“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist.
They assume that something that was a good investment in the recent past is still a good investment.
Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

– Ray Dalio
Founder, Bridgewater Associates, LP

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“As I was waiting to be introduced, I got the latest headline from the North Korean government saying ‘a super preemptive strike will reduce the United States to ashes.’  So we have that to look forward to.”  Ian Bremmer said as he began his presentation yesterday afternoon at the iShares Multi-Asset Summit in New York City.  “… [T]hat to look forward to.”  The crowd laughed.  I was looking forward to his presentation and it didn’t disappoint.  He continued,

On the one hand, there is a level of absurdity to the headlines on geopolitics these days, on the other hand, if we really were to think about it, the uncertainty of the geopolitical environment for the market place is higher than any of us have experienced in our professional careers….  Never in my career before would I have stood in front of you and said I think the greatest uncertainty in the medium-term comes from the geopolitical side.

I would have said there’s a hot spot here, worry about this, here’s a headline you don’t need to worry about, that generally the macro geopolitical environment is pretty stable, it isn’t really going to affect the way you think about investing.  I can’t say that anymore.

Is the risk of an event 5%, 10% or more?  Bremmer said he didn’t know and said, “It isn’t 1%.”

mramorn / Pixabay

To say there is little geopolitical event risk would be naive.  The tremors appear to be everywhere.  At the same time President Trump was having dessert with Chinese President Xi Jinping at Mar-a-Lago in Palm Beach, he was bombing Syria.  Russia’s taken a Trump u-turn.  From North Korea to the French elections… Brexit, China, Turkey, Russia and Trump.  Ian gave us a tour around the world as he shared his insights.  It was thought-provoking.  It was important.

You’ll find a summary of my high level notes below.


Seek gain… manage risk.  Investing is a game of risk and risk management.  It’s about compound interest.  It’s about the Merciless Mathematics of Loss.  Today we find ourselves late in the business cycle and while the S&P 500 could most certainly gain another 20%, asset prices are not cheap, the business expansion cycle is aged, the system is leveraged up and the Fed has turned course.

To manage risk, absent no other process in place, the simple 200-day moving average stop-loss rule can help.  I’m trying my hardest to prepare my clients for the next great opportunity.  I recall the same in 1998 (I was early) and again in 2007 when I felt Freddie and Fannie might collapse and that no-doc mortgages and Wall Street-engineered, AAA-rated subprime mortgage junk was just that: junk.  I wrote a piece in December 2008, “It’s So Bad it’s Good.”  Problem is it got even worse, it was two months later before it got great.

In late February 2009, I crossed paths with a wealthy friend.  He was racing into a large wirehouse brokerage firm.  My friend was sure that his custodian was the next Lehman Brothers.  He was in a state of panic.  He was not alone, investors were in panic mode everywhere.  As margin debt unwound and selling accelerated, few buyers were found.  It was an outstanding buying opportunity, as we know today.  Valuations were cheap and the forward 10-year returns were signaling mid-teens like opportunity.  But few saw it that way.

I haven’t shared this with you before, but one of my great personal and professional failures was not being about to keep my father from panicking that same February in 2009.  It hurt him and it hurt me.  We were always close and that remained, but the sting lingered heavy.  A few days before he passed (April 19, 2011), I was laying with him in his hospital bed.  We had Starbucks coffees in hand and the Masters on TV.  Just the two of us huddled together as we sipped and watched.  Out of nowhere he reached to me, held my face and said, “I am so sorry, please forgive me, I was scared.”  I thought this long ago healed but it hadn’t. We hugged and we cried.  I am grateful for that moment.

Dad was retired.  We had a large percentage of his money invested in our high yield trend following strategy (a moderate risk strategy).  Those monies were risk managed and did well.  The smaller allocations to a diversified mix of private hedge funds declined.  That was the scary stuff.  He sold everything at the low and missed not only the HY re-entry trade but the recovery of the markets.  An advisor friend of his put him in a fixed annuity.  Ugh.  It still stings.

Risk management sets in place the ability to seize great opportunity.  But absent mental preparation and game plan, there is no opportunity.

“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.” – Jeremy Grantham, GMO

“There is a simple, although not easy, alternative [to forecasting]. … Buy when an asset is cheap, and sell when an asset gets expensive. … Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.” – James Montier, GMO

“Rule No. 1: Most things will prove to be cyclical.  Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.” – Howard Marks, Oaktree Capital Management

A special hat tip to Lance Roberts for sharing the quotes in a recent MarketWatch piece. 

Buy when cheap and sell when expensive.  Hard to do.  Takes patience.  If you’re 30 and have many years to invest, put it in a smart beta equity ETF, use the 200-day stop-loss exit and entry rule and keep saving and adding to your position.  I advised my daughter, Brie, to follow dad’s Ned Davis Research CMG U.S. Large Cap Long/Flat indicator (posted each week in Trade Signals) to trade her firm’s large-cap equity ETF when it launches.  Until then, use a low fee S&P 500 ETF or smart beta ETF.  She can afford to take that targeted risk.  If you are a pre-retiree or retired, well, you (and me) just don’t have the same runway.  Risk manage your long-term equity exposure and add more diversification.  Utilize trading strategies that diversify to asset classes.  Risk manage everything.

As I wrote in a Trade Signals post a few weeks ago, Ride, Captain Ride Upon Your Mystery Ship… The equity market trend continues to lean bullish.  Let the trend be your friend, but know that forward return expectations are low and

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