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. خرید وی پی ان commented on Sep 21

    vpn ایفون

    Many thanks again for the website post.Actually thank you! Fantastic.

  2. اکانت وی پی ان commented on Sep 21

    vpn ایفون

    I totally really like your site and locate a good deal of your post’s to be precisely I’m looking for. Does a single offer visitor writers to create articles obtainable for you? I wouldn’t head making a submit or elaborating on a number of of the topic…

  3. خرید vpn برای کامپیوتر commented on Sep 22

    vpn ایفون

    Howdy would you brain permitting me know which webhost you are utilizing? I’ve loaded your blog in three entirely diverse browsers and I need to say this website hundreds a whole lot faster then most. Can you suggest a very good web hosting provider at…

  4. سرویس وی پی ان commented on Sep 23

    vpn ایفون

    My developer is striving to persuade me to shift to .net from PHP. I have always disliked the thought since of the costs. But he’s tryiong none the much less. I have been employing Movable-variety on a quantity of internet sites for about a year and am…

  5. Sie können dies ausprobieren commented on Sep 18

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  6. w88 commented on Sep 20

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  7. The Natural Penguin commented on Sep 22

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  8. bitcoinloophole commented on Oct 04

    … [Trackback]

    […] Find More to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  9. 안전놀이터 commented on Oct 16

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  10. 7lab pharma gear commented on Oct 22

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  11. check this out commented on Nov 27

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  12. regression testing meaning commented on Dec 02

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  13. last minute hotel booking commented on Dec 16

    … [Trackback]

    […] Find More on to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  14. td banking online commented on Dec 24

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]

  15. replica watches aaa+ quality commented on Dec 30

    … [Trackback]

    […] Find More on to that Topic: thereformedbroker.com/2013/02/05/t-i-n-a-or-the-sellers-dilemma/ […]