“You diversify.  You have a whole bunch of uncorrelated investment bets.

And then you understand it (the situation) as best you can.”

— Ray Dalio

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I had a long talk with an advisor client this week about portfolio construction, the economy, the debt cycle and what to do.  I’m sure you are having similar conversations with your clients.  In the “what you can do” category, I shared with my friend that the best advice, at least to me, is summarized in Ray Dalio’s quote above.

On Monday, I was on Fox Business Network’s “Countdown to the Closing Bell” with Liz Claman.  As I walked onto the set, there was a video of a ballplayer rounding third base who starts to stumble as he crosses home plate and then flops to the ground.  The comical flop was replayed a few times as Liz announced, “Stay tuned, our next guest thinks the market may be headed for a flop.”  Ugh, I thought to myself.  Here is the short interview:

[drizzle]

I remember my college soccer coach, Walter Bahr, hammering into us the idea that soccer is a game of opposites.  Fake left to move right.  If the flow is moving this way, look to see what has opened up over there.  Perhaps that is why the great Sir John Templeton’s sage words continue to ring in my head today.  I met him early in my career and he told me, and millions since:

“The secret to my success is that I buy when everyone else is selling and I sell when everyone else is buying.  …Do that and you will be one of the best brokers in the business.”

Of course, he warned, it is far easier said than done.  Same with soccer.  What seems logical and easy is really not so easy to execute.

I met Sir John at the Union League in Philadelphia in 1985.  Thinking back to that time, investors had just entered the greatest of all bull markets.  Except none of us knew it.

Few investors were interested in stocks.  Mutual funds charged 6% commissions and it cost about 2% to get into and 2% to get out of a stock trade.  Buy-and-hold was an unpopular concept.  Then, investors put money in real estate and gold.

Front of mind was the 1966 to 1982 long-term bear market.  Front of mind was Paul Volker, inflation and interest rates in the mid-teens.  Everyone knew you had to be a stock trader if you were to have any success in the equity markets.  I sold a lot of municipal bonds.  I remember my manager making me sell the Merrill Lynch Basic Value Fund.  A rough “cold call” to make.  Frankly, I could have/should have put my clients into a 30-year zero coupon Treasury bond yielding 16% and called it a day.

Today, the common belief is that low-fee passive investing is the way to go.  Today, money is flooding into bond funds and ETFs at record pace to earn record low yields.  We humans are herd beings.  Investing is a game of opposites.  It’s time to fake left and move right.

Think too about this: In the early 1970s everyone flocked to the “Nifty Fifty” stocks (the 50 popular large-cap stocks on the NYSE).  It was tech in the late 1990s.  Remember how displaced the value managers felt from 1995 to 2000?  It was the place to be from 2000 to 2010.  It is fixed income and passive investing today.  Hot for now.  The trend will change.

If you didn’t get a chance to read last week’s OMR, “Are We at the End of a Long-Term Debt Cycle?” you can find it here.  I’m pretty critical about what I write, but this is one piece I wrote that I felt good about when I reread it the next morning.  And the number of positive comments, always appreciated, were higher than normal (please know I appreciate the negative ones as well).

Show that OMR to your clients, if you feel it’s appropriate.  The idea is not to go to a place of fear, the idea is to remind them of the current state, defend diversification (when they call you upset their diversified portfolio isn’t beating the S&P) and prepare them for opportunity.

To that end, last Monday I also did an interview with TheStreet’s Gregg Greenberg.  I shared a few stock ideas – four stocks on my personal best ideas shopping list.  Not a recommendation for you to buy or sell any security!  It is my intention to buy them in my personal account when the next recession creates the next great buying opportunity.

The Fed, the global central bankers and our elected officials may be able to hold hands and fix this global debt mess, but I have my doubts.  Big doubts.  With valuations at the second highest level in history and bond yields near 5,000-year lows, risk is high.  The asymmetric risk is to the downside.

My two cents: Diversify to trend following based trading strategies, make sure they have the ability to raise cash, consider managed futures based mutual funds, tactically trade your fixed income and hedge the equity exposure you plan on holding for years to come.

Optimism, fear, optimism, fear.  Don’t bite on the fear and be aware and watch out for excessive optimism.  Remember that investing is a game of opposites.  We all survived the 2008 crisis, but many investors got run over.  And it took years just to get back to even.  We will all survive the next one, but I suspect it will be equally painful, financially, if you’re not properly positioned when the recession hits.

A unique challenge this time is that 75 percent of the money in the self-directed hands of pre-retirees and retirees by the year 2020, that’s a big number and this age demographic, which includes me, just doesn’t have the time to overcome the next -50% for stocks and -10% to -30% or more for bond funds (should rates and default levels rise).  Much of that money that’s been herding into passive buy-and-hold will likely herd back out, if past crisis history is any guide, at the wrong time.  But don’t see fear.  See opportunity.  Stay patient and prepared.

Grab a coffee.  I hope you find this week’s post helpful.  The last two OMR’s have talked about the long-term debt.  I believe it is the significant headwind we face.  As CMG’s Brian Schreiner said to me this week, “The math doesn’t allow for a soft landing.”  Read on and please let me know what you think.

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Included in this week’s On My Radar:

  • The Math Doesn’t Allow for a Soft Landing
  • Three Charts of Interest
  • Trade Signals – Little Movement in Equity Market, Equity Trend Remains Bullish, Sentiment Favorable (10-26-2016)

The Math Doesn’t Allow for a Soft Landing

My colleague Brian Schreiner reminded me of the testimony Laurence Kotlikoff, Professor of Economics at Boston University, gave to the Senate Budget Committee in early 2015. You’ll find the link below.  Brian’s comment to me is that the math doesn’t allow for a soft landing.  I continue to believe it will take a crisis to get the political engine

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