Below you will find a Summary of what we have advised retail and institutional clients for 2016:
- Core Holdings should be long and short (Market Neutral) - not time to be long only
- No requirement for shorts to crash and longs to soar - only relative return needed
- Use individual securities, not bundles - liquidity of ETFs and Index funds is a 2nd risk
- Don't try to time this market - difficult to make a perfectly timed global call
- Energy Sell-Off impact not fully felt - defaults ahead
- Bonds - trouble ahead, liquidity, defaults - a buying opportunity will emerge
- Cash - requires timing - not a good market to time
- Selective small caps offer opportunity
- Strategy - use market sell-offs during the year to build portfolios - buy growth
- Geopolitical risk - A permanent fixture; use to advantage
- Momentum stocks fueled by cheap money, leverage and speculation coming back to earth
In 2015, we became concerned with what we believed were significant overvaluations in some areas of the market, namely tech and glamour/momentum names such as Netflix. We were also worried about sell-offs in others areas, namely energy.
Bubbles and sell-offs generally do not co-exist in our experience for very long, with the result generally being a correction in which all market values reset.
As we enter 2016, we continue to believe that these conditions exist and have set the stage for elevated volatility in a best case scenario, and a steep sell-off in a worst case scenario.
Markets (and People) Adapt
As Fundamental Portfolio Managers, we have always believed that superior returns are best generated by finding well-run, fast growing companies early in their growth cycles and holding them until they become overvalued - all the while, continuing to find new opportunities.
Thus, we were generally less focused on macro indicators because managing from the macro perspective involves an element of timing. That is, interpreting events and how investors will react to predict the future direction of the market is not a prudent course in our experience.
The market, which is comprised of both institutional and individual investors, continually adapts its response to global events. Examples:
Markets sold off precipitously after 9-11 and remained challenged for over a year.
Markets sold off the first several hours of the London Subway bombings, but then recovered mid-day in what appeared to be a show of defiance by the modern world.
Hurricane Katrina hits a major oil port and devastates an important city over the long Labor Day weekend. The markets open and building supply, cement and insurance companies rally in anticipation of capital flow for rebuilding.
Paris terrorist attacks appeared to be a non-event to the financial markets.
Back to Fundamentals
The low/no-interest rate environment propped-up markets have run their course and will no longer: a) feed equities and fixed income; b) fuel mergers and acquisitions; c) push savers out of banks and into the markets; or d) provide Private Equity with an exit, as the IPO market goes cold.
The Game Plan - Batten Down in Market Neutral and Buy on the Big Dips
A slow, hard fought ground game is required this year:
- Park money in a long-short market neutral strategy
- Find excellent companies positioned to execute - label as 'Buy When Time is Right.' Buy incrementally during inevitable period of market stress that we will encounter.
Note: The preceding represents a summary of the views and opinions of The Stanley-Laman Group, Ltd. a Registered Investment Advisor and manager of separate accounts and Hedge Funds and should not be relied upon as investment advice.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.