A few clients have asked me about the recent stock market volatility in the broader market in general and with a few select stocks in particular which contain a high amount of short interest (such as AMC Entertainment and GameStop). As such, I thought I would share my reply with everyone as you may be interested in my thoughts and our strategy going forward.
During his annual shareholder meeting in 2018, Warren Buffett advised investors to put all their money into the Vanguard 500 index. In contrast, "The Big Short" investor Michael Burry recently explained why the wildly popular inflows to index funds are distorting the prices of the stocks they are designed to track and warned about the bubble.
Some weeks ago, I saw my seven-year-old daughter watching "The Lorax," a movie based on Dr. Seuss' favorite children's book. Although the fable is ostensibly used to express Dr. Seuss' anger at corporate greed, I believe the story displays that greed and care of the environment can coincide with one another.
Over the past decade, I was continually asked by prospective clients at the beginning of every year what they should do with the cash they have been sitting on as they have been too afraid to get back into the market after the financial crisis. Year after year rolled by with sound returns missed by these individuals who sat on large cash positions. Their usual response was that they were "waiting for the right time to invest and for a 10% or 20% market sell-off to do so". Unfortunately for them, every time a ~ 10% market correction occurred they were still too afraid to get into the market as whatever event was currently occurring kept them from investing. Now that the stock market has sold off more than 20%, one would think investors would be clamoring to finally enter again. However, we know that isn't the case as more investors are currently selling than buying and individuals are again too afraid to purchase equities.
Volatility has been on the rise in financial markets this year, and December seems to be unfolding as potentially the worst month of 2018 for stock market volatility. What’s unusual this year is that just about all asset classes are down at this point, which is a reversal of what we experienced last year in terms of both volatility and the return on our investments. In light of recent market trends, I answer some of the questions clients may be considering about the markets.