"The deer hunter doesn't see the mountains," the proverb says. It's true of most human activity that focus on some particular thing can make one lose general perspective, and it's especially true of investment in financial markets.
When we become involved, whether in enthusiasm for a bull market or in fear of a collapse around the corner, we tend to focus on the event itself and ignore everything else. I myself was very pessimistic about the consequences of the coronavirus pandemic, and thought that a once-in-a-century pandemic would have a more severe effect on the real economy and on the financial markets. In the event, I was proved wrong (and it's good that I was) but despite the fear of an unknown disease, I recommended buying 100-year Israel government bonds that were issued at $1 and were traded on the last day of 2020 at over $1.33, after reaching more than $1.5 two months ago. Since the bond was issued in April, even someone who sells today has made a return of 35% in eight months.
As far as hard-hit commodities are concerned, eventually the day will come when the world will have to get back to routine, which means production, infrastructures and development, requiring metals, and a lot of them.
What happened in 2020 is hard to explain even in retrospect. It's easy to write that everything is artificial and the central banks are keeping the markets afloat, but that's only a partial explanation. In the end, what the central banks did was to restore confidence that things will turn out right, that the world will not collapse and that even if there's a tough period it will pass and someone is providing a safety net.
Had what the central banks did failed to convince the public, no financial power could have prevented an economic crash.
The public's resilience, cool judgment, and the speed with which information was disseminated, led to higher volatility on the financial markets, but also to swift corrections after every fall. In the financial crisis of 2008, it took the markets about two years to return to their pre-crisis levels. Today, after the world has been coping with a once-in-a-century pandemic, within a few months the markets broke through the peaks seen before the global health crisis.
With every crisis that passes, investors become more inured, and better able to tolerate the next one, saying to themselves "Why sell in a crisis, if the correction is only a matter of time?"
At this point, it is just as pretentious to try to explain the past as it is to predict the future.
So what should the strategy be for 2021?
The attempt to forecast a financial year and assess whether it will be a crisis year or not is like trying to spot a "dream" stock, which could turn out to be a broken dream. When you look at financial assets that have risen extraordinarily steeply, whether its Tesla shares or Bitcoin, it's easy to become obsessed with the thought "how much money I would have if only I'd put in NIS 10,000 at the start," but it’s a mistaken thought.
At the start of venturesome investments, the risk is high, and the entire investment can be lost, and so no-one with any sense invests large amounts of their capital at high risk.
The most effective way of operating when there's uncertainty is to create certainty; not to invest in airlines, but in airports, because when the coronavirus pandemic is over, airlines might collapse, or go into administration and continue operating that way, to the detriment of shareholders and bondholders, whereas an airport is a monopoly. You can't compete with an airport. What, for example, will airlines do if they decide to boycott Ben Gurion? Land on Road 1?
The new year started on Friday, but the markets' direction in 2021 will be determined by the event that will take place on January 20, when Joe Biden is sworn in as president of the US. At this stage, I would hold a portfolio with a cash component of at least 25%, for the practical reason that anyone not holding cash when a crisis hits doesn't buy anything. When people see their other investments losing, it has a paralyzing effect, and in the end they do nothing. Someone with cash, however, can exploit the situation to buy cheaply what only yesterday was dear.
I estimate that the markets will be disappointed by Biden's economic program, whatever it is, because it's impossible to please everybody. To the extent that there's volatility, it will be worthwhile putting together a portfolio of stocks or bonds that will yield a regular cash flow from interest or dividends. That way, we will be more indifferent to the standard deviation, and at the same time we will have a steady return.
From that point of view, anyone debating whether to buy an investment home or build an income-producing securities portfolio needs to take into account that on the capital market he doesn't need to bother with tenants and maintaining the property, while the return is higher than the 3% rental return in central Israel.
Extreme investments, if they happen at all, are usually in small amounts. Instead of trying to hunt the deer - when there's a chance that we'll succeed but also a chance that the deer will get away - it's worthwhile stopping, looking around at the mountains, and finding a pleasant spot for a picnic. So with the capital market - the desirable to thing is to have a portfolio we feel comfortable with, one that instead of making our hearts flutter, gives us a regular cash flow.
The writer is CEO of OXTP Investments and head of Fixed Income at Oscar Gruss. The writer and/or companies connected to him may be invested in securities or other instruments mentioned in this article. The article does not represent investment marketing or investment advice that takes into account the particular needs of individuals.
Published by Globes, Israel business news - en.globes.co.il - on January 4, 2021
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