June 22, 2015
[Editor’s note: This letter was written by Tim Price, London-based wealth manager and frequent Sovereign Man contributor.]
The great biologist E.O. Wilson once observed:
“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
In few arenas are our mental shortcomings thrown into more stark relief than in the investment markets. Our brains evolved ‘fight or flight’ mechanisms to enable us to recognise potential predators in the wild. However, they have not yet had the evolutionary time to help us respond to threats – real or perceived – in the economy, bond or stock markets.
In recent weeks we’ve highlighted the aberrant price and yield volatility of longer dated German government bonds.
Since these instruments represent something close to the ‘risk-free’ rate for the euro zone, the fact that their prices are convulsing like someone in an electric chair hardly bodes well for future price stability across other capital markets.
It’s not fair just to blame Greece – how about the central banks that drove interest rates down to zero, effectively forcing investors into higher risk markets?
The markets cocktail of 2015 is a strong one, and whatever decision you ultimately make involves having to take a sip or two.
Bond prices are high (but we think unlikely to go meaningfully higher – there’s certainly insufficient value there for us).
Most stock market levels are high (but may easily go higher). Currency volatility is high. Commodity price volatility is high.
Even deciding to hoard cash is a decision to embrace an unusual level of risk these days – as Greece may confirm in due course.
For us, the sensible response is two-fold.
One: diversify across asset classes to an unusual extent as preparation for whatever future shocks may come.
Two: avoid the credit markets wherever possible, and favour instead high quality equity – or equity managers – offering the closest thing to a genuine margin of safety. To our way of thinking, nothing else makes any sense.
Tim Price is a principal at London-based Price Value Partners, a new global value equity fund, which invests precisely on the basis that Tim describes above. He is also the editor of Price Value International.