Good to have you back posting - I have missed your posts recently, holding me in check.
Have you considered, to which degree your original post in this topic is based on your own actual leverage?
Hi John, In so far as I am biased and prepared for a downturn, I suppose. I was prepared by the summer of 2007 the last time. I got caught off guard over a year later when I thought the worst had past and did some stupid investments on the way down. Washington Mutual comes to mind as one.
With inflows like what we are seeing into an overvalued stock market, things IMO are getting dangerous. Part of the problem is outside of oil cos. I am not seeing any value. And I am tentative with oil because it will get pulled down in a market crash, recession scenario.
People have forgotten, as usual, how fast and how badly things can turn. As usual I am probably early but in this case it doesn't really matter. I am not losing any opportunity cost. Snapping up a bunch of blue chips in a downturn when their yields go above five or six percent is worth the wait.
I'm firmly in the camp that any sort of congregation of investors in any one strategy will result in some sort of large correction. That correction in ETF's will simply take a much longer time to come to fruition, because you are talking about such a large overvaluation in the broad market...not simply in one sector. Seth Klarman talked about this two years ago in his annual letter.
Can anyone tell me that the economic cycles for the stock market have not compressed with algorithmic trading, ETF computer trading and huge interventions in monetary policy? We've seen this accelerate in the last 15-20 years.
As someone else said on here, Buffett and Bogle are correct long-term about index investing...but that is completely based on investors ignoring all emotion and simply holding or averaging into an index fund over the long-term. But that is not how portfolio managers or the average investor behaves, and certainly not how computers will behave, if their programming directs them to push a sell order with no triggers to stop a cascading market.
I remember an encounter with a certain investment manager and his professor in Omaha, and we had a discussion on the markets. I said at that time I was concerned about systemic risk and agreed with an article that Larry Sarbit wrote about how even money markets would break the dollar level in such an event. It was why Sarbit was getting out of many financial investments, including Fannie Mae and Freddie Mac.
The professor turned to his protege and asked him the question I posed. The protege thought about it for a moment and said that the likelihood of such an event occurring would be small because the treasury market was so large that a liquidity event was unlikely to occur to the money market industry on any given day. The professor agreed and there you have it! Two great intellects that clearly indicated how such an event could not occur.
Well a few years later in 2008, money market funds for the first time in their entire history of some 70 years, finally fell through the one dollar mark. There is a reason why this Buffett quote is always on the inside cover of our annual report:
“…Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.
Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues…”