Playing It Safe In 2019: Asset Allocation Daily

by: SA For FAs

Jim Sloan deploys his cash reserves into Berkshire shares.

Ploutos has been acquiring low-vol emerging market stocks and looking into low-vol bank loans.

Thought For The Day: The day will come when Facebook and Amazon go the way of GE and Sears.

Betting On Berkshire

“You can't worry about being overweight an index fund. Berkshire isn't quite an index fund, but it's diversified enough for my purposes. The parts of the market it doesn't own are generally the parts of the market I don't want to own either. The risk/reward of Berkshire is asymmetrical, with downside somewhat limited by its buyback policy, its cash position, and the conservative principles on which it is built.” (Jim Sloan)

Low-Vol Investments

“I have recently added some global value funds and lower volatility emerging market stocks. With the median S&P 500 constituent now down roughly 20% from the September high, I have added some equal-weight stock funds. Given the stress in the historically low volatility leveraged loan market, I am examining bank loan closed end funds at notable discounts to net asset value as well.” (Ploutos)

Why Low Beta?

“No matter what the investing climate may be, I always favor a low-beta strategy. When the market as a whole is going down, I expect my stock picks will go down too, but not by as much. I try to tailor my strategy to do relatively well in all markets, because I don't expect to be able to forecast market conditions.” (Yuval Taylor, in SA Marketplace)

The Plunge Protection Team

“Government interventions that favor prices going up and discourage prices going down are something that arguably serve the system at the expense of investor outcomes. Indeed, the essence of the Plunge Protection Team is that it sacrifices the ability of investors to buy at prices that accurately reflect market conditions.” (Daniel Amerman, CFA)

Fed Rate Hikes On Hold

“While many were critical of the [recent rate hike, it] was necessary for the Fed to maintain its credibility. They had been signaling a December hike for months, and had they refrained many would have viewed it as a sign of weakness, bowing to political pressure from President Trump. But that is the past. Going forward, the every-other-meeting hiking routine is over. While the Fed is still projecting 3 more interest rates hikes in 2019 (down from 4 at the September meeting), they are unlikely to meet this target. Instead, a long pause awaits us.” (Charlie Bilello)

Successful Predictions

“I don’t care about people whose only accomplishment is predicting something like the market decline in 2008. It is easy to ask them what they think now. Instead of finding someone’s broken clock that worked that day, tell me their entire prediction history. Look at similar prognosticators who were wrong. Find people whose methods make intellectual sense over varying market conditions. Seek skill rather than luck.” (Jeff Miller)

The Big Short

“In his interview with The Times, [Neuberger Berman’s Steve] Eisman also outlined the nightmare scenario for U.K. investors. ‘The worst situation for the U.K. is to have a hard Brexit, a general election and Corbyn wins. It would be perceived extremely negatively by the U.K. market. You could short anything in the U.K. at that point. It wouldn’t matter. Just throw a dart at it - short it.’” (SA Market News)

No Stock Is Safe

“The bulls may want you to believe this, but no stock is safe. There are businesses that may remain good for some time, maybe a long time, but you must not attach infinite values to them. Everything in this world is momentary. So, your best bet is to just stick with quality (even that is momentary, just for longer moments). The good thing about quality stocks is that you can pay up for them (not overpay), expensive-looking prices, and still do well till the underlying businesses remain good. With poor quality, most probably you have no hope.” (Vishal Khandelwal)

Thought For The Day

I’m in the no-stock-is-safe camp, as relayed via the quote from Vishal Khandelwal – No. 19 in a terrific list of 51 ideas he’s learned or re-learned in 2018. I wanted to amplify this idea based on today’s news.

The lead story in today’s Wall Street Breakfast, recounting the milestones of 2018, includes GE (GE) being dropped from the Dow and the collapse of Sears (OTCPK:SHLDQ). GE of course is one of that storied index’s original components, and Sears was the definition of department store, supplying the needs of your average American for a span of decades.

Suffice it to say that these two companies have long ceased to inspire the same awe as Facebook (FB) and Amazon (AMZN) do today. My point is the day will come when Facebook and Amazon are seen in the same unflattering light. I have no brief against these companies, and no timeline. Rather, I’m just stating the obvious fact that market economies are more dynamic than the business model of any one company. Sooner or later technological shifts, new competitors or revenue-hungry governments will eat their lunch too. Indeed, today’s Wall Street Breakfast also includes an item on Austria’s plans to impose a digital tax on the tech giants, after EU member states failed to hammer out an EU-level levy. France is next. As fiscal woes deepen, it’s easy to foresee a multiplication of governments feeding off these ample hosts.

Khandelwal’s response to the transitory nature of companies’ market might is to counsel quality – “even that is momentary, just for longer moments,” he writes. My approach is to pay a modest fee for the management of a globally diversified equity ETF that reconstitutes itself based on rules that emphasize value and minimize volatility, eschewing large bets on any one stock. (Indeed, that is the subject of a podcast I published earlier today.)

For some, the thrill of the chase is part of the compensation of investing, and thus my preference for keeping it simple will be of little interest. But I suspect that, as a group, uninvolved investors do better. An apocryphal investing story has it that a Fidelity survey of its own investors revealed that the ones who consistently did best were… dead. This not infrequently cited “study” has been disavowed by Fidelity. Whether such a study was ever conducted (if so, the findings would be bad for business), my gut tells me that while being dead is not something to aspire to, there’s merit in playing dead via a more passive approach to investing.

Best wishes to all of my readers for a safe and prosperous 2019!


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