Before the age of the internet and social networking, there was a long period where television and video ruled the entertainment landscape. Half hour and hour long television programs were ingrained in the culture, so episodes like Cheer’s, Hill Street Blues, Dallas, and Dynasty were rating juggernauts for many years. One such program which had a longer than expected shelf life was America’s Funniest Home Videos. People from across our land would send in video tapes of events where something that might be considered humorous could entertain viewers. In many of those videos, someone wears an outfit which is out of the mainstream. Other times, a person slips and falls, or gets humiliated by their friends in some way. Maybe its a pie in the face. Maybe its a practical joke on some unsuspecting teenager. The common theme is a sense of humiliation, looking bad, and embarrassment. It happens all the time, every day, where a person just is the odd duck from the crowd. Why is this important in financial affairs?
The reason why it should be of considerable attention is because a big part of investing is having the willingness and self confidence to look like a complete fool. Abject humiliation is what I am talking about, where the whole universe knows the joke is on you. If you invest, you are quite aware of the historical evidence of profitable investments where a contrarian approach ultimately proved successful. What the evidence does not tell you is the temporary financial loss and pain the investor must endure to reach that profitable outcome. Value investors currently bear the brunt of this humiliation as for many years, growth stocks have destroyed value in terms of market returns. Historically, the pendulum shifts and value investors eventually are vindicated. We saw it in 2000, but only after the internet bubble crashed. The same thing happened during the age of the Nifty Fifty, when all investors supposedly needed to do was buy and hold fifty of the best companies and they were financially set. This strategy proved disastrous during a tough stretch as what you pay for an investment proved quite important, which is typically the case. So let’s take a look at our current environment, and try and ascertain if there is a potential shift in the wind.
Last week, the dreaded inverted yield curve popped up again, spooking investors to buy already low yielding bonds and sending their yields even lower. Weakness in Germany was the main culprit, but there are other areas of the world that are clearly problematic. The ongoing saga of a hard Brexit with Europe continues to drag on both the UK and European markets. Heightened attention of the daily exchange rate of Chinese currency to the dollar is prevalent in Asia, along with daily protests in Hong Kong concerning citizen rights. In Argentina, a poor local election result for the current leader, Mauricio Macri, waylay-ed the Merval index to the tune of it losing nearly 50% (in dollar terms) in one day. Oil prices continue to retreat, even with heightened tension along the Straights of Hormuz. The political tension and rhetoric remains testy, especially regarding trade issues globally, particularly with China. President Trump called the CEO’s of the three largest banks in the country (Chase, Citi, and Bank of America (NYSE:BAC)) to discuss the market volatility. Reportedly, they explained the trade tiff is tempering confidence of businesses and consumers alike. All in all, we have a multitude of factors which lead to aversion of risk. Hence, the 800 point daily drop, although markets recovered about half of that loss during the rest of the week. We have seen this same pattern the last few months, so participants are familiar with the volatility.
In the midst of all of this, as an equity investor, when you identify something that looks like an attractive price, and you pull the trigger, (oops, click the button), and buy, you should prepare for that moment. No matter how good the purchase, no matter how accurate the analysis, there is a high probability that you are going to be humiliated by the market, at least temporarily. You are now the victim, just like the people laughed at on America’s funniest home videos. Of course, you may very well get the last laugh, especially if your analysis is accurate. It may take a long time for the final outcome to reveal itself, and patience is required. Naturally, the ability to accept humiliation is mandatory as well. So, if you find yourself deeply ashamed at what has been taking place, especially if you are seeing some red ink, this is the difficult part of investing which accompanies potential reward. Will value investors eventually have their day in the sun? Historically, the only constant is change, and I suspect now is no different.
It should be a light couple of weeks as far as news is concerned, although we can look forward to the Jackson Hole, Wyoming get together of central bankers for more political posturing. The so called decision makers, the ones who have a vested interest in preserving financial stability, are probably most responsible for creating the instability they want to avoid.