Author: Dan Plettner
Covestor models: Pure Short Opportunistic, MLP Direct Ownership, Taxable Income, Well-Intentioned Activism, Long/Short Opportunistic, Core
Is it time for the market to step back and digest the recent ascent, or time for investors to step up and realize the balance of risks remains skewed to the upside?
As I discussed last month, 2011 had a frustrating feel. The volatility and tendency for managers to be challenged in outperforming indices was noteworthy even in the presence of extraordinarily attractive valuations.
In 2012, the market has rewarded some already, and bewildered others. Those who have eschewed all but Treasuries and dividend growth stalwarts have significantly underperformed the rally.
There is a lesson: price matters. When securities are priced well, they tend to outperform for some period. But “when” tends to be the market’s painful tease. What we have been seeing is usually what the masses focus on in making investment decisions, rather than what logic objectively suggests should occur. Essentially, the masses are constantly focused on the rear-view mirror.
I feel great about my January, but more importantly about what I own. After all, whether the most recent move was up or down really has minimal relevance to what is priced well today and what objectively could be expected of future periods. The question to ask, I think, is “If I were a ground squirrel just awakened from hibernation, would I like valuations today?”
It’s a critical question for me because my thesis on the SunAmerica closed-end funds recently came to fruition (I’ve liquidated the now open-ended funds in my Well-Intentioned Activism model) leaving me capital to invest. I would today like valuations as a post-hibernation squirrel. The tremendous equity returns I expected for a 10 year period starting in January have scarcely started. The challenge is being a disciplined buyer in particular investment theses.
Notice in my analogy, I’m a ground squirrel. I’m most certainly not a bear and haven’t been bearish for a long time. Still, my objective expectations are always tempered by modesty, evident in my choice to blend my various styles.
