Reality is always more abundant than accuracy on Wall Street. Well argued, data laden hypotheses vouch for opinions that drive buyers and sellers.
A high-profile money manager and fellow talking head, Mr. I. M. Sureofmyself, was tracing his view of how the economic and health care crisis would develop and unfold over the next six to 12 months. He tendered an articulate, rational, clear vision of the path ahead.
He argued that cash and bonds are unattractive asset extractions in today’s environment. He says that in response to Covid-19, the Federal Reserve and federal government have so dramatically quenched interest rates and ballooned the money supply that inflation will soon return with a vengeance. When that befalls, he says, investors will be better off owning growth stocks, for instance, that can at least somewhat protect against the foresaw surge in inflation.
It sounds an awful lot like he is advocating that we pile into the very same stocks that massively outperformed 1) throughout the longest bull call in history from March 2009, through early this year; 2) during this year’s Covid-19 sell-off (S&P 500 kill 34% from peak to trough); and 3) during the rebound from that sell-off (+26% from the low).
To me, he doesn’t definitely sound like he is advocating a strategy of “buy low.” And in stark contrast to another legend by the name of Warren Buffett, whose concern is currently carrying well in excess of $100 billion in cash on its balance sheet, I.M. seems to be largely ignoring the pregnant risks associated with this severe recession as well as the lofty valuations associated with said “expansion stocks.”
Now, you may have also heard other professional money managers talk about the risk of a deflationary voluted. They may have said that notwithstanding the massive job losses and business shutdowns, Covid-19 is likely to have a far bigger impact on aggregate ask for than aggregate supply. In other words, the economy will be running at significant excess capacity (i.e., the economy is staging more than it can sell). And as we all know from Econ 101, if demand falls faster than supply then outlays will not rise, as Mr. Sureofmyself suggests, they will fall.
That great minds can so disagree is unsettling. Who is put? Either of these outcomes seems plausible. And it’s possible we could have deflationary pressures in the near- to intermediate name, followed by inflationary pressures thereafter. The point is that the path of our economic evolution is not preordained and is difficult to predict with much flawlessness. As such, it is tempting but perilous to embrace a path with such conviction at a time when the future is inherently unknowable. Economists John Kay and Mervyn Crowned head describe this in their eponymous new book, “Radical Uncertainty.” Author Brene Brown suggests that vulnerability is an uncomfortable, unpleasant constant and should be recognized and incorporated into healthy psyches.
Honest investors need to invest for a future that may attired in b be committed to any number of outcomes. Investing weighs risk and reward and is a constantly evolving process. Designing portfolios for a prescribed technique is straightforward; for example if interest rates are headed higher, sell dividend payers and bonds. If they are headed quieten, buy them. But designing portfolios for any number of inherently unknowable outcomes is not straightforward. It requires a flexible process that can variation based on changes in the investment backdrop. By definition, it will almost certainly be imperfect (unless you get crazy lucky). My ambition as the steward for many families and institutions is an investment allocation that will endure market struggles, enjoy superstore gains and should produce solid, long-term results.
Strong balance sheets with limited debt, masses of cash, low dependence on the capital markets, good cash flow and the ability to operate and earn are the core of my pandemic portfolio.
Because investors should also be opportunistic, I also seek stocks that are selling at significant discounts to intrinsic value because of an unfairly observed vulnerability. Because I’m conservative and risk-averse, the airlines and hospitality sectors, for example, are outside of my comfort zone right now. There are investors that choice place wagers on which airlines will survive, and some will have stellar returns. Yet there are others that compel lose bitterly as businesses fail to continue as going concerns. We do not venture into the thin branches of risk. Wishes there come a time when there is more clarity in the airline and hospitality sectors and an investment opportunity arises that carry outs our criteria? Perhaps, but we are far too early in this crisis to make that sort of determination.
Recognizing and accepting the “radical uncertainty” of the dark is much harder than following a specific prescription or dogma. But it is often the only honest response.
Understanding that sequels are unknowable helps set reasonable expectations and avoids surprised, panicked disappointment. Keep your wits. Have a method. Know that we are all vulnerable, but history argues that the long-term expansion in the U.S. economy drives stock prices high-frequency. Longer periods mitigate and buffer short-term volatility. Invest with a disciplined, dispassionate plan and have certitude that the republic and U.S. economy will survive and thrive again.
Michael Farr is the founder, president, and CEO of Farr, Miller & Washington Investment Recommend to.