December 21, 2017
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We decided to put together a series of the hard-hitting questions that investment managers are
being asked today. Last month we published Manager Interview – Part 1. This article finishes our interview with 4 more hard hitting questions answered by our lead investment manager. Enjoy!
6. What do you make of the bitcoin craze happening now?
Great question. I think it is important to start with understanding what bit coin really is. Bit coin is a digital currency built on the back of a new technology called block chain. Many other digital currencies also exist such as Ethereum, Litecoin and Riddle that all have slightly different designs and ways they bring block chain technology to life. To explain my full thoughts would take an article in itself, so let me summarize for now and we can release a more robust article as follow up. The technology will revolutionize the way data is transacted across all industries. Block chain allows a greatly improved way to send and receive data. Essentially the technology creates an open network that is more flexible and more secure than anything we currently have in place. It allows direct digital transactions to occur without middle men which will improve efficiencies and lower costs for many firms who adapt to block chain interface. If you did not understand any of that, no worries….it took me at least 10 hours of reading before I could even wrap my head around some of this stuff. Bottom line is this, the technology is fantastic and very valuable. However, the digital currencies are not directly the technology which leads to the following question….how do you invest in the technology? I think this is where many investors are stuck today. The technology seems to be easy to create, build upon and improve. You have many new start ups appearing and no one has any idea how this will really play out. Then you have the question of investing in the digital units that carry out block chain functions. Also known as digital currency. While not the technology directly, it represents the technology being used. This is what bit coin, eutherium, litecoin and many other digital currencies represent. They are a secondary reflection of the underlying technology being used to transact business. Each has there own story and unique spin on the technologies. Without a company to invest, these have become the default derivative investment into the technology. I think the craze could actually get much bigger before it busts. However, we have seen some of these digital currencies lose 99% of value in a single day and gain back or grow1000%+ in a few months. It is currently akin to gambling, but perhaps with slightly better odds. For now we treat as gambling. If you have a set amount you would like to gamble for entertainment and do not mind losing it all, this may be quite a ride the next couple years. Until we see the market develop a bit more and figure out an end game of how a digital currency can be backed by cash flow or what a supply/demand curve might look like long term….then we will tread lightly.
7. Are we in a bubble currently?
No, at least not yet. There is a big difference between overvaluation in the market and a bubble. We still see large parts of the market trading at a fair or undervalued price relative to historic business multiples. What we have seen in 2017 has been a flocking to growth companies and momentum driven trades while more traditional “value” companies have trailed behind. This has created a fragmented market with parts of the stock market still showing some reasonable long-term value. We expect this trend to correct and balance out long term. With such a large percentage of companies still trading at reasonable levels, it is hard to say we are in a market bubble. Of course we could still experience normal pullbacks but we do not see the dangerous 50% declines on the horizon just yet. You never know, but from a valuation perspective, a 10-20% decline in some of the higher flying areas would bring markets in alignment with fundamentals and set a base for reasonable forward growth. Of course, this is a very logical thought process. Markets tend to continue moving up beyond logic for a time and when they correct they often over correct beyond logic as well. So, no bubble, but that does not mean a correction won’t occur.
8. How will the new tax bill affect my investments?
Many projections for future earnings have already priced in a tax cut. If the new tax bill passes it will likely give a short-term boost to markets since it will take away some uncertainty. Long term the devil will be in the details. I will refrain from any long term comments until I see the final bill.
9. So what’s your prediction for 2018?
Thankfully we do not make predictions, rather we make investments. Had we market timed on strict value, we would have moved out of the market and missed a tremendous run up. Sometimes the market gets overvalued and companies catch up while other times it becomes over sold and prices catch up to value. In both cases, timing the market is never a good idea. Rather we find good investments that provide current or future cash flows that meet client needs. We balance according to risk and remain vigilant at taking profits and staying balanced for the long term. 2018 is as unclear as any other year, with some good and some bad ahead. Our ability to remain flexible and keep capturing obvious value when it comes will be key for ongoing success.
OK – you just dodged the question…. What’s your prediction?
The market will go up some and down some. How about that.
You’re not going to give a prediction are you?
After 16 years researching and managing money, I see no benefit of predicting the general market for 1 year. Unless someone is investing for 1 year, the results should have no bearing on a well designed plan. If someone cares that much about what happens over the next 12 months then they should likely be in cash. If they care about investing for the long run of 10,20,30+ years then my prediction is they will be very successful and much higher than today. Just like clients are who started with us 10+ years ago.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.