Are We in A Boy Scout Market?
The television and internet are suddenly alive with words that did not exist a few months ago: recession, depression, crash – well you get the point.
The massive build-up of passive investment via ETF’s was not unlike the insatiable global financial appetite for mortgage-backed securities before 2008. The set-up is essentially the same. Far too many investors want the “same thing” – a financial product that incorporates the idea that “risk” can be mostly eliminated through diversification – essentially through indexing. This concept was wrong in 2008, and it is proving to be wrong, once again, today.
Passive investment means that there is a focus on liquidity and trading rather than on asset quality and management. This form of investment also means that investors, in effect, “bypass” investing in a company via public offerings or private placements.
Invested funds flow through “the share market” but never through the company’s treasury.
The structure of an ETF guarantee that the shares held in an individual component company of the ETF are merely a small part of a greater whole. Consequently, there is a very weak relationship (if at all) between the company and the managers of the ETF. And, more importantly, no relationship between the investor who holds the ETF and the component companies of it.
Now we have a situation where investors are “selling” into a suddenly illiquid market and suffering massive losses.
So why is this a “Boy Scout Market”?
We can all remember the Boy Scout Motto: “Be Prepared.”
Perhaps some of the older generations remember the phrase: “Success is where Preparation meets Opportunity.”
The current stock market condition is a generational opportunity for those who are prepared. And exactly who I am referring to?
This time will come to be known as the time of “Stock Pickers.”
The concept of diversification through indexing has been a “no-brain” investment success for the past decade. Investing could not have become more simple – passively invest, buy the dips, never sell.
Those days are over.
Regrettably, investing now requires a “brain” to sort out the difference between opportunity and peril. Some of the confusion in the marketplace over the past few weeks clearly illustrates that many “asset managers” are failing on two counts; they are not prepared, and they can not recognize opportunity.
It is also evident that there still are a few “old fashioned” – “this is how we do it” – Boy Scout investors who are taking advantage of a truly generational opportunity. These are the “Stock Pickers.”
Investment decisions are made when the certainty of opportunity outweighs the uncertainty of risk. If you are not a stock picker, now is a good time to find one – they are finally worth their weight in gold.