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Day 330: An Investing Renaissance

Mother's Little Helper portfolio was UP today +$8,858.67 (+1.04%).

Overall GAIN YTD: +$274,398.10 (+46.99%).

Our benchmark index, the S&P 500 is up +16.09% Year To Date.

My whole life has largely been one of surprises.

I believe that any man's life will be filled with constant, unexpected encouragements of this kind

if he makes up his mind to do his level best each day of his life —

that is, tries to make each day reach as nearly as possible

the high-water mark of pure, unselfish, useful living.

- Booker T. Washington

A New High-Water Mark

The term high-water mark was first recorded in 1545-1555 as meaning, 'a mark showing the highest level reached by a body of water'. In financial terms a high water mark is used in investment funds to ensure that investors do not have to pay performance fees for bad or mediocre performance. A high water mark ensures that if the net asset value of the fund falls in one investment period, that the performance fee can only ever be charged on any out-performance above the highest the fund had ever reached in a previous investment period.

Today the portfolio posted a +1.04% gain to close up year-to-date +46.99%, our new high-water mark.

The DOW closed up today +160.50 points or 0.69%, the NASDAQ was up +71.76 and the S&P 500 advanced +16.89 points to close at 2,599.03. The S&P 500 has been getting progressively closer to my Day 184 call for it to reach or exceed 2,900 by year end. Can these gains continue, of course they can. Will they continue without a pull back or significant correction, no, that's highly unlikely. As we've seen time and again investors can be irrational much longer than any one of us can remain solvent. Today I'd like to spout off on what I think is really driving this market higher from current levels.

It's Different This Time

During any period of growth there's an old mantra that gets trotted out by the naive, the young and the downright delusional that goes like this, "It's different this time", which is usually followed by "you just don't understand".

Those statements are true and false. There is something different going on, but I think many in the financial markets fully understand. The thing that is different is probably best defined as "Everything old is new again". To explain let me paint some background.

First, many of the people working in the financial industry, analysts in particular either weren't alive or were too young to remember the crash of 1987, also known as 'Black Monday'. That event marked the first time that regulators had to take a serious look at computerized trading and put systems in place to try and prevent a similar event in the future. That was 30 years ago and most of the financial industry is under 40. Since 1987 we've seen a rapid increase in the use of computerized trading in particular 'algorithmic trading' and 'quantitative analysis' or quants. Algorithmic trading is a method of executing a large order (too large to fill all at once) using automated pre-programmed trading instructions accounting for variables such as time, price, and volume to send small slices of the order (child orders) out to the market over time. Quantitative analysis is the use of models, or algorithms, to evaluate assets for investment. The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns. This type of trading has little interest in what a company does but rather is purely focused on the technical and mathematical patterns that can be used to buy or sell stocks. There are investment firms that specialize in this type of investing; internally they look more like silicon valley tech companies than an investment firm.

Second, culturally we have changed, all of us, globally have experienced a profound cultural

change in what has been called the digital age. We expect instant everything. We can't wait for a newspaper to arrive, we need to know the headlines now. We can't go out for dinner, we want it delivered now, or at the very least waiting for us when we arrive. Hailing a cab is passe because with a couple taps on a smart phone a car not only arrives wherever you're standing you can also track its path. A full time job isn't necessary when the gig-economy can provide work that I can do from anywhere I have internet access. Buying products online was novel and a big step forward, but then delivery was a nuisance until Amazon made it expected that shipping should be free and delivery should be over night. This isn't just a Silicon Valley, or American trend, it's nearly universal all over the world. We want to know, buy, investigate and share everything, from anywhere at all times. Even investing had to adapt and provide solutions to this new generation that expects everything to be organized, laid out on a menu and provide instant gratification. Numerous Financial Technology firms have sprouted up, commonly called FinTech to provide these ready made investing solutions to the millennial generation. Robo-Investing puts your money to work in groups of index funds with no thought process or follow up on the part of the investor. Motif investing automatically creates a portfolio based on a theme and provides all the analysis for the investor. Then there is commission free trading, automated business and personal loans on your smart phone, automatic payment systems for person-to-person or business and much more. The general theme is, I want it now.

This cultural shift presents a bit of a problem for old buy and hold investors like me. I still live in a world where as an investor I think it's important to know what the company does, how it makes money, does it treat its employees well, how it impacts people, the environment and what the long term prospects are for the growth of the business.

Today I was looking at my pants and this got me to thinking about what's going on. You see on most days I wear the same pants, I own several pair, but my go to pants are Levi's 501 button fly shrink to fit jeans. Some of you may have to go back to your childhood to remember what those are, but I've been basically wearing the same brand and style of jeans for as long as I can remember. Every few years they come into vogue again and I get to be cool for 15 minutes. I'm seeing the same thing happen in the stock market, everything old is new again. This new generation of investors is discovering that fundamental valuation of stocks is a good thing. They're curious, they want an edge that their peers don't have yet and they're finding it in fundamental analysis.

This renaissance in the traditional methodology of picking stocks I predict will drive the markets higher. The recipe is simple, low interest rates, strong earnings, globally synchronized growth, and lots of money that's un-invested, all introduced to a new way of valuing stocks that at current valuations is screaming BUY!

Stay Invested

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, TBT, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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