Finance blog



June 29, 2021

"Uh-oh", you probably thought when you spotted this title. Aristotle. Maybe Kurt is going to get all technical and drag out some more Greek letters! Not to worry.

It has seemed pretty hard to come up with super-exciting topics lately, because in all honesty, the market feels very boring. The stock market continues to slowly grind higher in a remarkable "melt up" fashion. Just to put that in context, we reached a low on March 23rd of last year as the pandemic fear really kicked into full gear. The low point for the S&P 500 was 2191.86. Remember those days? Many of us were locked up tight in our homes - non-essential commerce was at a virtual standstill. Today, the market is in full recovery mode, near record highs. The close on Friday, June 25th was 4280.70…that is a 95+% return over a 15-month period. Perhaps it's not so boring, after all?

Meanwhile, the Treasury market has also quietly but significantly changed as well.

In March of last year, the 10-year Treasury was at 75 basis points. Money fleeing the equity markets was looking for anything that seemed safe and really drove down treasury yields. Do you remember the crazy? Front-month oil futures actually went negative for a bit there. Now, fifteen months down the road, the 10-year is standing at 1.50%, which still seems awfully low to me, historically, but seems as though it is being accepted as the new normal. Maybe there is strength to that notion - after all, the Feds have shown a willingness to bolster markets at will, coming in and buying billions of bonds at the drop of a hat. The third really significant change since March 2020 has occurred in the spread market (consisting of the debt products not directly or quasi-guaranteed by the U.S. Government). As the pandemic started to take root last year, these markets widened dramatically as market participants started to fear that many corporations, local governments, and the like might lose much of their revenues during an enforced shut down of many business activities.

It is funny how quickly we (or at least I) have forgotten just how volatile (and recent) those times were.

So, you may ask, how does Aristotle play into this? Fair question.

Aristotle famously defined courage as the midpoint between fear and confidence. To put a finer point on courage, he said that it is a willingness to accept personal risk in order to achieve a higher goal. I think courage defined in this manner is extremely important for portfolio managers right now.

As people who manage money, I think we might all agree that we are in dangerous waters right now. I have been discussing inflation and supply chain issues for the last several weeks, which I think threaten real danger. Rates historically are expected to rise in rapidly when the market fears near and present inflation, but that certainly hasn't materialized yet. Meanwhile, financial institutions are sitting on piles of cash earning essentially nothing at the Fed. Shareholder return expectations forces management teams to at least consider taking on risks that they may have never considered before.

Which brings me to my second - and connected - quote from Aristotle, "Fear of shame is noble."

How can we connect these two quotes in the world of investing? I think it's a pretty straight line. You should fear shame, in this context, failure, given that we are responsible for other people's money (I like to call it OPM). I see investors throwing their money at investments all the time these days in search of what promise at best only measly returns. These investors do not have a healthy fear of shame - often because there is no cost to them. However, I also see many people who have a healthy fear of investing right now, and yet are being courageous in the face of the adversity we all feel.

Per Aristotle, the only way they have courage in the face of fear is through confidence in their decision making. And this is where it comes full circle for me, because when I practice the discipline of examining my investment decisions across a variety of scenarios projected forward over time to count the money in each case, that is how I feel confident. It doesn't end there, though; I also need to be able to articulate and explain the "why" of decisions prior to making them. The prospective view of a decision might very well indicate a chance to "lose" to an alternative in some scenarios. Those possibilities should be freely discussed upfront. Sometimes the explanation of a potential for loss is the most important teaching moment you can create. After all, a healthy (and measured) fear of failure is critical to good decision making.

Never forget that combining courage and discipline never comes with a guarantee that you will always win. You won't. But if you often win, and you are very seldom surprised when you do not, confidence is built.

Never forget that combining courage and discipline never comes with a guarantee that you will always win. You won't. But if you often win, and you are very seldom surprised when you do not, confidence is built.

Frankly, not trying to sound too harsh, but I think many poor decisions are being made right now because there is too little fear. Is it possible there is too little accountability in the industry? It seems to me that so many financial institutions expect so little out of their investments that when they "fail," no one even notices. If there is no credit drama involved, too few even notice investment underperformance. So, many portfolio managers to take the path of least resistance and buy the crappy structures issued by federal agencies.

I'll close with one of my favorite quotes, from Dr. Samuel Johnson: "Integrity without knowledge is worthless and weak, but knowledge without integrity is dangerous and dreadful."

Just because someone is "honest" does not make them a great advisor. Similarly, just because someone is "smart" does not make them a great advisor or friend. At the end of the day, it is up to you to have the confidence (with a healthy measure of fear) to make good decisions. As your methodology proves reliable over time, your confidence, and your Aristotelian courage, will grow.

And you'll need it. There is a risk to sharing knowledge because it opens you to criticism and challenge. Courage can help you to articulate your decisions in a coherent way. Open and honest discussion of the risks of investments alternatives, including the conditions under which your decision might lose - because sometimes, it will.

Final, final thought: I am embarking on a quest to discover the best homemade salsa recipe…please shoot me yours!

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