Interestingly, despite 2016 many fearful calls of end-game. The markets appear to be holding up relatively well. The biggest of which appears to be the DJI. It doesn't even discount a Trump Presidency or an interest rate rising environment.
Its amazing what happens in 10 years.
Generally, if you think of life. What "kills" you is not what you saw and know. Its what you didn't see coming. If you crossed the road and didn't see an oncoming car - that could kill you, or injure you.
There are things like buses/lorries that are huge - if they hit you....the damage tends to be more severe. But if you took your necessary precautions, watch the traffic, obeyed the traffic rules....you have a better probability of safety.
Its the same logic with investing. Are the black swans what we see on the horizon?
Absolutely not.
Will Trump presidency cause a recession? I doubt it. But I believe that it will cause some uncertainty in the world where opportunities will arise.
Will a rising interest rate cause a recession? Not entirely, not yet. Maybe when it hits about 3-5%...then you have serious problems. At the current point. No.
So is it possible to see the Black Swans much less predict it? It is hard, but not impossible.
Certain people saw the easy credit and the dangerous practice of asset securitization in the USA. These people like Robert Shiller, John Paulson noticed it. Some raised concerns, some decidedly made billions of dollars from that impending collapse.
The point is the majority failed to see it because it came from a rather secluded part of the banking industry - Asset Backed Securtization.
Here is what I see
1. The big crashes come about every 10 years, think 1987, 1997, 2007 etc.
- Yes. This time it may be different. We never had such an environment before. But do you really want to be on the wrong side of the endgame when it happens?
2. The astronomical debt of countries, QE and negative interest rate
- USA, Japan, ECB. They have continually pushed on with a negative interest rate environment...typically this stimulates the economy and starves off a recession. In the long run, this causes massive inflation and when a collapse really comes. The countries really can only print money...talk about more inflation.
3. Commodity prices have started to pick up, but not as fast as some banks would like it
- The collapse of oil prices and other soft commodities resulted in the banks having an increase in NPL. Companies that are unable to survive this prolong winter will go belly up. The banks have strong balance sheets to handle such a situation. But contagion may happen if the winter holds out too long.
- Low oil prices starves off inflation. Its good for the economy. But low oil prices harm businesses, employment etc....."Damn if you do, damn if you don't".
Then the question comes. Do we sell everything and head for the hills?
The answer is no.
Nobody knows how long all this will happen. Having a good mix of income producing assets. Good value, good businesses will keep the investor steady on his journey to financial independence.
As a rule of thumb
1. Go for investments with yield above 7%
2. Go for companies with relatively lower debt (e.g. <40%)
3. Stick to companies you know (e.g. retail malls you can see, management who are transparent etc.)
Below is a breakdown of analysis of local trusts listed in Singapore. Green is good. Red is not so good. Data extracted from SGX Reit Data (http://reitdata.com/)
Caveat Emptor.
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