Why is investing so hard?
One reason is because markets are adaptive. They adjust to expectations. Sometimes we get concerned about a market melt-up. That’s where prices adjust so quickly to expected good news that there isn’t time to take advantage of the improved outlook. Moreover, an overpriced market sows the seeds of its own correction: new deals are put together that make little economic sense. Eventually, these shares fall.
Adaptive markets mean that what works one day may not work another. This makes investing fundamentally different from other mathematical disciplines. An engineer works with the laws of physics—a bridge built to bear a load will always bear that load, until its materials degrade. Its capacity won’t change just because everyone believes in it. But an undervalued stock won’t stay that way if too many people think it’s undervalued and buy it.
What works at one time may be sub-par later. Right now dividends are in vogue. Bond yields are low; tax-treatments are favorable; cash-flow has been strong. But if everyone buys dividend stocks, their yields will shrink. Other sectors will become more attractive. And circumstance in the future may not favor dividends.
Times change. Stay nimble, and watch out for inflection points.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!