Berkshire Hathaway’s Charlie Munger has been a ceaseless and helpful quote machine for investors during the majority of his 94 years on the planet. One of his better-known pieces of advice is to ‘always invert’ when faced with a business challenge – ask the questions in reverse as well as conventionally.
The best example of inversion I can remember concerns a company looking to increase productivity. Mr. Munger was fine with the process of looking for new ways to improve, but also suggested that management ask ‘What are we doing now that’s stopping us from getting better?”
This is a very helpful process for investors. Sell-side research is happy to provide a myriad of reasons to buy a stock, but investors should supplement this structural optimism by listing all of the reasons the investment could go wrong. Your broker, by the way, is unlikely to be helpful with this.
Inverting also applies to market strategy. In a March 1 report, Merrill Lynch quantitative strategist Savita Subramanian noted that when interest rates climbed, stocks followed them higher 90 per cent of the time. We can accept the historical patterns indicating that rising rates don’t immediately mean the bull market is over, but can also look for reasons that the usual precedents might not apply this time.
The demographics-led desperation for yield and income could makes things different. With a much larger percentage of the investing population stuffed into dividend and income instruments, equity markets are likely to be more negatively affected by rising rates than in previous inflationary periods.
Ms. Subramanian, no raging bull, also noted in the same report that “the S&P 500 is statistically expensive on almost every metric we track.” High valuation levels could also limit