Over 30-odd years in this business, I’ve learned that you have to look at where the excesses are, because that’s where you’re going to get hurt. And the excess that I’ve seen in the last couple of years is focused entirely on caution. People are excessively cautious.
Our sales team tells me that investors are asking about U.S. equities again.
For the life of me I can’t think of what people would be interested in other than U.S. equities right now. Seriously, as an asset class it stands out as being so highly attractive relative to anything else.
Risk can be slotted into two categories: capital risk and opportunity risk. Capital risk is simply the risk of losing money. Opportunity risk is the risk associated with not making money when the opportunity presents itself. And I believe this is what’s happening right now.
Around 2000, everybody was acutely focused on opportunity risk. They didn’t want to miss the next dot-com company. And, of course, they blew themselves out of the water. Now, investors don’t want to miss the next downtick in bonds. I believe it’s gone way too far in the opposite direction.
Since 2000, investors have shown an overwhelming lack of confidence in stock markets, housing markets, government policy and regulators.
This is the backdrop that we are working with now and the “no confidence” vote from investors is largely due to the negative experiences that many have had over the last decade. What caused all this negativity?
- Tech bust 2000
- Commodity craze/bust
- Mortgage debacle/ government policy failure
- Government intrusiveness
- Dividend, capital gains tax debacle
- Proliferation of instruments of questionable merit
There have been a lot of reasons not to invest, and as a result people haven’t – not in equities anyway. After the tech bust in 2000, many investors bought real estate in a frenzy. And then, of course, they bought bonds.
We need to rethink the so-called “new normal”. Excessive optimism in the 90s wasn’t rewarded and neither will today’s excessive pessimism. People crowding into bonds are taking on more risk than they realize. A small upward movement in interest rates will cause capital loss.
In 2000, people ignored risk. Many believed it was difficult to lose money. The concept of capital preservation disappeared. Now, too many investors are hyper-focused on capital preservation and uninterested in returns.
So now the opportunity risk, the risk of missing the move up, is real. And that’s the period when wealth accumulation occurs.