Great Investors have Discipline and Patience. But, are You Disciplined and Patient?

Monthly Market Commentary: September 1, 2020

Nimesh Chandan of Canara Robeco Asset Management wrote that, “In Greek mythology, one comes across a bandit character named Procrustes who lived on The Sacred Way between Athens and Eleusis. Procrustes used to invite tired travellers to his home, give them food and offer them his bed to rest. However, if the travellers were short and did not fit the bed completely, he would hammer and stretch them. If the travellers were tall, Procrustes would amputate the excess length. In either case, the travellers died.”

Chandan proceed to discuss two characteristics of our behaviour – Confirmation Bias and Cognitive Dissonance and how to avoid the pitfalls of these biases.

I have a very simple method for avoiding cognitive dissonance and confirmation bias: It is called Discipline.

It does not matter whether you are a growth stock, value stock, a real estate, gold, crypto currency, trader, long-term or bond investor, what matters is that you pursue your investment strategy with discipline and with patience.

As my readers know I pursue a diversified investment strategy consisting of investing 25% in real estate, 25% in equities, 25% in bonds and cash, and 25% in precious metals.

I am not arguing that this is the optimal investment strategy. However, my strategy is suitable for people like me who admit that they do not know how the world will look like in five or ten-years' time, and who are more concerned about capital preservation than about beating an index. Furthermore, I am not like Procrustes who will force his guest into the size of his bed. If an investor prefers to hold only equities and no other assets this is fine. Another investor may prefer to own 50% of his assets in equities and 50% in real estate. This is perfectly fine provided he invests in these asset classes with discipline.

Over the last two years, my equity allocation has underperformed the S&P 500 Index and especially the NASDAQ 100 Index, and a Bank Credit Analyst Index of the “Awesome 8” (Amazon, Apple, Facebook, Google, Microsoft, Netflix, Nvidia, and Tesla).

However, I believe that at some point, the Awesome 8 will turn down and that investors will move funds into value type of stocks including resource stocks and banks (European and Asian banks as well as BAC, JPM, C, WFC), where I have an overweight position.

A number of diverging trend are disconcerting:

Soaring lumber prices (up 127% in 2020) and strongly rebounding copper prices (up 29% in 2020) suggest a pick-up in inflation. But interest rates, by staying low, have not confirmed these inflationary trends.

Or consider the divergences in stocks. Broad Stock Indices are making new highs but the number of stocks making new highs is shrinking. Furthermore, in the case of the NASDAQ 100, the advance-decline line is collapsing.

These widely diverging trends and indicators suggest to me that something BIG (not so pleasant) is about to happen. Value stocks are likely to hold up better than the Awesome 8!

Year-to-date gold is up 35% and silver 54% while platinum is down 4%. The NYFANG Index is up 75% and Tesla is up 420%. Where is there a bubble? I am bringing this up because I keep hearing that precious metals are in a bubble phase.

I keep holding gold for the following reason. If you look at the Global Family Offices’ Strategic Asset Allocation, 2019, you can see that family offices (they service ultra-wealthy people) only held 0.8% of their assets in gold.

Now, I remember a time, in the late 1970s, when wealthy people had a least 10% of their assets in gold. Nowadays, I am sure that central bankers, given their atrophied intellect, will make sure with their money printing that wealthy and less wealthy individuals will have at least 20% of their assets in precious metals. [Not to mention financial institutions such as pension funds, insurance companies, endowments, sovereign funds, etc. whose trustees suffer currently from a virulent "compliance" virus, but will wake up one day and demand a higher allocation to precious metals.]

So, whereas I am aware that there is some froth in the precious metal markets right now, I feel reasonably happy with my exposure to this sector.

Remember the words of Leo Tolstoy:

"The strongest of all warriors are these two - Time and Patience."





With kind regards

Yours sincerely

Marc Faber



