T.I.N.A. (or the Seller’s Dilemma)

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?

 

 

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. گردنبند رو مانتویی طلا commented on Jul 13

    خرید طلا

    Examine below, are some fully unrelated world wide web-internet sites to ours, however, they’re most dependable resources that we use.

  2. hiking commented on Jul 13

    hiking

    […]we came across a cool web page that you simply may well enjoy. Take a appear if you want[…]

  3. Coach commented on Jul 14

    Coach

    […]one of our visitors lately suggested the following website[…]

  4. دوربین مدار بسته commented on Jul 15

    دوربین

    the time to review or get a seem at the material or internet-sites we have connected to under the

  5. FS 19 mods commented on Jul 16

    FS 19 mods

    […]we came across a cool web-site that you may possibly appreciate. Take a search in case you want[…]

  6. بازاریابی موتورهای جستجو commented on Jul 17

    تبلیغ در گوگل ادوردز

    Create much more, thats all I have to say. Virtually, it appears as although you relied on the online video to make your stage. You obviously know what youre speaking about, why waste your intelligence on just posting video clips to your website when y…

  7. smm panel commented on Jul 17

    smm panel

    […]just beneath, are many absolutely not associated internet sites to ours, having said that, they are certainly really worth going over[…]

  8. adam and eve recharge bunny commented on Jul 18

    adam and eve recharge bunny

    […]that would be the end of this report. Right here you will find some sites that we believe you’ll appreciate, just click the hyperlinks over[…]

  9. best priced hotels commented on Jul 20

    best priced hotels

    […]Every when inside a whilst we pick blogs that we read. Listed below are the latest websites that we choose […]

  10. husky dog expert commented on Jul 21

    husky dog expert

    […]please check out the sites we adhere to, such as this 1, because it represents our picks from the web[…]

  11. mp3 commented on Jul 21

    mp3

    […]below you will discover the link to some websites that we feel you should visit[…]

  12. den rozhdeniya 15 avgusta commented on Jul 22

    den rozhdeniya 15 avgusta

    […]please visit the web-sites we adhere to, like this one particular, as it represents our picks from the web[…]

  13. تبلیغات در گوگل commented on Jul 22

    تبلیغ در گوگل ادوردز

    Hey! I know this is somewhat off subject but I was pondering if you realized the place I could get a captcha plugin for my comment type? I’m employing the exact same weblog system as yours and I’m obtaining issues finding one particular? Thanks a good…

  14. مدل انگشتر دخترانه شیک commented on Jul 23

    خرید طلا

    Appreciating the time and work you place into your blog and comprehensive information you provide. It’s great to occur throughout a weblog each and every as soon as in a whilst that isn’t the identical undesirable rehashed data. Fantastic read! I’ve sa…