Monday, November 24, 2014

Stock Talk - 6

Your greatest risk in playing the market is the black swan, the geopolitical event that can send the market down 500 points in a heartbeat.  If you understand that and have limited your exposure accordingly, fine. But a lot of people overlook that risk and keep betting 50 or 60 percent of their wealth on a continuation of the bull market.  So far, they have done well.

The talking heads on CNBC keep reminding us that over the long term stocks outperform bonds. They are talking their book. People on CNBC - and the station itself - make money by promoting the stock market. One should never forget that fact.

We are about 5 percent of the world’s population.  A lot of the other 95% don’t like us, and the number of haters has risen in the past decades and continues to rise.  Some of this is the result of My Lai or Abu Ghraib or, more generally, Iraq and Afghanistan, some is because we are conspicuously wealthy and successful; the point here is not to argue philosophy, but to factor in risk. 

The degree of risk you can tolerate depends partly on your age; if you are too old to recoup a major loss (as I am), you may want to limit your market stake to 10 or 15 percent.  The black swan doesn’t have to be a repeat of 9-11; anything that induces sudden, mass fear will do.  And a sudden spike in hysteria will motivate people to pull money out of the market and into Treasury bonds. Some of that is already apparent in the low interest rates available in the bond market.

The fact that the U.S. is an open society is both our strength and – increasingly – our weakness. With social media available to everyone, including potential terrorists, the question is not if but when.  So what is an investor to do?  Consider well-protected yield, which include short-term Treasuries but is not limited to them. Tax-advantaged municipals are attractive, but one has to consider the municipalities. In the battle between pensioners and investors, the pensioners will win in many states. It’s better to shun municipals in those states – which may include your own. It’s better to pay state income tax than to risk principal.

It’s possible that terrorists will never attack the U.S. I hope so. But meanwhile, I’m avoiding the momentum (“mo-mo”) stocks, like Netflix, Facebook, Tesla, Keurig Green Mountain Coffee, and Amazon. Let the risk-takers make the profits, while they can.