Date: 2015-01-07
Market commentary
So far, my annual investment letter has only been serving the purpose of summarizing (of my view on various economic blocks and asset classes) and record keeping. This time, I decided to write a more personal one for myself. This one should be more entertaining than the previous ones.
In much of 2014, I was in the military. Because I could not trade in the base, I picked some assets and held them. My portfolio was up only modestly, and it was one of the worst years for me because my concentrated bet on GM did not pay out well, while gold continued to stay relatively low. Fortunately, I was discharged from the military in the end of 2014, due to the knee injury and subsequent knee operations. Thanks to the regained freedom, I can do more with my investment in 2015.
Because I write this letter on the 7th of January, many other investment outlook are already circulated. Hard to verify what the consensus is, but at least to me the consensus view seems to be: very high volatility and low/moderate market return. More simply put, you might as well just hold a diversified currency portfolio until things tank, since no serious correction has taken place in many months. But apparently there exists a super bond bubble, too. And then, consensus views in different segments might be wrong. How confusing? What to do?
Well, it would help if we knew the future. So, what will happen? I don't know. Neither do you. This thought process validates the continued holding of a key asset: gold. So, the first one: keep some gold in the portfolio. I expect gold's bubble to only grow in my life time, which I presume to last for many decades. I expect frustrated investors to add more gold, and those who do not care about gold do not matter for gold's price. Even though the ultimate goal of my investment is consumption and donation, and subsequent tangible and intangible comforts, it still makes sense to simply hold and only add some assets thanks to the concept of collateral financing.
The reasons for anticipated high volatility seem valid. Since 2008, which was the year of catastrophe and a fresh new start, even if we only count the well-published ones, the list of sources of 'black swan' scenarios has grown so long that it is not possible to pay full attention to all of them at this point of time. Does this mean that 'unthinkables' are slowly being eliminated, since (by definition) we are not supposed to be able to identify any unthinkables, while there are only so many things that can happen in a limited time span? Probably not. The ability to see shit's flying to the fan is different from catching the flying shit. It's often more difficult to catch than to see. Moreover, many institutions have taken variety of innovative paths to failure in history, so we shall not assume that what's known are taken care of by someone else, if you cannot take care of it by yourself. Who is willing to knowingly risk shit exploding in front of your face, anyway? So, we should expect high volatility. (Wow, constructively argued, indeed... I apologize.)
Best portfolio should be able to endure anything and thrive. But if there were two portfolios that are differently suited for different scenarios, one should be chosen. Even if a portfolio with lower return is argued to have taken lower 'risk,' the resulting return will still make the investors less happy than otherwise. Also, although rare, if two different portfolios yield exactly the same results, the efforts put into making one more is wasted. So, it is correct to think that there is no one best portfolio, but there is need for only one for each scenario. Accordingly, it makes sense for investors to map out different key scenarios along with contingency plans.
So, what if one of these well-published tail scenarios plays out in 2015? And if not? What if the world is exposed to a true tail risk or two? (How about an earthquake in Silicon Valley?)
I can't list here what I plan on doing in each case, because I think much faster than I speak or write, and so it'll be too convoluted and I won't do a good job. Also, the market reaction to events tends to be simplistic yet unpredictable. Unpredictable, because investors do whatever they want to do. It does not really matter what analysts think is logical and valid, at any point of time. Market sentiment and how powerful forces behave determine the direction and magnitude of fluctuation of the market. That said, if I have any medium to long term plan, it should only be a rough guide for myself rather than a detailed script. Detailed execution plans would only be available shortly before the action takes place.
In 2015, I continue to pay particular attention to the oil prices. Within the equity universe, I shall slowly shift my focus from the beneficiaries of low oil price to those of high oil price. I expect oil to overshoot both downward and upward, so this strategy should enable me to outperform the market, by the time it is completed. Also, I keep my bullish stance on Chinese consumers, as I believe that humans help themselves, especially when a stable systemic platform allows them to make positive changes. I tend to think that the power of liquidity is still underestimated by bears, and expect the US market to stretch its valuation even in 2016. While the US's valuation is higher than others', I think it is rightly so, even as I start from the assumption that market is always inefficient, just at different degrees. Any occasional shocks are likely to be absorbed by the liquidity, and the US's military dominance will help significantly in this regard. Even the Fed's tightening will not be enough to limit the power of liquidity, because of the market sentiment's inertia and the Fed's likely lateness. I am worried that the speed of transition from negative to low to high inflation would be too fast for anyone, including myself, and I am still thinking what to do about this. I am so far behind in doing my own homework for myself, because I did not manage to estimate/ quantify how much wealth actually evaporated in 2008 and how much excess liquidity currently exists. Will never be done at this pace. Sian.
Hm, I think the old way was a better way to write.