This morning Apple is trading at 90 bucks and change (after its 7-1 stock split a few weeks ago). Imagine that a little fairy came to you, whispered in your ear, and offered you the chance to buy it for, say, 10 bucks. Everything else exactly as it is today - sales and profit figures, anticipated next-quarter revenues, market share, product pipeline, book value, everything. Only difference is that you have a one-time opportunity to buy however many shares you want, at $10 per. What would you do?
Most of us would say "you betcha." Back up the truck. No brainer.
Now reverse things. Imagine that instead of 90 and change, Apple trades at $900 per share. Everything else the same. Are there any buyers?
Very doubtful.
Both prices are extreme to the point of being nonsensical, of course. My point only being that there is a price where most of us will buy, and most of us will sell.
The real, and broader, market is more challenging, of course, because we don't usually have such obvious extremes to guide our course. But the same premise applies. There are some market conditions which are conducive to future returns. And there are some market conditions which are not.
In the real world, determining that is very hard, of course. When to enter a market and when to exit is bound up in a host of factors, a great many of which are behavioral rather than economic. And so it is we end up with modern portfolio theory which circumvents the question altogether. Instead, it suggests as a solution that we stay invested all the time. That we remain in the markets, but with allocations that are uncorrelated. So when something is going down, something else is hopefully going up.
That works, after a fashion, of course.
And if that were all there were to it, I'd buy into it. I don't pretend that my emotional self is divorced from the picture when contemplating how to manage my portfolio.
Alas, I believe that there are unique and extenuating circumstances today that pose a grave threat to our financial health. Major economies today are more tightly interconnected than they have ever been. Keynesian solutions (with apologies to John Maynard, who I suspect would be aghast at some of the policies that today bear his name) are ascendent. And yet there is little economic traction that is resulting from those policies. Price discovery (through natural, organic interest rates) has been perverted. Which means that asset prices are distorted. The balance sheets of virtually all the central banks are a mess. The velocity of money has plummeted. And the zero bound of interest rates, everywhere, suggests that central banks have little left in the way of conventional monetary policy that they can apply.
Debt loads, everywhere, are at unsustainable levels. Sovereign debt, especially, is at a point where I do not believe it can be unwound without disruption.
There is a bigger game afoot, in other words, than what the S&P 500 will do next week, or next quarter. But it is a game in which the S&P 500 will likely be an early casualty.
I'm not one of those doom-and-gloom permabears who forever sees catastrophe around the corner. I spent most of my investing career fully invested in equities. All-in, as in 100%
I like investing in stocks more than anything else. I think, broadly, they are the best tool any of us have for building and maintaining wealth. Only, not right now.
