It’s All A Matter Of Perspective

“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.  – Abraham Maslow

The last three weeks have been pretty hectic for me. I was on the road for most of the first half of May, traveling to the US and then to Singapore for meetings with business partners, investors and to fulfill a few work obligations I had at various conferences. I’m not a huge fan of work travel (I hate flying if I don’t have to) but the silver lining for me is always the few hours of radio silence that I get on the plane. I started appreciating them a lot more after I had kids since I virtually have no “alone time” anymore and I usually spend most of the flight catching up on work, pondering markets and of course watching a movie or two.

In truth, this past trip was a whole lot more of movie watching than anything else (Darkest Hour was excellent by the way, if you haven’t seen it yet). This year has been challenging enough to say the least and it’s been exhausting trying to make sense of these sideways markets. As we inch closer to the all-time record of 114 months of a bull market (from 1990-2000) it’s been difficult to sit on the sidelines and figure out the best way to position our risk.  

The process of investing almost always begins with the mass consumption of newsflow. Whether it is researching a specific company you like or just keeping abreast of headline news, it is critical to stay on top of what is going on in the world. It doesn’t really matter which one of the various credible news sources you use since they mostly regurgitate the same information.  I rely heavily on Bloomberg, the Financial Times and of course ZeroHedge for laughs. The important thing is making sure you are able to consume all of the most relevant information at a rapid pace, and then process exactly what that news means as it pertains to your risk on positions.

Then, for astute investors, it is important to take it one step further and apply second level thinking to try and determine how the rest of the market will process this newsflow, and if they are right or wrong.  This is because the market tends to trade as a herd, and it is the ability to maintain a variant perspective from this herd behavior that allows you to capitalize off the erratic decision making of the pack.

Finally, if you believe they are wrong and you are right, a trading opportunity presents itself.

On paper this seems all pretty straightforward and anyone who is an active investor in the markets will usually assume they are smarter or more diligent than most retail investors.  

Afterall, how many regular people actually look at this stuff as much as you do…right?

This morning when I came in and scanned my usual news stories, I read a fun fact that technology companies make up almost 30% of all large-cap mutual fund portfolios in the US.  I also read that the FAANGs make up over 27% of the Nasdaq’s value. Both of these are extremely frightening stats.

And when I continued to read industry research that was saying things like “US equity valuations look attractive on earnings” and “We believe economic data will continue to inflect higher”, it flat out made me nervous.  

Strong earnings and economic numbers together with rising wages and low unemployment usually means that inflation will soon rear its ugly head. If you add in the continued volatile sideways trading market and the Fed’s need to imminently raise interest rates, I can’t help but start to feel extremely uncomfortable with the fact that everyone else is feeling so comfortable.

Is my paranoia unfounded?

At some point in every investor’s thought process, the issue of perception needs to be addressed. You see, whether you are a bull or a bear, the process of scanning newsflow through your respective lens will inevitably lead you to the conclusion that you wanted in the first place. Human beings have the ability to pick and choose the facts that they want to support their cognitive biases.  We spoke about these before, back in March and the dangers that these present.

When markets start moving against you (oftentimes at a rapid pace) you start second guessing your original assumptions. And when you start losing money, your confidence gets completely shattered.

Market meltdowns almost always surprise us during times of market euphoria or “irrational exuberance” in the very same way that the greatest opportunities tend to present themselves during times of extreme discomfort or when there is “blood in the streets.”

We all know hindsight is 20/20 and when you’ve lost money you always look back wishing you hadn’t bet as much.  But the reverse is also true when you’ve made money — you always feel like you didn’t adequately size up your bet.  

It is important for an investor to always consider our downside first. Capital preservation goes against the natural instinct of investing (doesn’t everyone want to make money?!) but ignoring this important rule is one of the biggest flaws that even I struggle with every single day.

The desire for investors to make outsized returns in as quick of a time period as possible is the single more dangerous flaw that is made which usually leads them exposed during periods of drawdowns, which will inevitably come due to external forces out of their control.

I am reminded of an old investing joke that says “a long-term investment is a short-term investment gone bad.”  It’s probably not a bad idea to take another close look at your portfolio and ask yourself if you’re ready to hold these positions in the red for an extended period of time?