The markets are like a Mohammed Ali/Joe Frazier boxing match—trading punch after punch, first one, then the other. The bulls reel, then rebound. The bears are routed, only to bounce back. The reasons favoring each side are almost identical: inflation, or not. Supply chain break down, or not. China implosion, or resiliency. Stock prices inflated or TINA. Who’s to say? Covid rampant or contained.
The fact is that these are all rearview mirror issues in the puzzle of investment positioning. The good thing about the past is that it can’t be changed. No one has long made, and kept, a fortune by out timing the market. Warren Buffet doesn’t try. Howard Marks doesn’t. The famed speculator Jesse Livermore tried to, but ended up committing suicide after losing his wealth for a fourth time.
What the really bright thoughtful investor can do is to assess the likely economic future and position his or her portfolio accordingly.
That future is comparatively clear: the U.S. and global economies are going to improve. Inflation is going to be high, even uncomfortably high. Interest rates will go up, but not to historically average levels anytime soon. Business will be good. So there is an opportunity ahead to make money even if the aged bull market falls to its knees. The economic backdrop is not going to be a catastrophe.
Specifically, what sort of a portfolio will accomplish that?
• 20-30% cash, cash in lieu of any significant amount of longer dated bonds. The income from either high grade or high yield debt is apt to be negated by price erosion as rates rise.
• 10% to 20% in bank and bank-like stocks. Net interest margins are apt to increase, boosting the earnings and prices of the financial sector.
• 10% to 20% in profitable growing companies that may have fundamental developments ahead that would push their stock prices up in even desultory markets. LAUR, BSIG and SERA are diverse examples of those special situations. (Disclaimer: I own the above, at prices generally around their current ones).
• The other 30% to 60% should be in traditional broad based stock indexes, as everyone should keep a diversified equity core, no matter what.
• For the more speculatively oriented, 5% to 10% could be long cryptocurrencies and related vehicles. GBTC, ETHE and COIN would be a representative mix. Cryptos have fundamental appeal as a hedge against dollar debasement and as a focus for the GenZ and beyond retail traders.
That’s a cocktail that might taste very good in the period ahead. Position your portfolio; don’t try to time the market.
George Ball is chief executive officer of Sanders Morris Harris in Houston.