As my thoughts about things like toll roads and other lowly correlated assets evolve I thought it might make sense to shed a little more light on why I am thinking about this stuff more, what realistically can be expected from these types of assets and more importantly what not to expect.
It’s no secret that I think a bear market has already started as a function of excess gone bad in the financial sector.
Regardless of whether a bear market has started or not, the fact is we have had bear markets in the past. The come, the market drops, they go and the market goes back up. This will be the fate of the next one whenever that might be.
It’s like going to the dentist. You don’t want to have to endure sitting in the chair but you pretty much know what you are going to get.
From this standpoint bear markets do not really threaten you financially (of course bad asset allocation is a different story). You pretty much know what you’re gonna get and if you can add any value during a bear market, all the better.
A bigger issue than a bear market that looms is the threat of returns below average after the bear market. Regardless of anyone’s emotional state a repeat of the past is not to be feared, it is to be endured. Once endured I think we may be in for a period of returns that are noticeably below normal for an extended period which could be a new thing. This would disrupt a lot of financial plans.
I am thinking something like US markets averaging 5% per year instead of 10%. It might sound benign but it isn’t.
Things like toll roads and plane leasing companies, as I mentioned the other day, have complex financial structures. There is a management of leverage and interest rates that is potentially more important that operating the tolls or contracting out the planes. Its kind of like car dealers. I’ve heard that selling the cars isn’t as important as how they manage their interest rate risk. Whether that is true or not crisis, like we have had this summer in the financial sector, creates either real or perceived problems for financially intricate companies like some toll roads and some plane leasing companies.
Since I think the bear market started with financial companies it seems logical to me that the toll roads and plane leasing companies may not offer as much bear market protection as we would like.
But I am not worried about the bear market I am focused on what might come afterwards; returns that are below the historical norm. That is where I think moderate exposure spread over disparate market segments that might yield 6-7% and go up in price 3-4% becomes very important.
To this point all four plane leasing stocks that I am aware of are down 20-26% in the last three months. This does not make them bad stocks, it makes this the wrong time. I don’t own any now but will be a buyer at some point (might not be for a couple of years) at a 2% weight. Anyone who bought three months ago at a 2 or 3% weight may not be happy with the purchase but they have not permanently damaged their portfolio either.
I believe the plane leasing space is a valid concept but it can, obviously be cyclical. The last few months have simply been the wrong time in the cycle. Getting the cycle wrong with too much of your portfolio becomes a real danger and all of these themes strike me as having the potential to end up being over owned.
For anyone who cares the context here is my trying to think about what comes after the bear market. If you have been reading this site for the last couple of years, or longer, you know that I was planning a strategy for what I believe is the current bear way back then and I have been making small changes in that direction (buying the double short, making the occasional sale and reducing the size of some bigger winners) for a while now.
The idea of waking up one day and saying a bear market is here I better do something seems crazy to me for anyone employing any sort of active strategy. Similarly waking up one day in 2010 and saying things are different I better do something is just as crazy.
Planning for a bear market that never comes does not seem crazy to me. Planning for a changing investment landscape that never changes doesn’t seem crazy either.
The picture is from Kapoho, which is kind of close to us. A few miles further down the road was covered by lava flow. And yes I think I did post this picture before.