Greed, Fear: plus and minus of the market and thinking on risk Warren Buffet style
A friend asked me about the state of the markets. But, I don’t give advice. That way lies ruin. There’s also complicated regulation. But, you are a professional. The professional system is mostly a relative institutional one. Their view of risk is very different to yours.
Hang on. What’s my view of risk? You’ve spoken to a financial adviser. Yeah, but they are all rubbish. It doesn’t make sense speaking about yields and downsides and tolerance for me.
OK. I can help you think about risk for you. It’s always personal. You are delaying consumption for something today, to allow for greater consumption later (see Warren Buffet 2018 letter). Your risk is you won’t have that consumption later. Thus ensues a conversation over retirement, work, education, children and exactly what we might want to consume later.
Under this view, there’s no point “risking” stuff needlessly, if you have mostly what you want.
Also (again see Buffet, as usual his whole letter worth reading) it made a “purportedly risk-free long-term bond in 2012 a far riskier investment than in stocks” back then for a 2017 pay off. In this case a low return product was a bigger risk for not achieving the goal they wanted.
Finally we got round to markets and we chatted about the range of views being held.
A Fear --- Greed continuum is always in play.
On the fear side:
-Valuation metrics (longer term valuation metrics remain elevated such as Market Cap / GDP and CAPE; see Hussman and here)
-Geopolitics (eg North Korea, Trade wars)
-Length of positive returns in stock market
-Interest rates rising
-Black swans, unknown unknowns
-No catalyst needed for stock market downturns
-Low long term prospective returns from stocks forecast by some
On the greed side:
-Positive economic signals
-positive job signals
-US tax reform
-Trump pro-business rhetoric
-Signs of increased capital investments
-low chance of negative catalysts (eg recession)
Various reasonable experts have different views. Look them up (picture). But remember to focus on what your personal view of risk to achieving your own goals.
One of the best Munger speeches on how to think about a mental model of inversion can be found here.
If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on Principles.
Cross fertilise. Read about the autistic mind here.
More thoughts: My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.