Volatility Paradox vs Market Returns
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Buffett once said: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.” What can we learn from the latest memo from him ( you may read the full memo here )?
In his latest memo, he touched on the topic of “market volatility” and “Pro-Risk behaviour”. According to him, although most of the valuations seem to point to high and overvalue scenario in major stock markets the “unacceptability of low returns on cash & Treasuries / Bonds couple with the attitude of “ FOMO “, continue to push the market indexes to higher high. Every week, we could hear or see the news of the market reaching a new record high, again and again.
A rising tide lifts all the boats, everyone seems happy with their portfolio’s performance (including me .. 😃 ). This “feel good “ factor may unintentionally push investors to take on more risk and expect the “ exceptional “ returns on investment to be a “new norm “ and their asset value to continue go higher and higher.
Below few sentences excerpted from the latest memo by Howard Marks :
· - Most valuation parameters are either the richest ever (Buffett ratio )of stock market capitalization to GDP, price-to-sales ratio, the VIX, bond yields, private equity transaction multiples, real estate capitalization ratios) or among the highest in history (p/e ratios, Shiller cycle-adjusted p/e ratio). In the past, levels like these were followed by downturns. Thus a decision to invest today has to rely on the belief that “it’s different this time.”
· Prospective returns in the vast majority of asset classes are some of the lowest in history.
· - The need of investors to wring out good returns in this “low-return world” is causing them to engage in what I call pro-risk behaviour.
- It appears many investment decisions are being made today on the basis of relative return, the unacceptability of the returns on cash and Treasurys, the belief that the overpriced market may have further to go, and FOMO. That is, they’re not being based on absolute returns or the fairness of price relative to intrinsic value.
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Some analysts or research has pointed out that low volatility might be bad for market and investors should be concerned about the unintended behaviour from low volatility. Low volatility will lead to higher volatility in the future when investors become complacent about the risk or the so-called "Volatility Paradox". ( more reading on Volatility Paradox: Here )
More articles about market volatility and market returns :
Volatility near record lows a bad omen for stock returns (here ) from Reuters
What to Make of a Low-Volatility, Low-Correlation Market (here ) from twosigma.com
As the late economist, Hyman Minsky observed, stability creates its own instability.
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But, Hey! we need a bubble before the crisis , please push the STI towards 4000 points and $30 for DBS, $20 for Keppel Corp ( as some predicted ) etc…
6 years later after this analyst made a prediction in 2012: Hahaha
If you are in the early stage of wealth accumulation, the crisis is good for you to buy stocks during GSS ( Great Singapore Sales ). We grow in times of trouble (crisis ) and inexperience ( good and bad ), all these things help to mould us to be a successful investor in the long run as quoted from Franklin D. Roosevelt "a smooth sea never made a skilled sailor."
But it’s easier said than done, (just recalled the most recent experience) how many will dare to buy when DBS dropped to $13.58 and Keppel Corp to $5.02 in early 2016.
Quote Of The Day:
“Volatility is something economists will never understand because it reflects changing stories; it’s whatever occupies people’s attention,” by Robert Shiller