What to invest in now

As long-term readers of this blog know, I consider it contrary to my purpose to give investment advice about specific investments.  My goal is your investment self-sufficiency.  That is one of the reasons that I tend to comment on macro-economic data – I feel that much of the investment business does a bad job of analyzing the daily news flow.  However, that said, that believed, that practiced, right now is an interesting moment for the financial markets.

Definitively, the Great Recession has ended.  In data terms, it has been over for almost a year and a half.  In psychological terms, it lingers.  In unemployment rate terms, it lingers.  But make no mistake, the recession is over.

Definitively, the financial markets have corrected themselves of excess valuations and now respond primarily to good economic news, not bubble era bluster and euphoria.  This is a fantastic thing.

Now what?

The rise in value of equities has not been driven by innovation at specific businesses.  Instead, it has been driven by a realization that an economic apocalypse is not going to happen and that businesses were oversold.  Consequently, prices were too low.

This combination of factors is another way of saying that there is not much to focus on as an analyst of businesses.  That is, there is not much value added potential right now for a “stock picker.”

It is difficult to see which industries or businesses are at the cutting edge but that have not yet gained the appreciation and attention of the investment community at large.  In turn, that means that we are in a period where something very unique (at least during my career) is unfolding.  That unique environment is an environment in which excess return cannot easily be gained by a thorough process.  In other words, I am anticipating that a rising tide will lift almost all of the boats.

Consequently, my advice is to be very diversified with your investments right now.  And, though I am loathe to say it, it may make sense to be invested in an index mutual fund.  Right now there is just not much separation.  Valuations are at about fair value relative to potential growth rates for businesses.

All of the above is a part of my intuitive process.  But there is anecdotal evidence as well.  Today’s Wall Street Journal ran an article about the recent herd mentality of hedge funds.  Hedge funds are those investors with the reputation of being super expert in stock picking.  They are more knowledgeable.  They are more intelligent.  They are faster.  They have better access to information.  They understand that information better.  Or so the theory goes.  But assuming that is true, and I think, in general, it is true.  Why would they be trading in lockstep?

The article quotes a statistic that approximately 80% of hedge funds move up and down together in value right now.  That is a sure sign of two things:

1.  That many of the hedge funds use similar criteria for evaluating prospective investments.

2.  That there just isn’t that much opportunity for value ad right now given the sameness of the economic landscape right now.

Either way, and you may only ever hear me say this once, it makes sense to be invested in sameness right now.  Unabashedly put, it seems a great time to be invested in an index mutual fund right now.

Jason