As 2015 draws toward a close, investor sentiment regarding the global market is remarkably mixed. While some focus on the lack of productivity, inventory overhangs and emerging-market stress, others emphasize the improving U.S. outlook – i.e. private research and development spending, manufacturing investment, residential housing, consumer discretionary, and wage growth. Questions including, “why did the market bounce back?” and “where is the market going from here?” hang in the air similar to some unexplained equation of general relativity in search of an Einstein to unravel its mystery.
The last few months have been particularly difficult as investors have been forced to re-digest a market that rallied through much of October through today, feasting on easy liquidity and promises of highly accommodative measures in Europe and Asia. A period in which stocks would presumably fall like autumn leaves, yet the S&P 500 managed to post its strongest month of the year (+8.3%) and it’s best performing month since October, 2011.
A month in which Chinese equities staged a fierce rally, driven by a 0.25% rate cut and a 0.5% reduction in the amount of deposits that banks are required to hold, and speculation that Chinese policy makers would accelerate reforms of state-owned companies. As a result the Shanghai Composite gained more than 10% while the Shenzen Composite soared 17%. In Europe, the signaling of additional stimulus from the European Central Bank (ECB) was sufficient to propel the Euro Stoxx 50 to post gains of over 10%.
Today we are juggling U.S. economic strength with global fragility, a strong U.S. dollar, large declines in dollar export prices, a consensus that fastens a high degree of confidence to its policymakers, blunt divergences in central bank monetary policy and manufacturing indicators, along with continued weakness in Chinese investment. All the while our minds manage the information flow – in an attempt to decipher revelation versus reason – failing to realize that these are not two distinct sources of information but two ways of interpreting the data. We overestimate our ability to interpret data and severely underestimate what can go wrong.
How to be a Successful in 2016
A successful investor needs to first rebel against firmly-established ways of seeing and hearing things. To recognize the ineffectiveness of our financial culture not chiefly because of its “strange theory of the month” (e.g. cheap oil is bad, Chinese currency devaluation). Rather, it’s that the financial media culture is simply a reflection – or microcosm – of American culture at large; where we are ever devoted to “bread and circus”, to the consumption of instant information and instant gratification. A culture that stopped being usefully discerning; becoming more like the careful retailer who has it as a golden rule never to make a customer angry. Viewers haven’t expressed interest in this worldview inasmuch as producers haven’t purposely produced it. It’s simply inside us and there are remarkably few alternatives.
Secondly, a successful investor needs to go against the grain of the popular financial culture and apprehend how impressionable the present is and how promising and fraught with danger is the future. In a world in which everything seems self-interested and attuned to the ironic, this is a hard thing for us to accomplish. We expect our world to run smoothly without improvisation, without failure or slip-ups. We expect the creation of an “app” to hedge our portfolios with judicious timing rather than sudden self-assertion. We expect everything to run perfectly and without the least bit of surprise.
Soon I will be writing my market predictions for 2016 including my expectations for U.S. single-digit stock market returns, better equity returns elsewhere, a slow recovery in oil, a case for owning select base metals, a U.S. dollar with a valuation problem, a maturing U.S. credit cycle, and the hidden but real risk of inflation. This is a decades old practice of mine; one that exerts a powerful and largely unacknowledged influence on me and my interaction with investors.
With every passing year it serves my deepest conviction for investors to be severely diversified at all times. Even with my very best predictions, I can prove the randomness of it all as I may have been right within the context of the wrong reasons. We are surrounded in a tangled web of information, relationships, and interdependence. Instead of trying to predict what might happen, we should work extremely hard at reducing our portfolio’s vulnerability to them.