“Those times when you get up early and you work hard, those times when you stay up late and you work hard, those times when you’re too tired and you don’t feel like working and you do it anyway: That is actually the dream. The destination is the journey.”
It is a bit of a depressing Monday with the news of Kobe Bryant, his daughter, and 7 other people dying in a helicopter crash on Sunday. Like many, I had a real obsession with sports as a kid and young adult, and I’d estimate that I watched 85-90% of Kobe and the Lakers games when he was playing. He had a lot going on in retirement in terms of youth development and he was a major proponent for the women’s game. Bryant was unique in that he was undeniably the hardest worker in the game, despite being blessed with amazing natural talent. Like many artists, he didn’t always work well with others, but his evolution as a player and a person is one that many can relate to, flaws and all.
In other news, this Coronavirus continues to spread from its origins in Wuhan, China. There are now cases in Arizona, California, and much of the world. China seems to be doing everything in its power to control the contagion along with other world officials, but viral contagions are unpredictable and massively dangerous. Other recent ones such as SARS, or Zika, ended up being controlled over time without catastrophic consequences, but that doesn’t mean that there can’t be a far more serious and devastating occurrence with this, or future contagions.
The reality is that there are always major issues that could arise, such as a meteor falling from the sky, or a Yellowstone eruption. We can control our process, but we don’t control the outcomes. It may be far more likely that we could get run-over crossing the street than dying from something like Coronavirus, but that doesn’t mean one should discount the risks, because the fat-tail consequences are so much greater in a pandemic. Just a century ago, the Spanish influenza killed tens of millions.
Unquestionably we feel safer today due to the progress of modern medicine, but this also might make us complacent. Recency bias similarly distorts the perceptions of many market participants on market risk, due to the wonderful 11-year bull market that we have benefited from. Valuations of stocks, bonds, and real estate are pricey by most metrics, bolstered by the record-low interest rate environment. Because the last decade has been so good, it is easy to forget that from September of 2000 to May of 2013, the S&P 500 returned nothing even after dividends and adjusted for inflation. Projecting zero real returns for the next 13 years probably wouldn’t look to good on your financial plan, which is why we have to be willing to invest differently than the consensus at times.
In our estimation it is going to be harder than ever to generate strong returns, given the record-low interest rate environment and with valuations being where they are. This is why we are taking a relatively conservative approach in our strategy and tactical decisions. Even on stocks we like, we are favoring selling puts out of the money to maximize the margin of safety. You’ll see the full benefits of this strategy as options get closer to expiration next January for the most part, as much of the value of the options is related to time value. The risks associated with these stocks are quite low in our estimation, as they are growing intrinsic value over time, while also buying back their own stock in many cases, so we would be happy to own them at the right price.
The risk/reward on these types of investments seems a lot more favorable to us than on anything fixed income related and on most equities we see in general terms. I’d expect to feel volatility spikes from time to time on these positions, but I think the risk of permanent losses of capital are quite a bit lower than most alternatives that are available in the current environment.
I’ll be writing more about some specific investment opportunities in the coming weeks as we are in the midst of earnings season, when I do most of my stock-related research reports. Hopefully, the week gets a bit better from here, and never hesitate to tell you loved ones that you love them!