It’s Time for Caution, But Not for Flight

One of the smartest, wisest investors you’ve never heard of is a man in Boston named Seth Klarman, who runs nearly $30 billion within a firm called Baupost. He’s generated enormous returns over many, many years, and has become a billionaire. He’s one of 2 or 3 “E.F. Huttons” out there in the modern day investment world that everyone listens to.

This past week, Mr. Klarman sent out the annual letter for his firm and raised several concerns:  rising global debt at the country, corporate and individual levels; the appearance of instability in the executive branch of the US government; and finally, the decline of civility and rising risk of increased levels of violence in America. Ironically, the risks presented by debt for an investor and the need for more civility in modern day America were recently raised in this blog. I’m in good company!

The negativity in Mr. Klarman‘s letter alarmed many on Wall Street. The average man on the street does not realize how important confidence in our institutions is for market stability — confidence in the Federal Reserve System, confidence in all 3 branches of the government, confidence in the banking system, the dollar, the police, the president, one could go on and on. With the aimless bickering between liberals and conservatives, governmental shutdowns that do not seem to serve a substantive purpose, an endless stream of tell-all books, and a revolving door of presidential aides, the government is not being run in a way to engender high confidence. Add to that a bad year in the stock market last year, and a growing sense that this bull market and economic growth are both a bit long in the tooth, and you have a recipe for declining confidence.

But when will debt outstanding, in the United States or other parts of the world, become a severe problem? No one knows. Will political rancor lead to more and more strife and a heightened level of violence in our society? Maybe, maybe not. Will the government continue to, at times, look chaotic? Probably. I would argue the current administration is not the only one in which chaos seemed to rear its head, for at least a while. Think back to the Kennedy Assassination. Vietnam. Watergate. The pardon of Nixon. Stagflation in the 1970s and Jimmy Carter in a sweater. Iran-contra. Monica Lewinsky. Hillary’s server. Washington can often appear to be a circus.

So are Mr. Klarman’s concerns substantive? Surely, they are. And yet, when will those concerns emerge as current problems severe enough to trip the market up significantly? No one knows. Investors should never let themselves get completely spooked out of the market by fear or anticipation of potential ill in the air. Instead, the allocation percentage to stocks the investor is comfortable with should be put into place, and rebalanced when necessary. Despite Mr. Klarman’s concerns, his firm Baupost seems to be close to fully invested at the current time.

As previously discussed, it’s a time for caution, and assuring an investor’s allocation matches their risk tolerance and long term goals well, but certainly not a time for flight. There will always be things to worry about — the art is to judge how worrisome our troubles are, and how likely to evolve into immediate threats to America’s economic might, well being, and the health of the markets.

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