It’s time to be prudent as the end of the boom draws closer
The increasing flow of money into riskier ‘investments’ is making us ever more cautious. After all, every boom must come to an end. So what does holding high levels of cash mean? In the short term, it may mean we lag some of our peers. But, longer term, we are convinced it will prove a very sound approach.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Vincent
:
Hello Roger
Interestingly Roger the CAPE/VIX ratio in the US (asset valuation levels vs how fearful people are about high valuations) is also now at an all time high and has historically been a leading indicator of sharp corrections.
http://www.europac.com/commentaries/calm_storm
Phil Drummond
:
Hi Roger,
Thanks for the sanguine article.. To put the article in context, would you mind defining what level of cash the fund is running st present?
wade.number
:
Hi Roger
A while ago you test piloted AI in picking value stocks. I was wondering how is the AI performing?
Roger Montgomery
:
We aren’t tracking the performance of that model any longer because our MAPF is the embodiment of the machine lerning model but with a quality overlay added. Quality has obviously detracted in the last 12-18 months as investors dumped quality in favour of cyclical growth.
Brett Edgerton
:
Roger, Six to 9 months ago I regularly read/heard analysts reporting high cash levels held by institutions – which tended to argue for a “buy the dip” situation for any pull back – but recently I heard Scott Philips (?) mentioning that this situation had turned around (many fundies found it too painful holding cash :) ) and cash levels in the US are now near record lows at less than 5%… Is that correct and can you provide any data?
I recall a media report comparing the run-up to last October to 1987 – with overlaid graphs of the Dow/S&P 500 inferring similarities… Since then more record highs and record low volatility…
Many thanks
Andre
:
Roger
What is clear is that the human race is hopeless at predicting the future. Anyone who has seen ‘Back to the Future’ part 2 will attest to this. The domestic economy appears to have a steady feel to it. Anchored by steady house price growth and accelerating population growth, unless a major unforeseen issue fractures this confidence, I think it will continue on its uneventful way. I will temper this comment by adding that the Chinese debt issue is possibly larger than we could ever have imagined.
andrew ronan
:
It seems the end is close now with the orange haired swan firmly in place as the fall guy and with the proud as punch Donald openly claiming ownership of the record Stockmarket highs etc, there could be no better time to pull the plug on the printing presses at the Fed Reserve and the other printing houses around the world and at the same time avoid getting the blame for all the redicules asset bubbles and the massive over capacity throughout the global economy and the inevitable pain that the great unwinding will bring to all, yes I think the printing crew can quietly back away from their failed theory’s and distructive experiments now and avoid the pitchforks etc they will be aimed instead at orange swan who has blindly fallen into the trap. So the socialists will blame the capitalists with the help of the leftist media for the failure of their own unsustainable socialist spending sprees and massive over regulation etc and they will most probably get away with it. End result = rinse and repeat, but under no circumstances are we to learn a single thing from this insanity.
shambhu sharma
:
Thanks for nice article. Really appreciate you taking time to explain this in detail.
Jeremy
:
A little odd that you mention Twitter given it is down ~80% from 2014 levels and been flat for the last 18 or so months. I don’t think ETF’s have been a driver of Twitter or Tesla (though I won’t argue that Tesla may be overvalued) and obviously not the unlisted Uber. The ETF’s are driving the big, liquid, profitable, acronym tech stocks (A, A, F, G, M, N) that everyone has fallen in love with. These stocks are included in just about every ETF basket possible (growth, value, tech, sustainable, etc.). Because these stocks look less ‘risky’ (i.e. they are profitable, growing, and generally dominant), investors have begun to ignore price, and so now, although their businesses may be relatively low risk (for tech), their valuations are very high risk.
Roger Montgomery
:
Thanks Jeremy, You may be interested in the articles we wrote about ETFs https://rogermontgomery.com/tag/etf/ and https://rogermontgomery.com/why-you-should-steer-clear-of-etfs/
Chris
:
Roger, one thing that seems to be missing from this boom is the ‘wealth effect’; I can’t personally see any signs that people are buying more consumer discretionary things (new cars etc.) as a result of feeling ‘wealthier’ because their house / super / share portfolio has gone up in value.
Chris
:
and by that, I’m talking about ‘the average person in the street’, not the super wealthy, who have cash to spend on Hermes bags and Nike Trainers as collectibles.
I’m talking about the average bloke who gets involved in the party, purely because of “Fear of Missing Out” (FOMO)…these people are the ones to watch, because by then, you know it’s time to sell.
Jon E
:
I’ve been seeing this in real estate alot.
People getting in because they don’t want to miss out. haven’t been following this in other spheres though.
Guy Davis
:
Don’t you own two of the FANGs?!
Roger Montgomery
:
Hi Guy,
There’s a big difference between pointing out some of the risks for buyers at current levels and predicting share price direction – which we make no claim to be able to do consistently or acurately!
Chris
:
In other words, “if you already hold assets that were bought a long time ago at much more favourable valuations, and are expected to still be around in 10 years”, rather than selling them and crystallising a capital gain, it would be better to accumulate cash from other areas whilst still retaining them ?
Roger Montgomery
:
That is certainly a rational possibility.
Guy Davis
:
Yes, but you have quoted the Howard Marks memo in stating your case, but the same memo specifically calls out the FANGs as a source of dangerous speculation. Just seems ironic, they seem to be the epicentre of the “no price is to high” meme you are discussing, yet you own them.
Roger Montgomery
:
We do own them at the moment Guy. We (and Howard Marks) could be years too early. Value investors tend to be.
Richard Vidal
:
Hi Roger,
Is your alpha fund expected to benefit significantly from the expected eventual downturn in the markets?
I notice the funds performance against the benchmark RBA cash rate is pretty ugly to say the least
In light of the preceding commentary and using your own valuation principles would you rate the Alpha Fund as a very strong buy for the long term?….perhaps that’s where the value lies for all us value investors?
Your thoughts would be appreciated
Roger Montgomery
:
Hi Richard,
Lest we be seen to be making a recommendation we will refarian from telling you what to do. We can say that the performance of the Alpha fund relies on the difference in returns between a portfolio of high quality businesses and a portfolio of low quality businesses. In 2016 high quality significantly underperformed junk. For example between June and December 2016 BHP ralied more than 30% and REA fell 30%. Under those circumstances the Alpha Plus fund cannot hope to do well. We like to remind ourselves of Herb Steins quote: “If something cannot go on forever, it must stop”.