Theories, Diagnoses, and Actions
I miss my book Dictionary of Theories, which rests on a shelf at home. Years ago it sat, loved, on my bedside table. I enjoyed reading it, largely because it helped stretch my brain with quick summaries of theories from all sorts of disciplines, including those far outside the realms of economics and finance. If I could thumb through it here in Uganda, I wonder how many of the theories covered could help explain why we humans as a race have seemingly gone off the rails these days. How as a society we can create massive revolutions in technological progress and financial prosperity, yet simultaneously devolve when it comes to how we react to stress, uncertainty, and the general “tough times” that inevitably come with life and change. Or how in a world of such “convergence” we can still have so much disparity. I’m sure my trusty DOT could offer more than a few logical diagnoses that explain why our logical species still manages to act so illogically.
Why, Why, Why?
Seemingly illogical situations abound in the financial world, which makes this job so darn interesting. Not a day goes by when the word “why” hasn’t crossed my brain dozens if not hundreds of times. Why are markets so bullish on Trump policies that may be considered protectionist? Why are investors ignoring what seems like obvious value in a beaten-up Canadian company? Why such a massive share price reaction to a single quarterly earnings announcement? Why a multi-billion-dollar valuation for a company with no clear path to profitability? Why would an investor care about how they performed against an arbitrary index? And the list goes on.
As wealth managers, a key part of our mission here is to sift through these “why’s,” assess a wide range of situations, and ultimately take action for our clients. Thankfully, at FIM Group, we were designed from the get-go to operate in a way where we can do this independently, creatively, and collaboratively. Unlike many other firms with cultures centered on “managing money to meet or beat an index,” or “growing assets under management no matter what,” we can concentrate our investments where we think they can do the most good for our clients and offer unbiased financial advice. For example, we can hold cash, short-term government bonds, and money market instruments, or even gold, if we think stocks or long-dated bonds are “risky.” And we can encourage paying off mortgages, building up rainy day funds, or exploring a local community investment even if doing so means fewer assets for us to manage.
Today, I view FIM Group’s ability to independently assess market risks and opportunities and take appropriate actions as more important than ever. I see plenty of risks to navigate through, although the biggest ones are not necessarily those hogging recent headlines. For example, these days there is no shortage of reporting and analysis around President Trump’s trade and fiscal policy ideas. At face value, President Trump’s bias toward spending on tools of war rather than tools of peace (education-diplomacy-trade) are cause for concern. It is an illusion, simple- minded, shortsighted, even irrational to think that protectionism and government overspending are good for an economy over the long haul. While such policies may juice GDP and provide relief for less globally competitive companies in the short term, the long-term consequences could well prove opposite. Higher debt, higher prices for consumers, and weaker corporate competitiveness are all possibilities should our leadership fully embrace and implement some of President Trump’s more extreme ideas. My hunch is that the most controversial elements of his platform will get watered down (even by his own party) and take longer than he’d like to implement. But even if his ideas do manage to fast-track through our system of checks and balances, I feel comforted (on the investing side of things) by our team’s flexible, balanced approach to managing money and our current positioning that leaves us well prepared should markets react negatively to any policy surprises.
Passive ETF Investor: “Keep Those Tax Cuts and ETF Flows Coming!”
The more significant risk I see at the moment is simply the valuation levels of many popular (for U.S. investors) parts of the investment world. Most large U.S. company stocks (like those in the S&P 500 or the Dow Jones Industrial Average) look expensive by just about every measure. It seems that there are at least two major factors driving the continued move higher in valuations.
First, a high expectation that President Trump will be able to quickly implement his ideas for corporate taxes (including a broad tax cut and a tax holiday for foreign cash repatriation) and infrastructure investment. These moves are expected to juice corporate earnings per share as companies pay less in taxes and have more US$ cash available for corporate share buybacks. Generally speaking, stocks go up as expectations for earnings per share go up.
Second, there continues to be a surge in investor flows toward value-agnostic (or what I like to call “dumb”) U.S. stock exchange-traded funds (ETFs). These funds, which held more than $1.6 TRILLION in assets at the end of January, blindly buy all of the stocks in a given index (like the S&P 500), and this can lead to a temporary, virtuous cycle for stock markets. The blind buying by the ETFs helps provide tailwinds for the price appreciation of the overall market, which in turn attracts more investors to these products (away from managers who care about the quality and valuation of what they own), and more blind buying of the market. Should President Trump’s tax and infrastructure plans proceed more slowly and/or the rabid buying of U.S. stock ETFs fade, today’s high stock market valuation would likely face meaningful challenges.
Striking a Balance
Our team’s response to this challenge of high valuation in the U.S. stock market is to strike a balance. On the one hand we are staying invested in other, less expensive parts of global stock and bond markets (and yes, we are still finding compelling places to invest, especially those not being influenced by Trumpmania and ETF-driven buying). On the other hand, we are keeping ample dry powder to deploy when conditions change. We will stay disciplined on investment price and quality and only invest where and when we feel our clients will be rewarded to do so. In addition, we will continue to train and hone our skill sets so that we stay on the top of our game. I am blessed to be surrounded by super-smart professionals at FIM Group who work tirelessly so that we can effectively diagnose risks and opportunities both in the investment realm and in the broader financial planning and client service areas.
We are a group of professionals who love investing, financial planning, and client service, who have been doing it a long time, and who collectively know one thing for certain: that investing and guiding clients successfully through life’s many financial decisions, over the long term, is hard work. We also have the training, temperament, experience, and humility to admit that even for us every day brings its challenges. True, it is fun, fulfilling, enjoyable work, but it is not simple.
Almost Fifty Years of Investing in the Books
As I write this, I just realized that in one hour and 24 minutes I turn 62 years old. I made my first investments at age 14, so I have been doing this for nearly five decades. What is interesting to me is that it remains challenging and interesting. Everything changes, so tomorrow night when I pull up to my desk (Kampala is eight hours ahead of New York, so I work late each night), after my kids sing “Happy Birthday” to me and I blow out the bonfire of candles, I will need to see the world afresh. I will continue to use my experience, contemplate others’ theories, look at history, analyze balance sheets, and consider products, competition, and management to value an investment to see if it is a quality, risk-adjusted bargain. My daughter Akasha will call from Costa Rica and we will chat about her work there, the environment, Trump, and her happy, fun, hippy, spiritual landlord. My son Keeston will also call, digging up some time from his 23 credit-hours college term, and want to chat about investments. He will stay on the phone talking investments till he has to go to class or I must get busy with my work. At the end he will say, “Oh, yeah. I just called to say, ‘Happy Birthday!’” Then there will be a pause and he will ask, “What do you think about the efficient market theory?” And then he might pause again and say, “Isn’t that the opposite of what you and Warren Buffett do, which is classic value investing?” And then, “Let me run my own theory by you,” which someday may very well appear in a future version of the DOT for his kids to read.