Sunday, December 30, 2018

Navigating Turmoil and Opportunity in Markets

In life we find that periods of turmoil are often the periods of greatest growth and development.  Psychologically, turmoil shakes us up and challenges our assumptions.  That opens us to new experiences and major life changes.  My marriage (going on 35 years strong) came after a period of personal and career turmoil; those taught me what I needed in life.  Similarly, it was the sting of losses I took in markets in the early 1980s that led me to re-evaluate my trading and take a more promising and profitable quantitative direction.  From a spiritual perspective, our task is to find the opportunity in turmoil.

In financial markets, one manifestation of turmoil is volatility.  When we look historically, periods of high volatility have generally corresponded to longer-term opportunity for investors.  The hard part is weathering short-term gyrations in order to participate in that bigger picture.  Secular bear markets (and I am open to the thesis that we may have entered into one in the stock market; see this debt-cycle analysis from Ray Dalio) can last quite a while:  consider how long it took for the market to return to its 1929 and 1972 peaks, for example.  For that reason, the bulk of our family capital is tied up in safe fixed income instruments that can provide a 3+% annual yield during a period that could prove disinflationary and not too friendly to risk asset prices.

Still, it would be foolish to hide under the bed covers and ignore the possible opportunities that can arise from the recent period of volatility.  One site that does a great job of separating signal from noise is A Dash of Insight, which has an excellent post looking at the year ahead.  Jeff Miller makes the important point that today's turmoil provides an opportunity to invest in tomorrow's themes and strong companies; see his list of "timely ideas".  

Yet another valuable resource is the new book The Lifecycle Trade from Boboch; Donnelly; Krull; and Daill.  The authors study IPOs and super growth stocks to identify their common trajectories and ways in which traders and investors can participate in their growth.  The idea is that today's turmoil fertilizes the soil of growth for a new generation of market leaders and promising technologies.  Stocks and industries that maintain their upward paths even during bear market times are candidates for tomorrow's large opportunities.

So that is our challenge during periods of turmoil.  To win the game, we have to stay in the game.  That requires prudence.  But to truly win, we have to use turmoil to find opportunity.  That requires optimism, resilience, and vision.  A solid business plan addresses threats and opportunities...we may be entering a period replete with both.

Further Reading: