Our Insights

Should We Ignore Crowd-Think?

In the investment world, following the crowd can be hazardous. We seem to be at one of those inflection points where this piece of market wisdom may hold true. Howard Marks, who I would say is one of the savviest investors out there recently quipped, “this just in, you can’t take the same actions as everyone else and expect to outperform”. So here we sit looking into our crystal ball for 2023 and the consensus is decidedly bearish. The crowd thinks a recession is imminent, the Fed is behind the curve, earnings are coming down and the market has more downside moving into 2023. As allocators of capital it’s hard not to get caught up in this negative headspace. Further compounding this feeling of malaise is some of the bigwigs of business are echoing a similar narrative. Jamie Dimon, perhaps the best bank CEO in the modern era with vast insight thru JP Morgan’s global footprint recently said, “These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now”. Jeff Bezos, who sits atop a vast consumer discretionary empire, seemed resolute while being interviewed last month, “Yep, the probabilities in this economy tell you batten down the hatches” and Ray Dalio, one of the most successful hedge fund managers in the last 20 years said, “Right now, we’re very close to a 0% growth year. I think it’s going to get worse in 2023 and 2024”. These negative sentiments are also reflected in much of the market data. For example, we have the highest put call ratio since the 90’s, investors have been net sellers of equity mutual funds and ETF’s in four of the last five weeks, and negative bearish sentiment, according to the AAII, is higher than during the COVID shutdown or the great recession. I could go on and on with this, but the conclusion is very clear that “the crowd” is bearish.

Please have a Happy New Year!

With this in mind, Ned and I are getting our shopping list together. Valuations in many sectors are still too high but there are pockets of value available. Growth and technology stocks seem to be pricing in much of the bad news so we are digging in there. REIT’s and interest rate sensitive stocks have been pummeled. International equities are the cheapest they have been in decades on a relative PE basis and the sirens sitting on the island of Fixed Income are singing an alluring tune. With the yield curve currently inverted suggesting recession, adding duration is very tempting. Maybe those in the minority that are predicting the Fed can engineer a soft landing are correct and the crowd is wrong. It’s possible a recession is already priced in. This year we have witnessed two selloffs in excess of 20%. The curve is inverted, oil prices have been softening, and sentiment is abysmal. Based on our experience, this is when the best opportunities present themselves. As we enter the New Year, keep an eye focused on the long term. At this point with the market already down by over 20%, fear can take over which can lead to getting out at the absolute wrong time. As the following chart shows, we are setting up for some powerful rally days in addition to increased volatility and trying to time things can lead to very sub-par returns. Taking a page out of Warren Buffet’s playbook, we expect to start moving against the crowd and uncover mispriced opportunities even in the face of continued volatility.

Ned Abbe
Co-CIO
Jess Ellington
Co-CIO
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