Capital Markets and the Morning Hike
Each morning my daughter and I hike with our two GSD’s. It’s early, the earth’s spin introduces the sun to a new day. Quiet reigns as our community begins to wake up. Usually, sans the dog training, the chatter is minimal as we both contemplate our forthcoming day. She plans her virtual learning as an Industrial Engineering major at Virginia Tech and I work through the logistics of meetings, calls, and deliverables. It is peaceful.
As I gain comfort with my game plan for the day, I tend to cogitate on deeper, highly relevant, problems. A recurring thought is that of the state of the capital markets. The footing on our hike is often tricky as we navigate terrain that varies in slope and quality. As such I must spend much of my time looking down at the immediate challenges I face as to not slip or roll an ankle. Rarely, do we look far ahead at the path in front of us. This morning I realized that this dynamic seems highly analogous to the current state of the investment universe. Moreover, my daughter and I also almost never look back to see where we have been. It seems that our hike captures most contemporary investor’s decision process perfectly. Who cares where we’ve been or where we’re going in the long view? Look down and watch your next step. It’s all about the short-term gratification of avoiding the fear of missing out rather than understanding what has transpired and the long view.
I mention this to my daughter, and she rolls her eyes and states that I am a bit strange. I am perpetually contemplating the state of the investment universe. I find the current state of the equity markets unfathomable given the economic, public health and political backdrop. When everyone and anyone can invest, or thinks they can invest, no one can. When this occurs the markets usually are way ahead of themselves. It is the classic contrarian indicator. We are certainly there now. But like hiking they are not looking ahead at the long view.
Investing is a long-term game. Most investors today seem to mistake trading with investing. Trading is watching your feet as you negotiate terrain. Investing is looking up and seeing where you’re going and learning from where you’ve been. We must thoroughly understand not only the next step but also how you are going to get to your destination (and enjoying the view as well). Time will tell as we move forward how many of these traders have the stomach for real volatility. Ultimately, I believe that this will meaningfully exacerbate volatility as the traders exit the markets.
As I interact with folk’s each day, I am dismayed by the statements being made by them. I coach football and lacrosse. Coaches and parents always pepper me with questions when they discover what I do for a living. These are college students, gym teachers, electricians, wood workers, stay at home moms, etc. All noble pursuits but not what I would categorize as investment professionals (though in fairness most investment professionals are not very knowledgeable either). The most common theme is how easy it is to invest right now and how everything is going up. This is during a pandemic, political upheaval, and a recession. The disconnect is extraordinary and their collective overconfidence in equities very unsettling. The only other time I felt this way in my almost 30 years of doing this was in 1999 when I was buying a car. The car salesman began to outline how he has purchased technology stocks on margin because “they never go down”. This time might be different but note that it rarely is.
We will continue to monitor the capital markets for the best opportunities. We recognize we can’t hide in a bunker as the market continues this irrational trend. However, we can be smart about how we manage the ever-increasing risks. Shorter duration high yield (preferably those that the Fed is buying), equal weighted equity exposures to exploit equity rotation out of the highfliers and maintaining above average liquidity to be able to take advantage of any decoupling that arises. In our long view this is the most responsible approach to risk management in the current environment.