Some very quick hits from this weekend's Barron's.
A couple of good ones from Morgan Samet and then James Anderson from Lingotto. Samet said "you have to repeatedly think orthogonally." I love that word and we occasionally talk about orthogonality here. It is very important trait for portfolio construction. One example that we review constantly here is avoiding bonds with duration. That part of the market has gone from very high risk when yields were very low to a serious pain point with large declines and unreliably volatility.
The various funds that are down 30-50% from their 2021 highs can never make their way back to those prices and if from here, yields move up from the 4-5% to maybe 5.5-6.5% range, those same funds might be very hard pressed to get back to today's prices. Many advisors and pundits never got off of bonds with duration and recommend it still but the risk reward tradeoff makes no sense to me.
Then Anderson, referring to a different colleague said "he was even more frustrated than I am that public-market investors haven’t adopted the view that outperformance is reliant on extreme winners." We talk about this point a few different ways including the barbell theory of concentrating risk into a narrow slice of the portfolio.
Getting that right is not easy of course but in a normal bull market, you're probably not going to have a laundry detergent company double in a year.
In the StreetWise column, Russ Brownback from Blackrock said "I’m like, guys, the range on the S&P 500 over the next 10 years is probably 5,000 on the downside and 10,000 on the upside. So you’re gonna be kicking yourself if you’re getting too cute about a hundred points now.”
We talk about the natural inertia that lifts the market from the lower left to the upper right of the chart. That inertia is pretty dependable over the long term but we don't know the path. Using the number from the quote, there is no question that the S&P 500 will hit 10,000 at some point but we cannot know how long it will take or whether the path to 10,000 will be by way of 4000 first. We've also used the word ergodicity to describe this effect.
Lastly, an article for retirees about how they can navigate their portfolios through choppy markets. An advisor said "this is not the time to treat your portfolio like it’s a global macro hedge fund.” When would be the time to treat your portfolio like it's a global macro hedge fund? Ok, I am being snarky but there is some contrast with this comment and the idea of orthogonality discussed above.
We talk a lot about using alts which I believe is one form of orthogonality but it is a stretch to think of our discussion (and my implementation) as being anything remotely similar to global macro anything. I'd be happy with just being resilient through market events like the one we are going through now.
The comments on this last article we're discussing were very critical of the article for being way too basic, offering nothing new. What was the first article you read that said "have a years worth of expenses in cash in case the market drops?" Even if you now come at that a little differently, at one point you didn't know about that, you read that advice for the first time and then you knew. Some number of readers of that article learned today to set some cash aside for expenses in case the market drops a lot.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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