Bob was really getting uncomfortable, "Next thing you know you'll be long gold!" "Well, actually..." "No, I don't want to hear about it," Bob insisted. "OK," I said, "We'll skip gold for now."
"But speaking of gold, I've been reading a very interesting and provocative book by Marc Faber called Tomorrow's Gold; Asia's Age of Discovery. He's recorded tons of financial history from the early 19th century through the 1990s New Era. Reviewing all those cycles helps you realize that human nature doesn't change. Our cycles of greed and fear, optimism and pessimism, always exaggerate quantifiable business realities like profit and loss. Global capital keeps sloshing away from overpriced assets toward overlooked ones. If we think of the securities markets as rational, we'll never master them. The average modern portfolio manager accepts current pricing as "efficient" and spends his time trying to be sure he is diversified across all asset classes. In the 1990s this manager looked good whether he owned U.S. stocks or long-term bonds, because whether he knew it or not he was riding a wave of enthusiasm manifest in ever-rising P/Es and ever-falling interest rates.
"Today those waves are washing up on the shore. Capital is starting to flow away. We can keep standing on our surfboards wondering why we're not going anywhere, or we can paddle out into the deep in search of, if not the perfect wave, at least some very good rides."
Bob and I tussled playfully over the check, vowed to meet soon in New York, and I drove my friend back to his hotel to rest up for tomorrow's wedding ... and the next wave!
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.