Posts Tagged Equity Markets

Again, as we end this difficult month, it’s important that markets are at least stable or flat. Markets are digesting a lot of news and assessing whether they are ready for another steady run up.

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Equinimity or composure are rare things in the investors world of fear and greed. Lex just wrote an interesting ed op piece titled “Irrational Equinimity” and he laments the current confidence and composure of investors riding this run in the markets. Institutional investors are overweight in equities, expecting 20% earnings growth this year with a sharp upside move seen as a greater risk than a sharp move down. Given the trade frictions, sovereign debt default risks and unprecedented public debt, he finds it irrational. His conclusion is, “Such equanimity is not totally irrational. Macroeconomic data in the past month have run ahead of expectations. When the herd trampling forward is this bullish, it is not a good idea to stand in its way. But it would be easier to feel comfortable with current share price levels if investors showed a little more unease. Complacency on this scale suggests risk of a correction.”

This hits the nail on the head for our investors because we are heavy in cash. Our equity positions have been strong enough to drag the whole portfolio along and it is no fun to sit on the sidelines while everyone else is partying. It is my advice that we err on the side of prudence at this moment.  There is still risk out there because there are still several potent macroeconomic realities that remain unresolved.  It will also be my advice to buy if a correction does indeed arrive. We are not traders or market timers, but investors.   We will keep picking up shares (like munching on an apple) every month moderately if 2010 consistently unfolds to become a  sublime year for equity markets all over the world, especially emerging markets. However, we stay cash strong.

Now

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I believe metaphors are an excellent way to change one’s thinking. Equity investors should not think about “buying stocks” in terms of the fear that the price will go down. There are twenty stable stockmarkets in the world . The rest are truly “frontier” markets. Those twenty markets look like nurseries with hundreds of potted plants filled with seeds, green shoots, and small plants. They are watered, cared for, and some are protected by subsidies or industrial policy. Some seeds are in hot greenhouses being surgically cultivated for because they represent such a powerful interest, like national security.

The equities are seeds. They represent something real like a seed, ownership. In modern history, even when the nursery was devastated there was always a perennial energy to that special patch, those conservatories, those stockmarkets. They come back. Investors must have patience and have planned with capital for good days and bad in order to be successful. Having said that, sometimes there are big old sturdy trees hanging over the nursery. They are so overhead that one could enter through the nursery gate and not even notice it as his eyes are captured by all the different colors, shapes and sizes in the pots. Those trees are drawing water from roots that are meters beneath the nursery. They aren’t being watered by caretakers or small investors. It’s as if they are like benign juggernauts at the center of it all. In the world of markets those trees are the Blue Chips in Emerging Markets. Their market capitalization is far greater and they dominate percentages of their respective markets. Their world view is beyond the nursery. These trees can weather storms and survive…and prosper.

Surprisingly easy to miss

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Equity Investors