Latest Investment Thoughts As We Approach The End Of 2016

by: Claudio Brocado


Politics has no place in Seeking Alpha, so I want to remain as politically neutral as possible.

That said, 2016 has indeed been an eventful year, and the post-election environment in the US has rekindled ‘animal spirits’.

I wrote this post for LinkedIn before one of my heroes, Ray Dalio, wrote on a similar subject, but a much better, more comprehensive post than mine there.

The tragic attack on a Berlin Christmas market, near where I was attending a similar event at the same time, changes nothing on my outlook.

In fact, I am hereby adding an emphatic recommendation to buy German stocks as well, in addition to my recent contrarian call on Mexican equities.

We are about to close the books on an eventful year. Thus, it seems like an appropriate time to briefly articulate my current thoughts on the investment landscape for the five years ahead. As my readers know by now, I strongly believe that the time horizon for what I call real investment is at least five years.

The shorter the period of time of one's focus, the more perilous and riskier the forecasting; the shorter the time horizon, the more that participating in the financial markets approaches gambling, in my view.

I am now writing from Germany, where we are in Berlin for Christmas. Curiously, the verb I most commonly hear when it comes to casual conversation on stocks here (which is in any case quite rare), is speculating. In other words, it seems that, in the minds of many Germans, participating in the stock market is more akin to speculation than to an approach to real long-term storage of savings.

The US, in my opinion, has a longer and stronger tradition of widespread investing in the stock market than many countries, notably Germany. However, as I have written here before, the so-called millennial generation in the US generally reflects a generally declining interest in the equity market. Wall Street has been largely discredited in many quarters, and there appears to be a much higher level of distrust in the virtues of long-term investing in stocks in the US than I believe warranted.

I want to remain as politically neutral as possible. That said, one of the welcome developments in the post-election environment in the US has been the beginning of a "revival of animal spirits" that appears to be contributing to a solid performance in equity markets. As my readers know, I have the utmost respect for liquid markets, particularly in the long run.

I believe that the long-term performance of the US equity market reflects the wisdom of crowds. In the short run, on the other hand, I often say that the pendulum-like swings of the markets can provide excellent opportunities for contrarian investors.

I strongly believe in (and definitely advocate) not trying to 'time' the markets. Nonetheless, trading around the edges of core positions in contrarian fashion can marginally add to the long-term investment performance of market participants with the time and passion to follow equities closely.

For instance, when I believe in the short run that the market is 'getting ahead of itself' in its enthusiasm for a particular stock in which I have a large position, I may write an out-of-the money call option with a maturity of up to three months out to potentially take some profits on a small portion of my position. That is true particularly when I see opportunities to take a new position in some other stock, or there may be a portion of my portfolio that presents other contrarian buying opportunities.

The breadth and depth of the US equity market means that it is always a great time for stock picking. Stocks and even entire sectors come in and out of favor, with upswings in volatility periodically creating particularly good long-term entry points in individual stocks.

Financials, such as Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), on which I have long been quite bullish - all remain cornerstones of my portfolio - are finally back in favor. Biotechs - among which I continue to like and hold decent positions in Gilead (NASDAQ:GILD) and Amgen (NASDAQ:AMGN) - are largely out of favor. The dividend growth theme more generally, on which I have been pounding the table for a while, is no longer as popular as it was becoming. I still believe it will be a great place to be for the next five years.

On the US equity market more broadly, now that I have quite a bit more 'company', at the margin I feel less sanguine. I always feel more comfortable holding a more contrarian opinion. That said, I do believe that a new secular trend towards renewed interest in company stocks is still in its early days in the US.

The 'great rotation' away from bonds and into equities is already underway, and the next five years should provide fertile ground for profitable bottom-up stock picking. As far as more contrarian alternatives, I am hereby reiterating my long-term bullishness on German stocks. Mexico, on which I wrote a recent post here, is also a great contrarian bet. For relevant ETFs, the iShares MSCI Germany (NYSEARCA:EWG) and iShares MSCI Mexico Capped (NYSEARCA:EWW) are decent alternatives. Many happy returns in 2017!

Disclosure: I am/we are long AMGN, BRK.B, GILD, GS, JPM.

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.

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