There’s been a lot of talk of markets being very expensive lately. This includes US stock markets, crypto, international stocks, venture capital, and many other markets. With everything being expensive, many have come to the natural inclination that a downturn must be imminent. The thought has certainly crossed my mind recently while working on our theme-based stock portfolio.
At some point, there will be a correction to all of these expensive markets. There’s no doubt about that. The problem comes in trying to guess when that may be, how far up it still has to go, and how far down it may tumble. Without knowing those three, there’s really no way to gauge when to enter or exit an investment. Of course, it’s not exactly easy to guess.
Some extremely successful investment managers like Jeremy Grantham and Howard Marks seem to think the markets are extremely risky, and have changed their portfolios accordingly. Many others, including Buffett, believe it’s foolish to try to time general market cycles, citing the risk in giving up potential huge gains while awaiting the impending crash.
We lean more towards the second line of thought, believing that the right investment can withstand negative shocks, at least to a better extent than the market as a whole, and that trying to guess what the market as a whole will do is a futile exercise. This thought process applies to our investments in public markets, as well as our private alternative investments.
Relating to the stock market, the style of ignoring market conditions works best when selecting individual companies rather than widespread market index funds. The more finite the selection (industry etf, specific stock), the greater the potential for either superior or inferior performance compared to the market as a whole, in the event of a widespread downturn.
As we work to build our theme-based portfolio, we are specifically looking for companies we believe provide room for significant upside while having a perceived lower downside compared to the market as a whole.
10 things investors can expect in 2018 – Ben Carlson
When things don’t make any sense – Ben Carlson
Stock Trends for 2018 – Chris Perruna
Bracing Yourself for a Possible Near-Term Melt-Up – Jeremy Grantham
How to Survive a Melt Up – Ben Carlson