As the more ardent FF readers know, Michelle has turned our home into a halfway house for morally casual strays & misfits. The latest addition is a one-eyed tabby (left in pic) who was so sickly as a kitten she lost her left eye to infection. Bringing her in was an experiment as we didn’t quite know how Lucy (right) would react to sharing her digs. Thinking Lucy might need some companionship and Katie a big sister, the image above doesn’t do justice for their mutual affinity. But outside of shared feline DNA, they might as well be Felix and Oscar[i].
Physically, the snapshot says it all: Lucy is a striking, husky Calico while Katie is a long, dark Tiger. Katie is an athletic jumper; Lucy blocks & tackles. Katie is the girlfriend that eats whatever she wants while Lucy is the Marie Osmond before picture. Even though Katie technically qualifies me for handicap parking, she’d get mad if I exploited it. Though she might not always stick her landings, her malady is an after-thought. Her one eye blinks are pretty cute.
Their personalities counter each other fittingly. Katie is a fearless mongrel while Lucy is a fussy princess. Katie will immediately approach you; Lucy will scamper into my golf shirts. Katie spends her days enjoying the birds, bunnies and squirrels while Lucy suffers over CNN. Katie is carefree; Lucy wears a mask.
They have different financial approaches. Katie, being just 8 months old, realizes she has a long investment horizon. She doesn’t worry about the day to day market gyrations. She’s optimistic and opportunistic. Lucy, just shy of 3, frets about everything. She watches too much CNBC and then binge eats. Katie was buying March 23rd while Lucy was selling.
While not quite life coach status, I have learned a fair amount from Katie as my investment mindset can sometimes mirror Lucy’s. Katie is that fun friend ordering a round of shots while splitting 8s and doubling down. She was buying airline and restaurant stocks while the world was going the way of Covid. She doesn’t overthink things – she lives within the 2 standard deviations of life -which is 95% of all outcomes. Lucy is not so cavalier – she fears the outlier tail risk which is the other 5% - low probability, high impact events. Below is a Stats 101 refresher.
Katie’s tender age likely insulates her from uncertainty. She’s not interested in the wannabe Cassandras[ii] that traffic in fear. She basically sticks with what she knows: buying low expensed, high quality assets and filtering out all the noise. Lucy, on the other hand, doesn’t like ambiguity. While none of us really do, she is especially susceptible to false prophets – particularly those offering free dinners at Biaggis and Hall’s. Her appetite has already cost her a neck.
To be fair to Lucy, her perspective is pretty common. Like many of us, she looks to media soothsayers for predictions. They’re experts, right? And don’t we all want to know the future? She lets current events (recency bias) muddle her judgement. Feelings & emotions begin to cloud the facts. She allows the herd mentality to seep into her psyche as a form of confirmation bias. Just the other day, she yanked on my pantleg and pointed out this unemployment graph.
Pretty powerful stuff. She then pulled out her yarn satchel and showed me lofty stock market valuations, the projected federal deficit, distressed yield curve, historic bankruptcies, highly leveraged corporations, the ballooning Federal Reserve balance sheet all while watching protests in our driveway. I noted the demonstrators were just hungry cats but point taken. I then asked her if all this was rearview looking?
Katie, not to be upstaged, remarked at how markets are forward discounting mechanisms, zero percent interest rates, strong dollar, high bearish sentiment, a historically good June employment report & a flattening of the curve. Then she dropped this doozy at my feet: off-the-chart personal savings - over $6 trillion now stuffed in money markets.
Now I was thoroughly confused. Both of them had convincingly data mined to support their contrary views. Since we know nothing about the future, we have no choice but to extrapolate past patterns, stats and events. The best forecasters somehow put it all in perspective: sift the fat, humbly choose a probability & prepare to be wrong. Famed investor Howard Marks said it astutely: “You can’t predict, you can prepare”.
The Fed’s determination to reflate the markets (Modern Monetary Theory) further convolutes an investment strategy. History says don’t fight ‘em (95% of outcomes) but what happens if/when the other 5% finally happens and they fail? I guess I’m going to continue doing what I usually do: spread my bets, hold some cash & lift Lucy with my legs. It won’t make for newsworthy headlines or tasty seminars but it’s also not a recipe for regret or a sore back.
Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends. Houlihan Asset Management. Wealth Counseling/Asset Management. Copyright 2020