Insatiable Desire
Pfäffikon SZ, Switzerland – Market participants seem to have less of an eye for valuations, quality and the risks of certain business models. The S&P 500 has not budged lately and seems unbeatable. The German DAX and the internationally lesser-known Dutch AEX index seem to be experiencing a bit more trouble due to the political turmoil in Ukraine. In this I do note that the gap between perception and reality produces interesting investment opportunities.
Stock Market Favourites
When we look more closely at the S&P 500, it strikes me that the gains are supported by a number of special shares: Delta Airlines for example. The airline went bankrupt in 2005. And in the past year the retailer Best Buy, which has been muddling along, has also been an S&P 500 favourite. A few weeks ago, The Best Buy retail dream came to an abrupt end, for the time being.
Personally, I am not a fan of investing in airlines and retailers. They are costly hobbies with an extremely high risk. Of course, Sir Richard Branson is an exception to this rule – he plays these businesses like sport. “To say yes is much more fun than to say no”, he says. Typically Branson! He simply knows no fear, has removed the word from his dictionary and is independently responsible for his investments.
More Risk, Less Quality
Other companies supporting gains in the S&P 500 are the disgraced broker E*Trade and ‘fashionable’ stocks such as Netflix and Facebook. The last two remind me of the late nineties Internet bubble. Not to mention carmaker Tesla; I have preferred rock-solid BMW for years now.
Investors are paying less and less attention to quality in their hunt for a yield; they don’t fully understand the risks and corresponding valuations. The widespread willingness to accept risks is fed by extremely low interest rates, which will end sooner or later. When high-quality bonds deliver virtually no yield, it is not surprising that market participants want more and therefore, take more risks. This means the ever-increasing margin requirements that are underwriting portfolios worldwide is incredible.
Wet Suit
The insatiable desire for gains is driving investors to companies with a questionable (to say the least) business model, especially when taking into account the long-term prospects. In addition, they get into sophisticated investment vehicles that cannot be understood. Even sub-prime mortgages are back. A well-known method to trade on the stock market is momentum trading. This category of speculators tries to surf trends in order to quickly and easily amass wealth. It is a method that is becoming more popular in the current bull market. The result is that the surfer not only gets wet but eventually gets drenched financially. Insatiable desire ultimately ends in a wet suit.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
