buffett’s Mentor Would Reduce Risk
I’ve been re-reading “The Intelligent Investor” by Benjamin Graham. Warren Buffett called it “by far the best book on investing ever written” – crediting Graham with laying the foundation for his entire investment philosophy. The book taught me three powerful lessons: (1) above all else, investing is about protecting your capital; (2) investors should strive to pursue adequate and sustainable gains; and (3) it requires overcoming self-defeating behaviors (e.g., fear, greed and bias). The lessons could not be more timely given today’s excessive valuations.
Not All Consumers Are Spending
Never underestimate the U.S. consumers want to spend. Well some of them at least. Last month’s retail figures exceeded expectations – up 1.7% YoY in nominal terms (not adjusted for inflation). But here’s the important point – these are nominal sales and only one month of data. One month is not overly helpful. When averaged over one quarter (which helps remove noise) – adjusted for inflation ( real terms) – and assessing the year-over-year change – growth is negative. And they have been negative in real terms for 9 straight quarters… this matters.
The Fiscal Tailwinds Helping Stocks
Will fewer rate cuts dampen the enthusiasm for stocks? It certainly hasn’t to this point. And could higher bond yields impact stock valuations? So far the market is not bothered. These (and other) questions need to be weighed carefully with the S&P 500 trading ~21.5x forward earnings. And whilst the multiple is heavily skewed by the ‘Mag 7’ – 21.5x is far from cheap. What’s more, from a historical perspective, paying a multiple above 20x offers investors a very low risk premium (e.g., with the risk free rate above 4.0%). But wait… what’s to say stocks cannot rise further? We’ll explore why they can…
For a full list of posts from 2017…