I’ve been a parent now for almost two decades and, yet, I still have a 10-year old daughter who periodically requires me to play act as a nurse. In her mind, I’m woefully deficient. When she’s sick, my wife is obviously her preferred caregiver. Who can blame her. Accurately diagnosing a fever in just seconds with the back of your hand is a true confidence builder!
This weekend, I read a book entitled, Mastering The Market Cycle, by Howard Marks. Mr. Marks is the co-founder of Oaktree Capital and his quarterly client letters are widely-followed by investment professionals. His latest book seemed especially appropriate to read given that we’re closing in on the ten year mark of our current bull market and economic expansion.
His book’s primary theme is to tilt against the crowd; to be the skeptic. For some, like me, this is a natural state of mind. For most, however, adopting this mindset is a challenge. Being agreeable is a social asset, after all. On the contrary, following the crowd doesn’t work that well in investing. Howard Marks actually argues for just the opposite; watch the crowd and act accordingly.
In his book, he referenced a checklist to help investors take the temperature of the markets. Like my wife’s trick with our daughter, it only takes a few seconds.
Marks asks readers to make a qualitative judgment for each item in the checklist; forcing a gut-level choice between an optimistic and a pessimistic descriptor. When your answers tilt heavily in either direction, his advice is to open your eyes for a market inflection point.
His checklist basically covers four main areas; the state of the economy, a review of general lending conditions, the overall market backdrop and a reading of the mindset of investors.
To give you a flavor of his checklist, here are some examples. On the economy; vibrant or sluggish. Its near-term outlook? Positive or negative. On lenders; eager and loose or reticent and tight? How about interest rates? Low or high, rising or falling? On investor attitude; aggressive and eager or cautious and distressed? On investor appetite; own the entire market or invest selectively?
So, you are likely wondering, what’s my back-of-the-hand temperature reading of today’s environment? Things are changing, especially compared to one year ago.
Unlike last year, with the tax cuts imminent, investors are openly nervous. In addition, interest rates have risen and lenders have grown more cautious. As a result, major industries, such as housing and autos, are feeling challenged. Further, while admittedly a recent phenomenon, the investor crowd is tilting toward conservative stocks and fleeing once-loved tech stocks. The broad stock market has completely given up its gains from this summer. And, after its total absence last year, volatility is firmly back.
For my daughter and, importantly, for your portfolio, taking an accurate temperature most certainly provides a confidence boost. However, it’s really just the first step in a true game plan. As a New Year’s resolution, I’d suggest taking a fresh look at your portfolio’s overall risk, be on alert for a sense of complacency and then, as Howard Marks suggests, act accordingly.
Jason P. Tank, CFA is the owner of Front Street Wealth Management, a purely independent and strictly fee-only firm located in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com