Mr. Market Goes Berserk Again

by: SA For FAs
Summary

CFA Institute Contributors: The focus on correlation over dispersion ignores the diversification benefits achieved with assets that seem to move in tandem.

Erik Conley: A global market portfolio can be as simple as three or four ETFs.

Thought For The Day: By surrounding yourself with good influences, you can begin to build an immunity to the bad cultural influences in the investment world.

High Dispersion Beats Low Correlation

“A big concern of my friends who advise US clients these days is that their clients are losing faith in international diversification. After more than a decade of outperformance by US stocks, US investors are wondering why they should even bother with European or emerging market equities. European investors, on the other hand, are tempted to shift more and more of their equity allocation towards the United States. After all, the US market seems to be the only one doing well.” (CFA Institute Contributors)

K.I.S.S. Portfolio

“Where do you want your portfolio to lie on the spectrum of simple to complex? You can have a well-designed portfolio that only holds 3 or 4 ETFs, or you could have one that holds 10 or 15 ETFs. It all depends on two things - how finely you want to slice and dice the asset classes in your portfolio, and how much time and effort you're willing to devote to tracking and maintaining your portfolio.” (Erik Conley)

Trade Discord

“U.S. stock futures point to additional losses after President Trump said yesterday that he would not meet with China's President Xi before a March 1 deadline set by the two countries to achieve a trade deal. The remarks… dampened growing optimism for a trade deal in the short term and weighed on stocks. ‘The keystone in the wall of worry is the trade discord,’ CFRA Research's Sam Stovall said. ‘Should the negotiations crumble, so too will near term support for equity prices.’” (Wall Street Breakfast)

Thought For The Day

Not a few investors would be satisfied with an 8% return for the year, yet, last month, the S&P 500 returned that much in one month alone, in the best January performance in 30 years. Moreover, if you hold by the “January effect,” which according to the Stock Trader’s Almanac predicts whether the year will be positive or negative with 87% accuracy, then you should be ready to relax and enjoy another good year of investing. And yet, today’s news (quoted above) brings the latest hand-wringing about the stock market losses to be expected in the short-term based on a sudden negative shift in sentiment about a U.S.-China deal.

This is Exhibit A (and case closed) in the perversity of Mr. Market’s manic-depressive outlook on business prospects, in Benjamin Graham’s famous allegory. Last month, Mr. Market couldn’t buy shares fast enough from his business partner; starting yesterday and apparently accelerating today if the stock futures indicator is accurate, Mr. Market will be dying to sell them to you.

Graham invites readers to view themselves as Mr. Market’s business partner. I would like to alter the analogy and invite you to consider yourself an out-of-town businessperson, preferably an overseas visitor, looking for investment opportunities. My reason is that, in my observation, so many people fail to avail themselves of Mr. Market’s largesse, but rather conduct themselves in sync with him.

So, here’s the scene. You come from a society with a foreign culture and a very different value system, which you esteem. In your wisdom, you recognize that your new country of residence, while offering great business opportunities, also exhibits tendencies you feel will serve as a bad influence on your family, most particularly a live-for-the-moment outlook that is corrosive to your long-term goals. So, you enroll your children in a private school that reflects your values, you constantly point out the errors of short-termism that you see and you clip articles that reflect your point of view and post them on the refrigerator as permanent reminders of your philosophy.

Keeping up with the news could have value – for the minority who know how to assimilate the information, to understand that Mr. Market may be poised to plunge into his depressive phase again. But investors not yet conditioned to take the opposite end of Mr. Market’s trades could start by posting an article on their refrigerator. By surrounding yourself with good influences, you can begin to build an immunity to the bad cultural influences in the investment world.

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