Where Are We? – Emotional Capital City
Posted on Saturday, March 17th, 2018
Markets are about cycles. We see them repeat over time. The question now is where are we in the cycle? One important reason why we need to be aware of cycles is because investing is an emotional roller coaster. If we jump out of the market too soon we risk under performance and client angst. If we are too late clients may feel over invested and lack the courage to buy when others are selling. It is then that we run the risk of permanent capital loss. Our job as financial advisors is really about contingency planning, trying to anticipate what happens next and how to respond. An underappreciated part of investment management is how we, as advisors, react to our client’s emotional response. Our ability to respond to market cycles is directly influenced by where our clients are emotionally – their emotional capital.
We have spent a good deal of time lately talking to clients about emotional capital. When cycles reach a more mature stage it is prudent to sell some winners and build a cash (and emotional) cushion with which to buy future bargains. That way when market losses come you are keenly aware that you prepared for this moment and this money was set aside to buy assets at bargain prices. If you are holding too much in the way of assets when they begin to fall you will be tempted to start selling. It is then that you will be managing your money from an emotional point of view. We all know that losses hurt far more than gains feel good. Much as Joseph stored the grain in Egypt during the 7 years of plenty it is time to store some cash to prepare emotionally for when the lean times arrive. Leaving some gains on the table will make you a better investor over the long haul.
Now let Pharaoh look for a man discerning and wise, and set him over the land of Egypt. 34“Let Pharaoh take action to appoint overseers in charge of the land, and let him exact a fifth of the produce of the land of Egypt in the seven years of abundance. 35“Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. 36“Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine.” -Genesis 41:34
We caution that we are not seeing anything imminent. We just know that trees don’t grow to the sky and bull markets end. We know that we are in the midst of one of the longest bull markets on record influenced by historical central bank largesse. We don’t know when but we are due for leaner years. We need to store some cash and build emotional capital. The people in the industry whose opinions we respect are advocating caution. Hopefully, it will only be a minor disruption but it is imperative that one is not “all in” when it arrives and we are emotionally prepared to purchase bargains. A recession is the big worry and that still seems some time away.
The market is still struggling to supplant 2800 on the S&P 500. Bond yields are struggling with rising above 3% on the 10 year. Gold cannot seem to break out and hold above $1350. The yield curve is flattening. The key takeaway here is that the pressure is building. We are at a crossroads. Bonds. Commodities and equities. We are all waiting.
The bears pushed back this week but we give a slight edge here to the bulls. Stocks are slightly oversold and bonds slightly overbought. The big option expiration came and went without incident. Next week, hopefully, will tell us more but we could just see the tension build. The bulls still need to get over the 2850 gap to really convince us but if they do things will progress quickly. Be on your toes.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.