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  • Writer's picturecrhyldahl

Rock and a Hard Place

Advisors are watching this market in disbelief and wonder how to properly balance the risk and return tradeoff of this market without inevitably losing ground to perfect hindsight. Marginally reduce equity exposure, they lose; realize some profits, they lose; increase liquidity, you lose; purchase put options, you lose; sell covered calls, you lose. No matter the strategy in this powerfully trending market the smart manager loses ground. To make matters worse is the inevitable comparison with some inappropriate reference benchmark. “Well the ‘market’ went up by X% and you went up less than that…” Managers and advisors believe that they are truly caught between a rock and a hard place. We offer some suggestions on how to navigate away from this position.

It is a market for the short sighted and inexperienced. The instant gratification crowd is living large. Living in the now with no understanding of the path taken or the path forward defines the fear of missing out (FOMO) crowd. We are not nihilists, but I do dearly want the markets to reflect some representative valuations across the board. Allow some reversion to fair value to shake out the current insanity. Current valuations and spreads simply do not reflect justifiable discounting of future earnings. It is impossible to believe that can be true. We are at valuations higher than pre-pandemic when we were at the highest level of employment ever seen accompanied by organic economic growth and an oh so accommodating central bank. [We realize that the central bank seems to be always accommodating.] In other words, the future was far brighter than it is today. So how is it plausible to be at higher valuations now? It’s not. Even with the short-term liquidity insertions and misguided fiscal handouts it is impossible to reconcile. But this market is in defiance of fundamentals. Talking heads and politicians cheer it on and take credit for it. I wonder where they’ll be when this market corrects.

Source: The Economist.

Armed with this logic, it is understandable that experienced advisors would lean toward risk management. But they are faced with the unrelenting trend across risky assets. It is a market valued for impossible growth and economic utopia. Discipline and clear communication with investors are direly needed at this time. Manage risk as cost effectively as possible. In an efficient market every cent used to manage risk will not participate in the trend and accountability based on perfect hindsight, against misplaced benchmarks, is painful. But fiduciaries must be able to deal with this discomfort if they are to fulfill their responsibility. For the best interest of your investors wealth aggregation you must properly manage risk. The aforementioned myopic crowd may sneer and try to steal your clients but sleep well knowing that decades of experience have allowed you to develop a respect for risk even when they claim it does not exist. An advisor’s job is to build and protect wealth. It is a balancing act between the two. Operating solely on fear of hindsight is not balancing but cowardly. Cowards never win. Nor does ignorance.

Transparency and Proper Benchmarks

We would rather lose the greedy and uninformed client than compromise our ethics or our understanding of market dynamics. Pigs are greedy and most pigs are eventually slaughtered. We prefer to lose marginally now in order to ensure wealth is protected. Operate with the clear objective of acting in the best interest of your clients all the time. Don’t make decisions based on the possibility of losing the marginal client or being judged against an inappropriate benchmark with perfect hindsight. Develop transparency with clients and proper benchmarks with them. Build into your benchmark a cost for proper risk management and clearly explain why it is necessary. With this more appropriate benchmark the advisor can more properly manage client expectations. Doing so removes the rock and allows easy mobility away from the hard place. Time is of the essence.


Our society is operating under the fog of fear. Fear created by the media and politicians. Our fear empowers both the media and the political elite. It is a new weapon being used by them to get the result they want. A population will not behave the same as without the fear. We will alter the way we make decisions to allay our fear. We consume differently as a result. This benefits a select few entities. Politicians bring their leadership to “testify” all the while winking and nodding. It is a pathetic attempt at misdirection. They exploit our collective fear to benefit themselves. It has never been so apparent what is going on because the means on how it is being done are so nefarious. The destruction of our society, and particularly our youth, is complete.

Many suggest that the election is an important demarcation when this will end. This logic is perverted. Why would the election have anything to do with our current situation? It shouldn’t unless it is all fabricated. And why would it end? Politicians don’t develop an effective tool to further their empowerment and abandon it. Now that they have tasted increased power you can bet that they will continue to exploit it. It seems that we are moving toward a CCP outcome. Fear based leadership is the tool of the communist not the democratically elected. Conform or be forever shamed. Does that sound familiar? We are certainly not conspiratorial but either the China virus is irony of the highest order or an effort by the political elite and the media to utilize tactics more commonly associated with communist dictators. Think about that in November. God Bless America.

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