Great insights from Ray Dalio on where he sees the market going in the next 2 years. I highly recommend this video.
The bottom line is when investing you really don’t care a whole lot what people think that have no or little money in the market. Yes, they may hold a number of convictions about the movement of the market as a whole or a particular commodity. Yet, if they’re not managing large sums of money or espousing the opinions of those people, then you should not all their opinions dictate your market perception.
Look towards seasoned investors for thoughts on if the market is over or under bought. They might not get it right on the dot, but you have a much better chance of getting some insightful information from those that have been and are in the trenches of the investing world.
The market isn’t a democracy. If you start hearing me espousing predictions on where the market will end at the time we reach X date, then I hope I’m telling you my source. Otherwise, you probably shouldn’t put much weight behind my crystal ball prediction.
Will Landers, managing director for Latin America at BlackRock, which has $10.2bn under management in the region, is overweight Brazil and has been building positions as others pull out.
“The government is showing strong resolve and everything is moving in the right direction,” Landers told beyondbrics on Thursday. “But Brazilians are sceptical by nature. And the top-down call right now is that it’s time to move into developed markets.”…READ MORE.
My Take: What BlackRock is doing is investing, not trading. As you hear in the article, they are looking at Brazil from a multi-year perspective, not a short term perspective. They know their strategy and their projections. This allows them to keep their cool and not run at the sign of a slight sift. Pullbacks are a natural part of a growing market. Unexpected events will occur and some people will take profits and move to other areas. If you believe in a long-term growth story, then stick with that country, industry, sector or stock. Just because the market doesn’t move up when you want it to doesn’t mean you’re wrong; it might only be a small piece of a much larger picture.
I’m of a similar opinion with regards to Brazil. Yes, political concerns are there and will remain, but I do not believe we’re going to see a 2nd Hugo Chavez or other command and control dictator take power there. With more development and wealth their country should become more stable and more attractive to investors across the globe.
Consumers will continue to get caught up in gale-force winds that are cutting into their spending — just as they’re starting to feel some level of comfort about job security and financial health…READ MORE.
My Take: Read the sentence above again. If you can anticipate inflation in the 7 areas listed in the article, then you potentially can buffer the harsh consequences through well positioned investments.
For example, in 2007-2008 we saw energy prices sky rocket (remember the cost of a gallon of gas?). Yet, it didn’t have to be all bad for you the consumer. If you acted soon enough you could have bought positioned in energy producing or service related companies. Their stock prices rose because they were providing more valuable products and services (in terms of $).
Part of being a successful investor is ensuring that you’re not having to spend all your money to maintain your way of life. You do not want to be in a position where inflationary pressures are consuming all the money you planned to be able to invest.
If you’re bound and determined to beat the market, you need to have an edge. The pertinent question then becomes, “Where do I have an edge?” rather than “How can I beat the market?” If you answer the former correctly the latter is likely to follow.
Beating the market is not easy. Many professional fund managers attempt the feat each year and fail. To consistently beat the market you need to have knowledge and an understanding that sets you apart from the crowd. This does not mean that you must be a market guru or have inside knowledge, but it does mean you need to have some uncommon knowledge.
If you’re serious about beating the market and willing to take on a substantial amount of additional risk, here is my advice:
- Reflect on what industries, products, services, new technology you know better than most people. (By most people I mean most informed/knowledgeable people in society; people in jail, on drugs, drunk, in mental institutions, or simply out of touch do not count.)
- Look for what knowledgeable people within a certain industries or sectors are saying about the companies you think are going to grow substantially in the future. How do these opinions compare with your opinions?
- Research. Find good sources of information and use them to help determine where good investments reside. Look at the source overtime to see if he/she has a good track record of accurately predicting the future (I wouldn’t consult a palm reader in this situation, but that’s just me.)
- If you’re hearing that X trend is picking up momentum and X, Y and Z major companies stand to benefit from the trend, look for smaller companies that will benefit as well.
- Smaller companies sometimes are not monitored as well as larger companies, which means they have a greater chance of being not fully understood. This leads to valuations being out-of-line, which can serve as your window of investing opportunity.
- Do not over-diversify. Diversification is about safety in numbers. If you’re going to steal the show (significantly outperform the market), you need to select your few all-stars and let them ride.
- Do not be overly trigger-happy. This goes for both buying and selling. If a stock moves up quickly that you want to buy, do not feel that you must buy now or you will miss your opportunity forever. If you own a stock and it moves up significantly, do not be overly anxious to sell the stock.
Again, if you want to beat the market you need an edge. Without an edge you should strive to match whatever it is that your market consists of (S&P 500, Dow, BRIC Index, a small cap index…). Taking on additional risk without additional information is a dangerous game.
Thinking of making an investment in a business? If so, it’s wise to consider what products and/or lines of service the business maintains. Do these lines fit well with its core competency (what it does/knows best)? When you find that the answer is “no”, then a yellow or red flag should pop-up in your mind.
A business that ventures into other products or services that do not sync-up with their main line of business can be a dangerous distraction. With limited resources in materials, money and time, a business must have a clear justification for delving into an area that they aren’t experts in.
In the video example, the dairy has a revenue stream from natural gas production. This is not something their business is built to do, but it turns out that their footprint (physical location) is on accessible natural gas reserves. In their case, a 3rd party has done the development and is responsible for the distribution of gas. Therefore, they’re collecting money, but not having not worry about operations. This is a case where an unreleased business venture is a clear positive for the future profitability of this business.
Many other businesses that venture into areas that are outside their core competnency are not as lucky as the dairy in our example above. Often you will see companies lose sight of their main purpose and goal. Through other business ideas they become distracted and use precious resources on an area they aren’t fit to succeed in and often weaken their position where they do have an advantage.
It pays to have good management/ownership that has a strong sense of purpose and mission. Without this necessary focus, it’s not very difficult for a good business to lose its way and compromise itself in an environment where competitors are lurking around every corner.
Increasing interest rates & how to best position your portfolio
Many investors foresee an increase in the Fed’s short-term borrowing rate as a negative force against rising stock prices. Increasing interest rates increase the reward investors receive from “risk-free” investments and therefore cause risk to be more expensive (figuratively speaking).
Dividend paying stocks have been noted as a tool to help position your portfolio against adverse effects the an increase in interest rates could have on the market, but is this the best method? One fact investors should be aware of is that dividends will look less attractive as interest rates increase. Annual Dividend Yield – Annual Risk Free Yield = the percentage premium you expect to earn from the dividend yield alone on a stock/fund. As the annual risk free rate increases the premium is less and less (assuming the dividend yield is actually greater than the risk-free yield).
More to come…Some other methods of better positioning your portfolio for an environment where interest rates are on the rise.