2014: Risks and Opportunities

“Climate is what you expect, weather is what you get.”

                                                                                               Robert A. Heinlein

We are now a month into 2014, and it has already been an eventful year in the financial markets. Just when a generation of investors, burned badly in the crash of 2008-2009, were beginning to think it was safe to get back in the water, volatility and uncertainty returned with a vengeance. Emerging markets dropped, U. S. equity prices followed, and Treasury bond prices rose in a classic “flight to quality.” Meanwhile, cash yields remain at historic lows.

The best investment opportunities are usually those most out of favor. Despite the sell off, right now that list is pretty short, with emerging markets stocks and commodities the most obviously unloved.

Our portfolios are over-weight cash, under-weight both stocks and bonds. Our core stock mutual funds holdings are defensive, low-beta, and focused on companies of high financial quality.

I’ve commented several times in recent months about optimism, pessimism, and the dangers of sentiment to investment performance. This year’s market action validates those insights. As Warren Buffett has long observed, one key to investment success is, “Be greedy when others are fearful, be fearful when others are greedy.”

At the end of 2013, we were certainly being cautious, though not downright afraid. With markets down about 6% in one month, and market sentiment having swung from Extreme Greed to Extreme Fear, we’re doing some cautious buying in accounts that are under-weight stocks.