I have developed a specialty niche that utilizes alternative investments which include commodity based assets managed by trend following specialists. Unlike traditional money managers that are dependent on a rising market for sustained positive returns, these specialists utilize their training, technology, and expertise to seek positive returns during rising and declining markets.
“When the consequences of a particular outcome would be extremely destructive, one has to hedge, regardless of one’s estimate of the probabilities and no one can know the probabilities with certainty.”
Since the second quarter of 2002 I have been convinced that the 18-year bull market was over in 2000 and that a new bear market had begun. Historically, this meant that the stock market had experienced flat or negative returns anywhere from a few years to as many as 26 years (1929-1946). The implications of this possibility were, and are, enormous and very damaging for investor’s portfolios - particularly for retirees.
Recognizing that bear markets are noted for long periods of undulating and disappointing performance required me to reconfigure portfolios accordingly. The problem for investors is they typically do not want to accept the notion that bear markets are as normal as bull markets and that they can last much longer than they either want them to or can afford.
The problem with bear markets is that they tend to fall much faster than they rise and usually do so when the public either does not believe it or won’t accept it. To illustrate the risk involved in ignoring bear market strength and duration, I began to utilize a quote from famed mathematician Blaise Pascal which is stated above.
It is my opinion that the concepts of performance cycles, risk and volatility are understated by popular theories and that clients who are endlessly waiting for the market to “get better” are missing opportunities to achieve positive performance while the markets are volatile. There are alternatives to investing only in stocks or bonds. These alternatives include investments that are hedged against the possibility of market reversals or, more importantly, are non-correlated from the market where their returns are derived in investments different from stocks and bonds. A frequent objection to these strategies are a fear of “missing the market” when it goes back up. This thought process presumes that will become favorable within a reasonable amount of time and remain that way.
John Maynard Kaynes once stated that “markets can remain illogical longer than you can remain solvent”. I concur with that logic and believe bear markets require a different course of action. The risk of investing in bull or bear markets is the same: When you purchase a stock, three things can happen and two of them are bad (they either go up, stay the same or go down).
In a bull market, strategy and skill can offset the disadvantage. In bear markets, the odds are worse and evidence supports that opinion. The good news is that there are investment disciplines that allow the money manager to make money when the investment goes up in value or goes down. They are available to qualified investors and offer the opportunity to obtain profits while markets are trending up and down.
This trend following style of investing leads me to introduce my second favorite quote taken from Captain Woodrow Call in the western classic Lonesome Dove:
“It’s better to have it and not need it than it is to need it and not have it.”
Sometimes we have to look outside the (style) box to move forward. My procedure of providing investment services is to identify and explain investment risks to clients and then implement the best money management services available to us. It is a dynamic, not static, process and offers the investor a greater array of solutions to investing in a historically very challenging environment.