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Bulls, Bears, and Pigs

There’s an old adage on Wall Street; Bulls can make money, Bears can make money, but Pigs get slaughtered. There are many different adaptations of this saying but the general point being made is that there is room for disagreement among Bulls and Bears. Both Bulls and Bears have profited depending on market cycles. Pigs in contrast are greedy and undisciplined. They also tend to be stubborn, arrogant and overconfident. Pigs ignore well thought out contradicting viewpoints. This leads Pigs into taking on undue risk in the hopes of making a lot of money quickly. While this sort of “boarish” behavior (go ahead and groan but we think that was an awesome pun) sometimes works, it’s only a matter of time before too much risk gets you slaughtered. At GreenPort, we have been and would still be considered Bulls. We believe the overall trend of the market is higher. Record earnings, subdued inflation, reasonable valuation, and an accelerating economy frame our view. Despite the higher than normal volatility, the S&P 500 is up 2.56% this year. Since the lows of 2009 the S&P 500 is up 324%. What we need to guard against is being a Pig. With that in mind, let’s listen to what some of the Bears are saying. “This is the second longest bull market in history so it has to end soon.”

Many Bears have been making this argument since 2011. We strongly disagree with this argument. We understand how a casual observer of the market would feel this way, but not someone who is referred to as a market analyst. It bothers us. There is no evidence whatsoever that Bull Markets die of old age. Bull Markets die because of recessions, which lead to a deterioration in earnings. Currently there are no signs of a recession. The constant warnings from analysts to sell stocks because the Bull Market has been going on for a long time has been incredibly damaging to investors who listened to this advice. This Bull Market will end, we are not being cavalier. We just don’t think it will be the first Bull Market to simply die because it got old. We are looking for signs that earnings and the economy are slowing. We don’t see any. To the contrary, we see an economy that is accelerating and is above trend growth for the first time in a long time.

“Stocks are overvalued”. Perhaps. Much like beauty, valuation is in the eye of the beholder. There are valuation measures that indicate overvaluation and valuation indicators that suggest undervaluation. A generally agreed upon indicator is the price to earnings ratio. It tells us how many multiples investors are currently paying for the forward consensus earnings. While in absolute terms the P/E Ratio it is a little expensive, when adjusted for today’s low inflation level it’s actually a little cheap. Low inflation increases the present value of future earnings. We don’t think valuation is a problem.

"I think there is going to be a Black Swan event." Most of you have heard this overused term. It refers to unlikely events that no one saw coming. The irony is that when Nassim Taleb coined this term in his best selling book “The Black Swan”, his main point was that these events are unpredictable. He argued that investors should not try to forecast these events, rather they should be aware that they happen and model risk appropriately to account for the unpredictable. Market Analysts on TV have twisted Taleb’s thesis and use it to make forecasts, which is the exact opposite of its intent. i.e., “The trade war with China is a black swan”. Inappropriate application aside, we prefer looking at economic facts, not what might happen if…… In our Crying Wolf indicator https://www.greenportcapitaladvisors.com/single-post/2018/04/10/Crying-Wolf we look at all the “Black Swans” that never landed. We are not suggesting we shouldn’t pay attention to the world around us, it’s just that we’ve been humbled enough to understand our limitations in forecasting the final geopolitical result. We completely missed the who has the bigger nuclear button argument leading to a summit.

There are countless other arguments. We don’t take any of them lightly. Our job at GreenPort is to help each investor maximize his or her wealth within the risk parameters we have agreed upon. Not participating in positive stock market returns is incredibly detrimental to that goal. We currently believe that stocks will go higher before the next Bear Market. We currently don’t expect that a Bear market is imminent, but we are being vigilant. If you have a specific concern about the stock market please let us know. We always enjoy hearing from you. You might even get referenced in our next write up! School is finally out and summer is here. It looks like it’s finally warming up too. Have a wonderful week. The GreenPort Team

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