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?
how to decorate home using waste material
[…]that is the finish of this post. Right here youll come across some websites that we consider you will enjoy, just click the links over[…]
crystal Beads
[…]check below, are some completely unrelated sites to ours, nevertheless, they are most trustworthy sources that we use[…]
9 design home decor
[…]Sites of interest we have a link to[…]
route 66 home decor
[…]check below, are some completely unrelated internet sites to ours, however, they may be most trustworthy sources that we use[…]
cake decorating ideas 60 birthday
[…]Here are some of the sites we recommend for our visitors[…]
phase 8 wedding shoes
[…]Here is an excellent Weblog You might Come across Fascinating that we Encourage You[…]
http://www.hamptonbaylightinghd.com
[…]the time to study or take a look at the content material or web pages we have linked to below the[…]
http://www.motupatlugameshd.com
[…]check below, are some totally unrelated internet websites to ours, nevertheless, they’re most trustworthy sources that we use[…]
dating european men
[…]Sites of interest we have a link to[…]
sex
[…]we like to honor many other online websites on the internet, even though they arent linked to us, by linking to them. Underneath are some webpages worth checking out[…]
Kinky Bondage toys
[…]that would be the end of this write-up. Right here youll locate some sites that we assume you will appreciate, just click the hyperlinks over[…]
Adam \u0026 Eve Sex Toys
[…]Every after in a whilst we select blogs that we read. Listed below would be the newest sites that we decide on […]
wedding jewelry dos and don’ts
[…]always a massive fan of linking to bloggers that I like but dont get quite a bit of link really like from[…]
100% kona coffee k-cups
[…]we came across a cool site which you could appreciate. Take a search if you want[…]
100% kona coffee
[…]check beneath, are some absolutely unrelated websites to ours, having said that, they are most trustworthy sources that we use[…]