It can't be right.
This is the general tone of several comments from long time reader George. As I read it, he is basically saying that too many people have been on the same side of the emerging market and commodity trade. He goes on to say that you should invest in other areas that people are not talking about.
He is right, both emerging markets, as measured by iShares Emerging Market (EEM), and commodities measured by just about anything you want to look at have not done well lately.
However if you want to be diversified you need emerging market and commodity exposure. Maybe now you should have less than you did before but that is not the point here. Emerging markets and commodities provided a lot of leadership, now they aren't but they will again. By have zero exposure you are betting that you will be able to be right about when they lead again.
A portfolio that relies on being that right about timing each part of the market is a path of much resistance and not a bet I am willing to make with client money.
Being diversified means owning every sector, foreign stocks, commodities and REITs. You add value by overweighting and underweighting various parts of the market and hopefully being correct more often than you re wrong. By being diversified you expose yourself to less severe consequences when you are wrong
This brings up an important issue for trying to manage your portfolio. At any given point some part of the market is the best performer and some part is the worst. The following quarter the best and the worst could switch for what may seem like no reason at all. Are you willing to bet your own money you can consistently get these calls right?
The extreme allocation is much tougher to swallow when you are wrong.
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8 comments:
Looking for the new trend is like Donald Trump looking for the next realestate deal. Patience, lots of looks, and comfort in saying NO. The best big picture money manager I have EVER followed was Ralph Wanger of Acorn Fund. Each quarter he wrote "Squirrel Chatter" to share holders. He was fond of elaborating on don't follow the herd (wrote a book to that effect). He spotted, quite early, the negative trend of tech turning to low profit commodities and the value of investing in non tech companies that use tech for higher productivity. Wisdom from the adage, don't dig for gold, sell the tools that the fools use to dig for gold.Outsourcing was a theme he hardily played. Mr Wanger is retired now, but he trained some great money mgrs. George's suggestion of follow the great mutual funds might offer a clue down the road. Acorn, a place to look.
Counter point to Roger's diversification. You can regularly do better than the market by heavily weighting bets. Personally, I look for a chart set up that's currently working, shows patterns. Lately I compare the wilshire 7000 to a best of breed short fund (grzzx). Weekly data. Bets are with large market exposure. With no more than 50% exposed to equities, total return to ytd is 8%. I may change the chart to nasdaq vs commodities...looking for opposites.Having said all this, it's still about fundamental top down views, as Roger points out or implies with Gold, down but not necessrily a falling knife without a bottom. And, I like to keep a lot of cash, now, because of the higher yield. And, I still have the option of going long with impunity. Currently 37% equities.
My comments had more to do with Roger's " really big themes " statement than anything. I'm not saying a person should allocate his portfolio any way. Do what you like.
I just know that you can't just read about these really big themes on the internet and go with that. If the themes are THAT obvious, well.......you know what I mean.
g
I have seen the every single thing has to be priced in argument be wrong too many times to put blind faith in it.
It was correct for the entire wall of worry in the summer of 2002 and incorrect for the emerging market lift of 2004 and 2005.
Good point, Roger. And...very correct. I think sometimes it's easier to be the cynic than the optimist. And lately I've taken the easy road.
g
Big bet themes can last longer than we would expect. Active index management jargon is "trajectory power." In the 90's, the sell signal is a cliche now...when on the cover of newsweek. Today, it may be a metric applied to coverage in mutual funds. And, you have to have an exit strategy and never feel married to a theme. And, there is real danger of making too big of a bet on something too narrow. There is middle ground here, some.
Just for the fun of mental speculation,the Green theme, I think, is worth thinking of as a potential seprate allocation. I used to think of it as something for tree huggers who put values ahead of money. The movement of independence from m.east oil is gaining traction.There'll be room for both domestic drilling and conservation. Or, do you think this theme, per ADM and power shares' pbw-etf, has played out?
Wanger,mentioned above, my take is that he started with world dynamics that had legs and then drilled down to implications. Could be changing demographics...such as rising domestic retirees or rising global middle class. Old already identified themes, but do they have legs?
If you are with the crowd at the front or middle of the wave it is likely you will do well. Obviously the closer you can consistently get to the front edge the better you would do.
The avoidance of "common knowledge investing" has more to do with being stuck in with the Tail End Charlies. Trying to go short on Tail End Charlie of course can be great fun and excitement.
I don't understand why diversification requires that you be invested in all investment classes? I thought modern portfolio theory involved weighting investment classes by whether they were counter cyclical or not. Or did your (Roger's) statement assume that was understood?
Russell
You hit it right on the head, Rog. Btw, the market can stay irrational longer than we can stay solvent.
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