Despite weak business spending, rising wages, Brexit aftermath, five developed nations with negative rate policy, and a borderline schizophrenic U.S. presidential election, 2016 has turned out to be fairly unexciting for markets and U.S. equities are on-track to deliver the humble returns.
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Like the circular rails of a carnival ride, the market script we’ve come to know over the past five years offers a brand of confidence, sureness, and protection for us. The problem is it only loops us back where we’ve already been and helps us find what we already know. It takes us back to places where investors can easily go, not necessarily where they should be going.
Today’s investor is better informed than they’ve ever been and yet has lost that critical edge to think. I find that markets sporadically drop hints and suggestions yet it requires discipline, discernment and hard-work to find them. In today’s culture we demand things faster, on a highly individual basis, and very flexible to boot. Successful investing demands just the opposite. It is a tiresome chore – requiring the sorting round a cluttered basement full of words and peering through peep holes in a quest to accumulate investment knowledge - not for information but formation. It settles who are you following and why? It knows that the challenge is always the wisdom in the answer – not the answer itself.
The investing “new normal” is like an over-muscled thug, coercing sentiment to overthink the implication of a key word. It creates group opinion ruled by reluctance – all the financial media is on-board, most of the investment houses on-board, and people wind up thinking – get this – that unless you don’t understand the market this way you’re on the wrong side of market history!
The latest financial buzz words including “roughly balanced”, “flat yield curve”, “high equity valuation” are nothing other than big words - just like justice or beauty which everyone affirms but nobody really understands. Words are like a hall of mirrors; only reflecting ourselves. There exists no objective location for the words we often use as the ground beneath us is constantly a shift – there is no guaranteed point of reference.
From the beginning of time, markets have been a measure of the perceived value of an asset as it reflects what people are willing to pay at any given point in time. From ancient Rome, to Ming China, to revolutionary America, to the present, investors have evaluated price using all sorts of objective criteria.
Throw in mob mentality and the occasional panic and the market is as much about the psychology of the future as it is the economic realities of the present. What does change is market risk - it is constantly changing and the tail of the return distribution will always have the biggest impact on your portfolio. Spend less time thinking of the next crash and start preparing for its inevitability.