We Keep Dancing

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
– Chuck Prince

The intent of this WJNotes is to let you know we continue to dance while the music is playing, but unlike Mr. Prince we have taken numerous steps to protect portfolios when the music stops. The music was loud and blaring during the first half of 2017 with most major indexes up strongly, especially stocks outside the US. International emerging stocks were up 18.7% and International developed stocks were up 15.3%. At home, US large stocks and US small stocks were up 9.2% and 4.8%, respectively. US Bonds did well also with taxable bonds up 2.3% and tax free bonds up 3.6%. In fact, for the year we could not find a single loser in any of the stock indexes we follow. Mind you, we are 9 years into an aging US bull market not in the beginning of new bull market so the results were surprising.

As value investors, this type of performance is a bit disorienting. Fortunately, we comfort ourselves by recognizing that expensive markets can become much more expensive, just as inexpensive markets can become much cheaper. Our job is to take note of where we are and adjust portfolios accordingly. To that end, we remain positioned conservatively by holding multiple managers that don’t rely on a strong stock market to make money (i.e. they can bet against stocks). We also use several managers that reduce stock exposure when future returns appear lower (like right now). Collectively we refer to these managers as “alternatives”. When the music stops, the alternatives in portfolios will cushion on the way down and act as dry powder to increase our risk exposure in preparation for the rebound.

Having been through multiple bull markets in our 20 year history, we caution clients against acting as if strong returns will persist forever. When returns are above expectations, this is not a signal to buy a new car, a new boat, or take an extra vacation. Rather it should be a time to “bank” your gains in anticipation of tougher times ahead. Unfortunately, in past bull markets we have seen clients spend all their excess gains and be completely unprepared for the inevitable downturn. Keep in mind, high returns mean lower returns in the future, guaranteed. We work with all our clients to try and put investment performance in the context of achieving your long-term goals. If you would like to discuss with us, please let us know.

By the way, Mr. Prince was fired as CEO of Citigroup after the music stopped and Citigroup was stuck with billions in bad mortgages and had to be bailed out by the Government.