In 1901, steel magnate Andrew Carnegie sold his entire empire to JP Morgan for $480 million – a sum he had scribbled on a piece of paper and that Morgan did not haggle over.
After years of the kind of debilitating economic and political warfare it took to remain on top, Carnegie was finally done fighting, finally free to pursue his charitable endeavors on the other side of perpetual strife. With the stroke of a pen, Carnegie had become one of the wealthiest human beings in world history – that $480 million equates to a fortune of nearly $340 billion in today’s dollars, more than the net worth of Gates, Buffett and Carlos Slim combined.
But despite this amazing windfall, legend has it that before the deal-signing champagne bottle was even through Carnegie was wondering aloud about whether or not he’d made a good deal. Should he have departed with his business and if so, was $480 million all he could have gotten out of the insatiable banker.
When discussing the possibility for continued rotation into stocks or the lofty levels of the S&P currently relative to recent years, it is important that we consider the Seller’s Dilemma.
Think of a portfolio manager who is charged with earning a return for investors and can assume a moderate amount of risk. Let’s suppose he’s been running a portfolio of 25% US stocks, 25% international stocks and 50% fixed income (I can’t tell you how many portfolios have looked like this in real life for the last few years). Now assume he reads a bunch of research and news and concludes that the market is due for a ten to twenty percent sell-off. And so he sells half his stocks, putting a quarter of his portfolio into wealth-destroying money market funds.
Days go by. Weeks. In the end, he buys back into the stock market again – maybe even buying some of his old positions back at slightly higher prices.
Why does he do this?
T.I.N.A. – There Is No Alternative.
The alternative he has is to own aburdly-priced bonds, buy highly volatile commodities, or go into less-liquid assets like real estate or private equity. In other words, for most PMs there is no alternative.
Think about the college endowments – the top 800 control $400 billion in investable assets. Among these 800 pools of professionally managed capital, US equities represent only 15%. In the meantime, hedge funds are their largest allocation bucket, 20% or $80 billion. The returns have been scary-bad, not even keeping up with the pace of the schools’ spending in the past year. Yale University posted a loss of just under 1% in their last fiscal year ended June 30th. They have a laughable 6% allocation to US stocks. If you think this kind of thing isn’t being rethought all over the country as we speak, then you misunderstand the concept of career risk.
Now we’re all going to laugh at the T.I.N.A. acronym the next time the market gets bludgeoned – and it sure is overdue for a healthy beating one of these days. But the fact remains that much of the activity we’ll see across asset classes this year will be driven by exactly that lack of alternative, barring some other calamity we’re not yet aware of.
Seriously, what else are you going to do?
This is the reason stocks are now trading at an average multiple of 14 (vs the discounted one they may deserve given the lackluster economy). It’s the reason earnings shortfalls are being ignored in the aggregate and the reason even the most dour market watchers are coming out one after the other and admitting that yes, stocks are expensive, but not relative to alternatives.
Carnegie was faced with a “dilemma” of sorts – having sold out of his stake, now what? A good dilemma to have, but still, it bothered him. The investment management pros I talk to are all feeling the same way each time they lighten up on stocks – now what do I do?
rapture massager
[…]usually posts some pretty exciting stuff like this. If you are new to this site[…]
thai netflix
[…]usually posts some quite fascinating stuff like this. If youre new to this site[…]
iPhone 7 Charger
[…]very few web sites that transpire to become detailed beneath, from our point of view are undoubtedly properly really worth checking out[…]
iPhone Charging Cable
[…]here are some links to internet sites that we link to since we feel they’re really worth visiting[…]
تعمیر
I was curious if you at any time thought of shifting the format of your site? Its really well created I enjoy what youve got to say. But possibly you could a minor far more in the way of articles so individuals could link with it greater. Youve obtaine…
vpn ایفون
Greetings from Colorado! I’m bored to demise at operate so I made the decision to search your website on my apple iphone in the course of lunch split. I actually like the info you give below and cannot wait to consider a search when I get home. I’m sho…
پیچ و مهره
The data pointed out inside the report are some of the most powerful obtainable.
Lenovo
[…]Sites of interest we have a link to[…]
together traveling
[…]just beneath, are a lot of totally not associated websites to ours, on the other hand, they are surely worth going over[…]
premier online golf shop
[…]Every once inside a although we select blogs that we study. Listed beneath would be the newest sites that we pick […]
full apps download
[…]very few internet websites that come about to become comprehensive beneath, from our point of view are undoubtedly well worth checking out[…]
free download for pc windows
[…]below youll locate the link to some web sites that we feel you need to visit[…]
app download for pc
[…]we came across a cool site which you may possibly delight in. Take a search in case you want[…]
triple blowjob
[…]Here is a superb Blog You may Uncover Intriguing that we Encourage You[…]
lesbian couple vibrator
[…]The info talked about inside the article are a number of the very best available […]