2nd Level Thinking

Video Transcript:

So I just stepped out of the office for a little while and am thinking about what is going to be required to preserve and build wealth in the coming years.

What we know right now is that it’s going to require different strategies than what have worked in the past, and it’s going to take second-level thinking to identify the opportunities and risks that are ahead.

I wrote recently that I’m concerned most investors aren’t aware of the implications of the current economic and market environment.

But consensus thinking, or “the crowd” if you will, has a knack for getting things wrong. A good example is the direction of bond yields over the past 8 years. The crowd has insisted that rates have to go up. Instead, they have gone down by over 50%, and good investors profited handsomely by identifying that rates had much further to fall. That’s second-level thinking.

So today we find ourselves in a place where it actually costs money to hold cash (negative real rates), and 10-year Treasuries now pay only 1.76%. These rates have pushed investors out to riskier assets in a search for higher returns, driving valuations to the highest levels we’ve seen in several generations. Even margin debt has reached a historic high, which means people are actually borrowing money more than ever to buy stocks today. As a result, the expected return on most assets is nearly zero for the next decade, with a high probability of significant losses along the way.

That’s not the kind of investment setup that excites me. And if you like preserving your wealth, it’s not a great setup for you either.

The good news is that for patient investors real opportunities exist in what we’re seeing. There are entire asset classes that the crowd has shunned, creating fantastic value for us today. There are other asset classes that will be shunned in the future, and we need to be prepared to take advantage of those new values — preserving wealth today will put us in that position.