With 2014 wrapped up a new year started many people are inclined to ask questions – it sort of reminds me of the old game “20 Questions”. All sorts of questions get asked at this time of year – often I wish I had all the answers; but when looking forward I soon realize that no matter how much experience anyone has in the market or investing professions no one has the answers to how a particular investment portfolio or market will behave – we just don’t know the future!
Sometimes people may think they have right answers, only to realize that they answered the wrong question. I remember once in college, sitting in the testing center, taking a timed exam getting to the bottom of the Scantron answer sheet (where you fill in the bubbles with pencil and the machine grades the test in seconds) and realizing I had miss placed one answer, thus making all the subsequent answers wrong. That would have been an epic failure!
Fast forward thirty years and I still am amazed at the answers people give to questions asked. Maybe we really need to look at the questions better. I have learned that asking questions helps to crystallize your thinking or another person’s thinking.
“The art and science of asking questions is the source of all knowledge” Thomas Berger
“A focus on questions recognized the ambiguity associated with economics, markets and investing – there are rarely “specifically” right answers, but more commonly, there are “generally” right answers. Investment answers may materialize abruptly, but often answers occur on a timeframe independent of consensus. Thoughtful questions point us generally in the right investment direction. In our view, “generally right” is a worthy, sustainable, long-term objective. On the other hand, “specifically right” investing is rarely repeatable and too often leads an investor onto unrealistic and unattainable market paths. We also recognize that sometimes we don’t know what we don’t know, so the “right” questions may not even be on our radar.”[1]
Recently we have seen Germany’s central bank lower rates on its 10 year bonds to 50 basis points and Japan has lowered their rates to 25 basis points, while the US is around 2.0 percent. This begs the question how long can these governments keep rates so low? At some point won’t Germany and Japan have to raise rates somewhat closer to the US? Or will we have to lower our rates? After all, we could theoretically, borrow money from Japan and loan it out in the US and make 1.75 percent.
In the past six months oil prices have been cut in half. I was in a meeting listening to an oil analyst during the summer where he expected oil to hit $140+ per barrel before the end of the year. Perhaps he was not asking the right questions? Are the geopolitical assumptions we have been using the past five to ten years going to hold out for the next five years? What could cause a shift in the geopolitical environment that would cause a drop in the price of oil? Will the current oil prices remain low? What impact does a stronger dollar have on current commodity prices? Are derivatives going to be impacted by the low oil prices? Will the U.S. be able to continue producing oil from shale as prices continue to fall?
With all that is going on in the world the United States looks pretty good, but how long will that last? China is boasting that their economy is now larger than that of the U.S. Is the U.S. economy really picking up steam or are we still sputtering along? While our political leaders battle things out in Washington, leaving us in a solid gridlock (thank goodness), is the market advancing because of real value or because of central bank manipulation? The gridlock in many ways has kept lots of laws from being passed, thus creating new regulations, which have given us a bit of a break from the constant barrage of endless new regulations we must follow. I believe this has been a blessing to the economy and businesses in general.
Human nature can always make the markets rise and fall by how we react to news and information and mostly by our own emotions. We are susceptible to irrational behavior and emotional responses to “what just happened.”
All of these things can impact investments, markets and returns. However successful investing requires that we not only question what is going on in the markets, but also ask ourselves in an effort to seek greater understanding. Have we selected an investment approach that makes sense, is disciplined, and sustainable? Next – am I willing to follow this approach over the long term? Giving up is a challenge we all struggle with in the face of up or down markets or account values. Up, because we should have more of the return, we think “the strategy just isn’t working right”; down, “because the account should never go down, where is the downside protection!”
This is why long term investing is so difficult, sometimes it is better to just forget about it and let someone else worry about it. “Investment success is most likely to be achieved when finding the appropriate combination of diversified market risk and tactical strategy risk.”[2]
As an advisory firm, we worry plenty about our clients’ investment portfolio; we appreciate working with you and remain devoted to your overall long-term success. We are happy to answer questions about what is important to you. We wish y’all the greatest success in 2015.
If you want some basic questions to ask yourself about how you invest, check out our short investor profile - click the button below to get a copy.
[1] John Lunt, Lunt Capital Management, Inc.
[2] John Lunt, Lunt Capital Management, Inc.
