(This commentary is a little longer than usual, but I consider it very important for those interested in how Frontier thinks about investing.)
There is a tremendous amount being written on a number of what I consider to be short term or “trader” issues these days, and all days for that matter, so let me use a few of these issues to help you understand how these things do and do not influence the Frontier investment process.
One of the most talked about issues these days is the Fed’s recently announced monetary stimulus package, dubbed QE2. Economists roundly disparage the $600 billion stimulus as either unnecessary, ineffective, economically damaging, or any combination of the above, and governments around the world are angry about it because of what it does to relative exchange rates and their own plans for export-led growth. On the other side of the argument is Fed Chairman Ben Bernanke, the Obama administration, and the US markets themselves (demonstrated by strong moves upward prior to and around the announcement) arguing that deflation is the bigger concern and that this stimulus is absolutely necessary to keep deflation at bay and to help support employment. While it does disadvantage other exchange rates for the time being, Bernanke argues that that is an unfortunate side-effect, not the target of the policy, and that these foreign markets would be disadvantaged even more by US deflation.
Around this issue, traders have to decide many things across the various asset classes in their portfolios. Should they increase or decrease exposure to US equities based on their view of QE2 being helpful or harmful to our economy, respectively? What to do about their foreign equity exposure – does a favorable US economy cause problems for all others and how do currency fluctuations figure in? The current environment could be a significant boon or bust for emerging economies so will assets flee the US market for these rapidly growing areas or are we expecting emerging markets to experience major headwinds when significant pricing pressure in commodities reverberates throughout the developing world? How should they play bonds since interest rates will have to go up at some point but for now rates are depressingly low at the short end of the yield curve? Being long commodities seems like a sure thing given all the inflation we’re expecting, but what if growth does slow in emerging markets and demand for commodities also slows? And what is the best way to play commodities? So many of the futures markets are in contango right now, do commodities futures make any sense and how do we invest in them directly if that is our choice?
Now figure in the other issues of the day. Just to name a few: real estate bubbles in China; sovereign debt concerns in Greece, Ireland, Spain, Portugal, Italy, and possibly a few others; municipal bond defaults across the US; the likelihood of significant political battles in the US over unemployment insurance, tax rates, health care, discretionary spending, entitlements, and many others over the next two years. And that’s only at the macro level without even considering individual sectors or companies.
At any point in time there are hundreds, if not thousands, of variables to factor in to any single trade, and every decision has an effect on all others. Getting those decisions right on a regular basis is a ridiculously impossible task, yet that is the game most investors play either directly or indirectly. If they aren’t doing it themselves as a day trader, they are paying some else to trade for them. Most commonly investors pay some else to pay someone else to trade for them by hiring a broker or perhaps a “wealth manager” to pick other money managers to actively trade in various markets. At Frontier, paying someone to pay someone to engage in an impossible task is perfectly nonsensical.
That is not to say the proper course is to ignore all of these issues, market weight a portfolio of various asset classes and forget about it. It is important to stay on top of all the previously mentioned issues because they create the mosaic that drives the long-term evolution of the global economy and therefore the global markets. Understanding today’s developments helps us gain a sense of https://buycbdproducts.com things might be five or ten years from now, and seeing how things change week to week and month to month helps us either confirm or deny the long-term theses around which we do actually build our portfolios.
And since we do use historical relationships between asset classes to inform today’s portfolio construction, the issues of the day help us determine how accurate those historical relationships continue to be or whether they will or won’t hold down the road. For example, understanding what is driving growth and creating risk in today’s emerging markets helps us think about the relationship between the emerging and developed markets over the last ten and twenty years as we try to think about that relationship today and what we expect it to be ten and twenty years forward.
The bottom line is that all information matters, but what is crucial is how we use that information when making investment decisions and building portfolios to weather the longer term. I would argue that most investors, whether individual or professional, put too much significance on the day-to-day and let it crowd out their thinking on the far more important longer term. For those who recognize this, they open themselves up to a new frontier of investing. One in which day to day anxieties over the multitude of variables affecting their portfolio are significantly reduced (they never go away completely, nor should they), the cost of portfolio management goes down considerably, and the performance of their portfolio is likely to go up as the risks remain largely the same but the cost drag facing most portfolios is no longer there. And, to the extent that the long-term decisions for their portfolio become clearer and result in better positioning, portfolio growth over time could be significantly better than those portfolios without the proper perspective. But it all depends on that one crucial component…perspective.