Smugness
Pfäffikon SZ, Switzerland – In a black week for The Netherlands, global investors shrug their shoulders. Nothing can happen to us, so the consensus seems to be. Every international conflict is ignored, geopolitical tensions no longer matter. I’ve warned you before that the situation along the peripheries of the European Union (EU) is rapidly becoming increasingly precarious. In the mean time the EU has degenerated into a toothless lapdog without the needed well functioning defensive forces. Not to mention the European mountain of debt and the frighteningly high (youth) unemployment. Jean-Claude Juncker has his work cut out for him.
Lulled to sleep
Over the past few years investors have been lulled to sleep. The game in question is simple. “Buy the Dips” and everything will turn out alright. Followers of this strategy – including some silly index investors – are cheering and beating their chests. They believe it’s their merit. The biggest dip in the S&P 500 since 16 November 2012 was a mere 7.62 percent. Investors believe that financial markets at all times can be made and controlled. Moreover, they share unconditional faith in the Fed. But the geopolitical problems of today are much harder to assess than in the past. The forcefield in the past century was much simpler. The iron curtain is a simple example of that, equipped with a good set of binoculars we had the enemy in our crosshairs. But now everything is interwoven and difficult to unweave. Investors, in my view, are underestimating this geopolitical development.
Not a cloud in the sky
As said, for many fund managers, there isn’t a cloud in the sky. Moreover, I make that assessment based on different conversations I’ve had in the financial industry about our investment strategy, which is based on value investing with a hedge. It makes me reserved, even though this bull market could persist for another two years. A famous quote from successful investor Warren Buffet is: “Be fearful when others are greedy and greedy when others are fearful”. And that’s the way it is. I am fairly reserved at the moment and will patiently wait until “greed” truly gets the upper hand in the market.
There are many indicators and charts that tell us something about the current market situation. We invest a lot of time doing our homework in unweaving this type of information. It is drudgery which will have to pay out in the coming years when a true correction presents itself. For this correction will arise at a moment when no one expects it. The accompanying graph, in my view, is a decent indicator of the direction this madness is moving towards; it’s the market capitalization in relation to the Gross Domestic Product (GDP) of the New York Stock Exchange since 1925. The graph speaks for itself.
Positive but alert
As a long term investor I am very positive about the future. There is a lot of good in store for us, however, as an investor, it’s becoming increasingly complicated to maneuver between obstacles. I view this as a nice challenge. All this has no bearing on the fact that the current world wide unrest can punish investors unexpectedly for their smugness.
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.
