Sunday, January 3, 2016

What I'm Buying As We Enter The New Year

Discussions like this are extremely dangerous for the casual reader, but it is the question people want to have answered most often. The human mind is built to find answers to questions as quickly as possible, therefore, when most people read about investment topics they want to find out what they should be investing in today and move on with their life.

With that in mind the most obvious disclaimer is this is what I am doing, and therefore it most likely does not apply to your specific investment strategy. In order to get to the answer to "what should I should be buying today?", a person should figure out what their investing goals are, risk tolerances, time horizon, etc. and then work backwards.

If you are planning on retiring in 6 months and you need to live off your investments next year in order to survive, your investment approach should be completely different from someone who is planning on working and adding to their portfolio for 40 more years.

I am someone that is expecting/hoping to work for 30 more years or longer (I hope I still have the ability and passion to work at 100). My personal investment strategy is to buy assets that fit the following requirements:

1. Strong long term fundamentals
2. Recently experienced a (hopefully large) decline in price
3. Sentiment surrounding the asset is terrible

What is the benefit of investing in this type of strategy? 

- It is the one I believe works the best over long term investment horizons based on the thousands of hours I have studied market history.

What is the problem with this type of investing?

- Human psychology causes people to make investment decisions based on the exact opposite reasons I just described. Humans naturally move in herds whether consciously or subconsciously. It is too stressful or even impossible psychologically to hold or purchase investments that have declined in value.

- Due to the momentous nature of financial markets today (due to reasons beyond the scope of this discussion) asset prices tend to stay in motion in the direction they are moving. In other words, assets that become cheap and hated can get far cheaper and far more hated than a rational market observer would believe possible. The same applies on the other side of the spectrum (and usually even more so); assets that have become expensive and loved can become far more expensive and loved than a rational market observer would believe possible. Even if an investor knows they are buying an asset that is fundamentally strong, cheap and hated; it is almost impossible for them to continue buying or holding that type of asset during a decline. They "give up" and move money back with the herd in an rising overpriced asset class.

While some of the asset classes I have purchased (and discussed purchasing) on this site over the past few years found a bottom and experienced dramatic rises, far more of the assets I have been purchasing have been falling and continue to fall. For some reason, maybe because I've dedicated my life over the last decade to studying the financial markets, this does not bother me at all. It excites me.

Back in mid 2011 there was almost nothing I could find around the world that would elicit a purchase. I was selling positions of strength and almost exclusively accumulating US dollar cash. Today we live in a world completely different full of investment opportunity (for me personally). For example:

After a few years of declining in value (from 2009 ish to mid 2011 ish), the U.S. dollar has been strengthening against almost every currency in the world (including precious metals) for over four years running. On the opposite end of the spectrum emerging market currencies, bonds, and stocks surged in value heading into mid 2011 and they have been steadily falling (and in some cases collapsing) since. Emerging markets are now considered a toxic investment landscape and money is rapidly flooding away from their shores.

I believe emerging markets will provide the greatest opportunities for economic growth over the next 30 years (and as I mentioned I don't plan on selling assets before then). Since their assets have been beaten down and they are hated beyond almost any measure, it is a perfect environment today for my investment capital. I am purchasing stocks, bonds and currencies within emerging markets countries as investors panic and run for the exits. Will these assets continue to decline in value during 2016? I sure hope so. I will be there to purchase more.

If there is an investment region of the world more hated than emerging markets, it would be commodities. Many of the commodity indices are trading near prices last seen in the mid 1980's. Investors are confident energy, food, water and precious metals are heading somewhere close to zero and will stay there for eternity. There are fundamental reasons why these commodities will be needed in the future, their prices have collapsed and sentiment is at historic lows. Will these assets continue to decline in value during 2016? I sure hope so. I will be there to purchase more.

In summary, as we enter the new year I am purchasing investments in emerging markets and commodities. I'm not saying I hold 100% of my portfolio in these asset classes, I am only discussing where I am adding to positions right now.

We will spend a tremendous amount of time this year discussing the areas around the world I feel are the most dangerous for investors to be adding to positions (I still hold a U.S. dollar position), but here is a quick snap shot of those areas of concerns:

- U.S. dollar
- Most global stock markets
- Most global bond markets
- Most global real estate markets

Happy New Year!

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