Who actually likes uncertainty? For most people, it’s pretty bothersome really, particularly when it concerns someone’s hard-earned savings and investments. It’s difficult for investors to understand how uncertainty could be a very good thing for their investments. Geoff MacDonald explains why investors need uncertainty in this excerpt from our 2020 Cymbria Investor Day Q&A session.
U.S. stocks have managed a remarkable advance in the past several weeks as optimism outweighed concerns about the economic recovery and worsening COVID-19 cases. Has this been appropriate or irrational? Howard Marks thinks investors should ponder the following questions:
- Are investors weighing both the positives and the negatives dispassionately?
- What’s the probability the positive factors driving the market will prove valid (or that the negatives will gain in strength instead)?
- Are the positives fundamental (value-based) or largely technical, relating to inflows of liquidity (i.e., cash-driven)? If the latter, is their salutary influence likely to prove temporary or permanent?
- Is the market being lifted by rampant optimism?
- Is that optimism causing investors to ignore valid counter-arguments?
- How do valuations based on things like earnings, sales and asset values stack up against historical norms?
Technology stock valuations
Investors have come to believe in the sustainability of free cash flow, bringing down yields.
Shares of companies popular with individual investors have outperformed.
While it's not clear how much of the recent rally was driven by retail investors/traders, their increased presence in the market has been signaling a spike in speculative behavior.
Grocers charged into delivery to meet a surge in demand sparked by the coronavirus crisis, though many haven’t figured out how to get food to customers’ homes profitably and some wonder if they ever will. Retailers have modified their operations to manage the jump in delivery demand, hiring thousands of additional workers and devoting some stores to fulfilling online orders. That work is pushing up costs that eat into the margins on delivery sales.