When stock prices slid last summer and early fall, we found ourselves to be, strangely enough, happy. Value investors – which we are – appreciate an opportunity to buy assets on the cheap. The slide afforded us the chance to do so, albeit in small increments as prices fell only moderately below fair value.
A strong October 2011 and January 2012 have ended the discount sale. Equities across the board range from fairly priced to somewhat expensive. This is a less enviable position for investors, because it means lower expected returns. It also means a smaller margin of safety – the prices of expensive assets have further to fall than those of cheap assets.
This puts us in an uncomfortable, itchy place. We would love to hold an outsized portion of cash, but cash yields approach zero. Bonds are terribly expensive, so they’re not an option for overweighting. We hold a fair sized position in alternative investments precisely because of that.
Our long-term goal for the average client is to earn 5% plus inflation (as measured by CPI.) At times like this, we must mind the risk that accompanies expensive markets. You will find us cautious, concerned investors for the time being.