For anyone disciplined in investment valuation and probability assessments, the past 5 years have been taxing. Since 2012 when Q-ever euphoria re-inflated animal spirits in world markets, those with the least care and concern for capital have looked like they have the most investment ‘talent’ just as they did in 2005-07 and 1997-2000 and every other speculative frenzy since markets began.
But the road to financial strength is a long and winding road, and this cycle’s performance race is far from over. Fools and their money will once more be parted, this time will be no different. Each of us must chose how we wish to use market and business cycles, no one gets it all their way throughout. Durable capital requires:
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- understanding that every investment trend is a cycle
- choosing how we wish to navigate each, and
- the mental strength to stick our chosen course for however long completion takes.
We can either look dumb for missing out now or look suicidal and reckless for staying in, later. We pick our poison: one feels bad for a bit, one is bad with long lasting harm. See: Hot stock rally tests patience of value investors:
While value investing appears to have lost some luster now as the so-called FAANG stocks— Facebook Inc., Amazon, Apple Inc., Netflix and Google parent Alphabet Inc. —have surged in value, the most steadfast devotees to value-style investing are often the ones that benefit most in market downturns.
The market’s attraction to highflying stocks punished value investors in a similar fashion in the late 1990s during the dot-com bubble. Growth stocks beat their value peers toward the end of two major bull markets that peaked in 2000 and 2007, before large market selloffs reversed the trend, putting value stocks ahead.
Some investors today worry that the longer growth stocks are viewed as nearly invincible, the worse the likely pullback will ultimately be.
History assures us that value’s bear market will end in a spring of high yield return opportunities with much lower risk, while those riding high on hopium today will give back 10 plus years of what they thought was ‘growth’ in a matter of months. Dreams will be dashed, retirement plans capsized and lawsuits plentiful. Very few will exit this cycle with capital in tact and the cash to buy as others are liquidating in panic.
This extra-long indiscriminate buying cycle has convinced many that value discipline and managers are worthless. But as Jared Dillion wrote last month:
But do you think it’s more likely that: a) a bunch of smart people became stupid, or b) that the environment suddenly changed? If you’re one of those smart people, do you completely abandon your process and just buy FANGS? Or do you stick with what has worked your entire career in the likelihood that it will one day work again? This time is (probably) not different.
Unlike central bankers, individuals in the real world with real savings to lose, don’t get to work in theory. There are no do-overs or endless lines of credit, no one will bail us out from bad choices. We don’t get to chose the cycles we live through, only our own responses to them. Every financial decision we make is real time in our finite lifespans and we must govern ourselves accordingly.
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