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21 Oct Embracing Market Volatility – Can You Stomach 20% Annual Market Volatility? You should…

As we reflect on the 30th anniversary of the 1987 crash in the context of an 8-year bull market for stocks, it is worth highlighting that investing based on traditional measures of volatility, like the CBOE VIX index, are not always a good indicator of future market returns. There has been a lot of commentary about the VIX trading at low levels not seen since 2004 or the early 1990s. In previous periods these unusually low periods of volatility as measured by VIX, were in fact followed by very robust market returns. It is unclear if the same holds to be true for today’s market.
Perhaps a better way to look at market volatility in the equities’ market is to simply divide the high and the low of the market index (S&P500) annually. This year this difference is 13%. Since 1967 you get an average percentage of 21% on average since 1967. Jim Moltz, C.J. Lawrence’s Chairman and my mentor for the past 25 years, suggests that equity investors should be willing to stomach at least 20% annual volatility if they are allocating into stocks regardless of valuation or market timing. Are you ready for that?
It is interesting to note that since 1967 there were only 6 years where the percentage between high and low was above 30%, the most recent two events were in 2008 and 2009, 48% and 40%, before that in 2001 and 2002, 30% and 34%, and prior to that you have to go all the way back to 1980 when it was 30% and 1974 when it was 38%. These volatility spikes were often signaling to adverse macro conditions or recessions.
If you look to the chart above, when paired with CJL’s Rule of 20 (a measure of the market attractiveness based on adding the market P/E with CPI), market volatility stays in a predictably range between 10% and 30% and tells you very little about how attractive the market is, in other words, there is a low correlation between the market’s valuation and volatility even when accounting for inflation. This means that every investor should be willing to embrace at least 20% annual volatility if allocated into stocks. It is actually quite the norm!
Sources: High-Low data for S&P500 index from Standard & Poor’s handbook. Rule of 20 data from C.J. Lawrence.


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.


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BK 10/20/17

19 Oct “Finding The Optimal Balance – Lessons From a NYC Commuter”

Navigating these markets is much like my 30-minute bike commute to work every day through the streets of Manhattan (see video above in 6 min version). Every twist and turn is a split-second reassessment of risk versus reward. Your mind is constantly evaluating speed, risk, braking, volatility, potholes, shifting terrain and anticipating sudden obstacles either human or natural. The key here is to be highly alert and active. Activity is the only way to find the optimal balance.  It not only leads to much safer outcomes, but also leads to better health. In the end, you will arrive at your destination safely and it gives you the satisfaction that you are in charge of your journey.  These lessons apply directly to how I approach investing, which is the basis for successful long-term financial advice.

What do successful market practitioners need when they dive into these markets?

Well, it starts with the proper equipment and tools. My equipment of choice when I leave my apartment on the upper East-side of Manhattan is my Dahon-Mariner bike. I love this bike! It is compact, foldable, it has 8 speeds (just right!), it has a highly nimble but strong aluminum frame, and above all costs half of what some other higher end brands cost.  If your ‘tool’ for navigating these financial markets is a financial advisor follow these same principles: beware of high cost advisors, be suspicious of advisors pushing “passive” investing, find an advisor who is nimble and not too rigid when it comes to advice-giving. All advisors must demonstrate a deep proficiency in their tools of trade, but the good ones possess the intellectual honesty to know when they are wrong and change course when the facts have changed.

I launched “The Trusted Navigator” to share insights and observations on markets and investing, based on my 30-year experience as a banker, institutional portfolio manager and now advisor to private clients at C.J. Lawrence. Hopefully it will give you an insight into how we apply our trade.

Why “The Trusted Navigator”?  I was always fascinated with the concept of navigation.  According to a legendary adventurer1, there are five characteristics of an expert navigator. I believe these same characteristics apply to successfully investing:

  • Equipped with the proper tools
  • Proficiency in the understanding of these tools
  • Attentive
  • Anticipating
  • Experienced

My fascination with navigation began in 1970, when at age five my parents moved our family across the Atlantic from Bonn, West-Germany to Washington D.C. where my father spent the next 25 years at the World Bank.  My Grandfather, did the same in 1927 when he boarded a freight ship in Germany and headed for New York City.

With little money and no formal education, the idea was “to gain work experience” in the new world. He began doing odd jobs like washing dishes to various jobs as an office boy. He learned the language quickly and soon landed a job at a fish-tackle distributor and travelled to all corners and the smallest towns in America to sell his goods.  A year after his arrival in New York, he sent for his fiancé, who he married within days of her arrival in New York harbor (she is in the bottom right row in the picture). As a result, my father and aunt were born in Manhattan at Lenox Hill hospital in the 1930s.  So began our family’s history in New York!

When I started working in New York in 1993 for Deutsche MorganGrenfell/C.J.Lawrence (the long name for Deutsche Bank at the time) followed by 16 years at ISI Group, the circle was complete. The connection to New York has obviously not only shaped my family’s life, but also how I navigate through the ever-shifting financial markets. I believe this perspective gives me an edge when giving financial advice to private and institutional investors. I hope you will follow “The Trusted Navigator” on your way to becoming an expert navigator!

Notes: 1 Andrew Skurka, the 35-year-old is most well-known for his solo long-distance backpacking trips, notably the 4,700-mile 6-month Alaska-Yukon Expedition, the 6,875-mile 7-month Great Western Loop, and the 7,775-mile 11-month Sea-to-Sea Route. In total, he has backpacked, skied, and packrafted 30,000+ miles through many of the world’s most prized backcountry and wilderness areas—the equivalent of traveling 1.2 times around Earth’s equator!


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.


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BK 10/16/17

17 Oct Europe – Unified Growth

Welcome back Growth! It’s been too long and we sure have missed you. Real GDP growth stands at 2.3% in the Eurozone slightly taller than the U.S. at 2.2%. Follow the Money and you’ll find Eurozone M3 supply up 5.0% years-on-year, 7% in the UK. Unemployment in Germany and UK has broken through multi decade lows, in France below pre-crisis 2011 levels and falling. Industrial Production across the region has surged above 2008 levels and climbing, same for retail sales and housing starts. The Euro is up 14% and Sterling 7% versus the USD. Did I mention European Equity markets? The STOXX600 is up 21% year-to-date in dollar terms. Great news? Well yes terrific if you owned sufficient European exposure, you had great kicker in your portfolio strategy. But, unfortunately, no if you have zero or minimal exposure which judging by fund flows is the more likely answer.

Investors should be forgiven their skepticism for European equities, recent history has proven treacherous for asset allocators leaving the homeland for anywhere outside of U.S. Treasuries and Large Cap. stocks. But 2017 has thus far proved significantly different, at least in terms of relative market returns, from the preceding half dozen. Europe and Emerging markets have finally awoken, supported by an economic recovery that has shifted from theory to reality, joining what is now a measured synchronized global expansion. Investors with a foothold in international markets should reap the benefits of a highly constructive macro backdrop. For those still with reservations and minimal exposure, tread wisely but tread. Accumulating exposure is our preferred path rather than chasing what remain risk on/risk off markets. However, if we watch and listen to the data isn’t this what you have been waiting for?


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

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