Category Risk

Risk vs Reward

Warren Buffett once told us "the stock market is a device for transferring money from the impatient to the patient”. Which one are you? And while it sounds cliché, the power of patience is real. We need patience for two things: (i) allow our existing investments to work over time; and also (b) if buying, waiting for prices to come to us (eliminating FOMO). For example, some investors may have felt left out the past three months (I certainly did) - as 'hot' momentum stocks like Nvidia, Netflix, Meta and others surged. Fundamentals were not front of mind - where investors thought nothing of paying 40x plus earnings. The momentum trade had taken hold. But as we know - things inevitably revert to the mean.

Mean Reversion: Index Risks & the ‘M7’

In the game of asset speculation – mean reversion suggests that over time an asset will eventually return to its average price if it drifts or spikes too far from that average level. If applied, it can often help you avoid paying too much. My thinking is the S&P 500 has now drifted too far from the longer-term mean. History has always told us that inevitably prices will mean revert. This post explores the potential risks to investors if simply choosing to passively invest via the benchmark Index. Look no further than the so-called "Mag 7" - which constitute more than a 30% weight.

Will Earnings Deliver on the Hype?

Q4 2023 earnings are starting to hit the tape. From mine, if the market is to continue rallying - it's less about inflation and the Fed - it's whether corporate America will deliver on 12% earnings growth in 2024. Coming into earning's season - my view 12% felt ambitious - given the slowing economy and relative health of the consumer. This post talks more to the concentration in the market - the relative influence from NVDA - and why diversification will be key this year.

Did We Just Pull 2024’s Gains Forward?

Stocks were already partying into the Fed meeting (up ~12% over 6 weeks) - however when Powell provided his December update on monetary policy - he simply turned up the music. Risk was on. So here's my question - with stocks up an incredible 15% in just 7 weeks - how much of next year's potential gains have been pulled forward? Is it riskier now to buy stocks than it was a few weeks ago? To be clear, stocks are likely to add to their gains before the year is done - however we are now trading close to 20x next years earnings. That's not a bargain.

Why I’m Not Betting on a Soft Landing

With the Fed seemingly on pause and bond yields sharply off their highs - markets are optimistic. Equities have surged the past few weeks - up around 17.6% year-to-date. The S&P 500 added 10% in just 3 weeks! The narrative (as far as I can tell) is we're headed for "soft landing". But can we be so sure? Past experience suggests a "hard landing" is the more likely outcome. And absent other evidence, when the Fed hikes this much (and especially this fast) - we should expect one.

Fed Warns, Stocks Shrug

"We still have a long way to go" - that was the not-so subtle warning from Jay Powell this week. After what many felt was a slightly less hawkish Fed Chair last week - sparking an equity rally - Powell attempted to adjust his tone at an IMF event. Was he successful? That's hard to say - as equities seemed to shrug off any warning from the Fed - surging ahead to be up 15% year-to-date. Here's my question: are investors being too sanguine about what's still unknown?

The Battle-lines are Drawn

Here's today's question: do you think 18.3x forward earnings is a good risk/reward bet? For me, the answer is no. And I say this because investors have a very compelling alternative. We don't need to look any further than bond yields. For example, the 12-month US treasury yield offers investors 5.45%

Now less about the Fed… It’s about Bond Yields

In ~11 years writing this blog - I've never seen a move in bond markets like the past 24 months. 10-year yields traded below 0.5% not that long ago. Money was next to free. Now that instrument will return 4.25% risk free. The 12-month T-Bill is a very attractive 5.34%. But it's not just in the US - it's global. Germany, Australia, Japan and the UK... yields on major fixed-income benchmarks are moving higher. In the UK, the 10-year gilt is yielding its most in 15 years. For me, where the market goes is more about bond yields than what the Fed do next...

“Big Short” Investor Goes Short… But Not on Housing

45 days after the end of every quarter - Wall Street's top fund managers are required to report their most recent holdings. These filings are known as 13Fs - and they reveal a lot about where the 'smart' money is going. Whilst there was nothing too out of the ordinary - a particular trade from Big Short investor - Michael Burry - caught my eye. He took a $1.6B short bet against the SPY and QQQ (in aggregate) using Put Options. Let's explore why he could have made that bet.... and he's not alone

Stocks Treading Water for a Good Reason

Stocks cannot get out of neutral. If anything, they appear to be going into reverse. Makes sense... they ripped~ 30% higher in 9 short months. But the risks are increasing as prices rise. This post looks at "equity risk premium". In short, investors are not being adequately compensated for the risk being taken in stocks (at current valuations) against the risk free return from Treasuries.