Whatever is popular in personal financial planning and investment management today will not be in the near future.
People believe and do the wrong things at the wrong time without a reasonable estimate of where trends are in different cycles.
Example: In 2007, everyone believed a house was an excellent investment.
Today younger generations believe the opposite.
The truth: Timing is everything.
Example: I see a lot of talk on Twitter, etc. about “low fees” referring to index ETFs. We sure didn’t hear that at the lows of 2008 – 2009 when those low fee index funds were getting crushed.
Investors wished they had tactical risk management or hedge funds that actually hedged or traded long/short. After the fact, they would have gladly paid a 2% management fee plus 20% of profits to have avoided the crash in their investment accounts.
I tactically trade low fee index ETFs, so I like them to be efficient, too, but I observe other financial advisors put too much focus on it. If your only value proposition is “low fee” you may be in the wrong profession. I’d rather achieve something over full market cycles and get compensated adequately for it.
Another recent example is after 2008 up until 2013, investors and advisers wanted tactical risk management (after-the-fact). Then, after the stock market kept trending up post-2013, they have become more and more complacent about risk.
This when a sage investor monitors and observes the big picture, preparing for the next cycle and change in trend.
I operated through these periods by observing these cycles and trends and noticing when the crowd reaches extremes.
But, this time has been different.
We are now witnessing the longest bull market in stocks and economic expansion in U.S. history.
What you need to know today is this too shall pass. When cycles reach an extreme, they usually swing the other way just as intense.
In 2013, the stock market reached what is considered an expensive valuation level. The S&P 500 was trading at 20 times earnings per share. As such, many active investment managers dialed back their stock risk exposures. But, the stock market kept trending up, and expensive has only gotten more expensive. Maybe it’s justified in a low inflationary period? Nevertheless, it’s considered a much higher risk state for fundamental investors.
You can see the expensive valuation of the stock index in the Shiller PE chart below. There were only two times it was this high or higher.
It is what it is. The valuation level as measured by Shiller PE is well into what is considered a higher risk zone in what is now the longest bull market and economic expansion in U.S. history.
At extremes, I prepare for the other way.
This one has taken much longer and stretched higher, so maybe its reversal will be uglier.
I’m not saying I’m bearish on the stock market at this moment, but instead pointing out the big picture risk longer term that I’m prepared to deal with.
People are attracted to things after the fact. What is fashionable today will be tomorrows despised. What is hated today will be tomorrows cool.
It will all happen after the fact.
Count on it.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.
Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm.. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.
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