Investment Environment - Winter 2019

Sep 12, 2019 | Mark Lloyd


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The fourth quarter of 2018 brought the biggest storm of market volatility that we have witnessed in a long time.  Rising interest rates in the face of some concerning economic numbers provoked investors to press the sell button aggressively.  The early weeks of 2019 have been somewhat calmer.  My message to clients is that we are unperturbed by ordinary volatility and ordinary market corrections.  We have a long-term plan to create wealth without regard to unpredictable market moves.  Furthermore, our plan includes subtle elements that reduce our volatility levels without reducing our overall total return.

The correction so far has felt to me like an overreaction.  Mr. Market has been indicating that a recession is going to happen soon, but the economic news has only been mixed (at worst).  Many encouraging numbers on employment and consumer confidence have co-mingled with disappointing numbers regarding U.S. housing starts and Chinese iPhone sales. 

I believe that market traders in Q4 had an “itchy trigger finger” because the bull market has lasted so long.  But interest rates are still extremely low and corporate profits are still extremely high.  Jim Grant this week reminds us what 18th century Scottish philosopher David Hume had to say: “No man will accept of low profits where he can have high interest; and no man will accept of low interest where he can have high profits.”  In 2019 meanwhile, $8 trillion dollars of government bonds still yield less than zero in real terms!  Investors like us (who prefer to get their share of high profits) are required to allocate a major part of their savings to prime grade common stock.

Daily stock price reports and monthly investment statements only communicate prices from an auction that continues every business day.  At some point in the career of every successful investor a market price report will arrive that features appallingly low market prices.  If the investor doesn’t need to sell, then the investor doesn’t need to accept low prices.  We adjust our stock market exposure levels over time to ensure that we won’t ever need to sell at low prices.

I’m pleased to report that my discretionary clients’ portfolios avoided most of the market decline of 2018.  Some even eked out a modest gain. Our long-term rates of return have been increased by our success at playing defense in 2018.

 

Mark Lloyd, Ph.D.

Vice President & Portfolio Manager