The modern world developed from a society of subsistence farmers. The metaphors of nature, crops and orchards and seasons and livestock, have deeply rooted appeal. They remind us of a simpler time. But the metaphor in this story is personal history, not a fairy tale.
As a child I was privileged to visit the Omaha Stockyards from time to time in the company of a friend and his father, a “commission agent” who bought and sold cattle for farmer clients. Mr. G was a master of his work and he loved it. The stockyards were the largest in the world. The vast collection of pens and chutes and loading facilities were a temporary home each day to thousands of cattle, in transit from one place to another.
One might say the stockyards presented a rich tapestry for the senses. The fragrance of thousands of cattle in close quarters is one of those things that cannot adequately be described with pen and ink, or electrons.
Upon my introduction to this sensation, I first heard the words thought by some to be only a cliché. But they came from Mr. G, smiling broadly, breathing deeply, with a twinkle in his eye: “Smell that, son? That’s the smell of money!” For Mr. G and his colleagues and companions, the hundreds of workers at the yards and the customers they served, it was true. And there is value in this old tale to investors today.
As contrarian investors, we are mindful that the sentiment of the crowd is a contrary indicator. High levels of optimism may be associated with market drops ahead. Rotten sentiment sometimes points to future gains. When everyone expects the same thing, that expectation usually does not come to pass.
These days, the country seems to be in the grip of pessimism and foreboding. Sentiment about the future in general and the prospects for the markets in particular is poor by many measures. It stinks.
This too shall pass, sooner or later, and the mood of the country will improve. But for now, in the spirit of Mr. G we smile broadly, breathe deeply, and say “Smell that rotten sentiment? That’s the smell of money!”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
You’ve heard us talk about conventional investment wisdom, as embodied in Modern Portfolio Theory. No surprise here: we don’t like it. The pie charts, talk of asset classes and correlation… It is all wonderful until it isn’t.
Our alternative approach relies on three fundamental principles. We believe they apply in every season.
Avoid stampedes. Our first principle to avoid stampedes in the markets, and it’s based on our understanding that the stampede is usually going the wrong way. There was a stampede into tech stocks in 1999, which ended badly. There was a stampede into real estate in the early 2000s, which ended badly. There was a stampede into commodities after that, which ended badly. In short, major peaks are usually accompanied by a stampede of money that drives prices to extremes.
Seek the best bargains. Our second principle is to seek the best bargains in the investment universe. This principle lets us sort “the market” into its pieces. The three major asset classes are stocks, bonds, and cash alternatives. Cash and its alternatives currently earn practically zero-point-nothing interest rates; bonds are barely better. Diving one level deeper into stocks, we find that some sectors and industries are expensive and others appear to be bargains.
Own the orchard. Our third principle is to seek to own the orchard for the fruit crop. Portfolio income is an important component of total returns, and those among us who rely on our portfolios to buy groceries surely understand the importance of cash income. As noted above, interest rates remain very close to zero: we do not believe that bonds or cash alternatives are a good way to generate income these days. But we are currently enjoying generous dividends from many companies in the bargain sectors. Other holdings purchased in past years continue to pay regular dividends today.
We must note that, in actual practice, these principles require patience. One should always know where needed cash and necessary income will come from. Please see our other posts for fuller treatment of the three principles in action.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.