
Areté Quarterly Q224 |
If you ask just about anyone who has been in the investment business for more than thirty years what the keys to success are, they are likely to focus on subjects that seem almost ridiculously abstract to newcomers. Subjects like philosophy, politics, history, and psychology don’t seem to have much relevance at all to the finance, economics, and math favored by young go-getters.
While the finance and economics and math help with modeling and calculating things, those other subjects matter over the course of long periods of time. After all, prices fluctuate due to lots of individual decisions being made (psychology), the trend of legislative priorities (politics), and patterns that often recur through time (history). In short, prices depend on context. This is something people who manage to survive the industry for several decades learn to appreciate.
This bit of reflection comes up as I try to find a way to convincingly describe current market extremes. Yes, valuations are at all-time highs, but if you don’t regularly look at the numbers, read the footnotes, do the modeling, and compare to history, you just can’t really appreciate how meaningful the statement is.
Perhaps market extremes are easier to understand in less formal terms. There are certainly well-known periods in history when extremes were reached. It wasn’t just a function of exuberance. It was also a function of social norms and conventions, political trends, and geopolitical conditions, among others.
This is abundantly clear in the book I am currently reading, Taming the Street by Diana Henriques. It tells the story of FDR’s New Deal efforts to reign in the massive conflicts of interest and other dubious practices that proliferated during the Roaring Twenties.
One of the most interesting lessons is that most of the egregiously manipulative behavior of the era was simply a function of the times. Pro-business politics, captured government, light regulation, and virtually no enforcement were just elements of the environment. It wasn’t about good or bad so much, but what you could get by with.
Interestingly, many of the practices of questionable ethics, such as operating stock pools to manipulate prices, were so common place many actors didn’t even bother trying to cover up their participation. There was no need really; everybody was doing it.
What causes society to change? It’s usually a function of things having swung too far in one direction or another. In the Roaring Twenties, corporations accrued an enormous amount of power and influence. By the early 1980s, government and labor unions had accrued too much power and influence. In both cases the pendulum had swung too far and voters clamored for change.
On that note, I thought we may have been on the threshold of major change in the investment industry in the financial crisis of 2008. The crisis revealed a lot of problems such as excessive management fees, poor transparency, and conflicts of interest that infuriated investors. I founded Areté to provide a better alternative.
As it turned out, however, investor fury quickly dissipated when a variety of monetary and public policy measures reversed the market decline, and then went on to steadily drive the market higher and higher. Essentially, investors got bribed – and they took it.
I get the sense this is changing though. With stock valuations at all-time highs and the costs of wealth inequality rising, the pendulum of pro-market policies is starting to swing back. Further, federal deficits running at persistently at high levels and rising geopolitical tensions substantially reduce the room for public policy to maneuver. Importantly, a lot of investor portfolios are not well positioned for what is coming.
As a result, I feel like a lot of pieces are falling into place for Areté. If you have any questions about what I do or just want to learn more about the All-Terrain strategy, please reach me at [email protected]. I look forward to it!
Thanks for your support!
David Robertson, CFA
CEO and founder, Areté Asset Management