Displaying items by tag: stocks

(New York)

One of the big conundrums in markets is that while it is practically gospel to diversify into a wide range of securities and asset classes, some of the best and most famous investors do the exact opposite. As evidence, just consider the investing styles of Warren Buffett, George Soros, or Bernard Baruch. Forbes has published a piece examining this seeming disconnect, and provides some interesting insights. According to Buffett, “Diversification is a protection against ignorance … [It] makes very little sense for those who know what they’re doing”. Baruch adds, “It is unwise to spread one’s funds over too many different securities … Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues”.

FINSUM: Okay, a couple of points here. Firstly, those investors can afford the big losses that can occur with a concentrated portfolio. And secondly, since they invest for a living, they have the time to devote to deeply understanding each of their holdings. For the 99.99% of people not in that group, diversification has major benefits.

(New York)

Despite a generally weak year in equities, the market is still very expensive. That said, not every sector is and there are still some bargains to be had. Interestingly, more than half the S&P 500’s sectors currently trade at a discount to their historical relative value (relative to the S&P 500’s P/E ratio). These include: Tech, Materials, Real Estate, Industrials, Health Care and Telecom. Telecom is 60% below its average relative valuation, for instance.

FINSUM: Interesting to see how many sectors are at discounts. That said, the problem with this view is that there are no catalysts to prompt a return to the mean.

(New York)

If you have been following the situation closely, you will have noticed that the Fed is pretty uniformly dismissing the risks of our almost-inverted yield curve. The central bank thinks that central bank bond buying has held long-term yields to artificially low levels, and accordingly, they think the only 30 bp spread between two- and ten-year Treasuries is of no concern. The problem is that this is almost the exact same logic the Fed used when the yield curve inverted in 2006. Then they said it was a global savings glut keeping long-term yields pinned. Soon after, the US went in to recession and the Crisis erupted.

FINSUM: A big part of the problem here is not just that higher rates could lead to a recession, but that low long-term yields drive investors into riskier investments (just as they did pre-Crisis), so the flat yield curve is actually very worrying. The Fed is sleeping walking into a bear trap.

(Rio de Janeiro)

Emerging markets have been in a really tough patch lately and generally entered a bear market recently. Their losses have been urged on by higher rates and a stronger Dollar. However, the situation may be about to turn around. The argument is from UBS Asset Management, who says that EMs have de-risked from five years ago during the Taper Tantrum, and that they are in a much stronger financial position now. In particular, whereas investors were worried about EM risk during the Taper Tantrum, now the losses have just been down to a rising Dollar, which does not signal any fundamental weakness.

FINSUM: Our worry with this argument is the lack of a catalyst. While all of what UBS argues may be true, what will cause the market to comprehensively reverse?

(New York)

One of the weakest sectors over the last year has been asset management. If you take a close look at some top asset managers, including Invesco, BlackRock, etc, you will see that many are down 20% or more. The growth of passives, pressure on fees, and weak inflows have all combined to bring down the managers. According to Barron’s they look like big bargains. BlackRock, T.Rowe, Franklin Resources, and Legg Mason look like the good bets. There are some great payers in the group too, with Invesco and BlackRock both sporting yields over 4% and AllianceBernstein paying a whopping 8.6%.

FINSUM: Yes, the industry’s traditional model is under fire, but those with very good scale will win out. Therefore, we do think the very top managers are a good buy, especially at these valuations/yields.