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Dan Nestlerode: Dealing with the Investment Markets: Dichotomy and Doublethink

by on January 22, 2012 9:45 AM

I am an avid reader of all things related to the economies of the world and their related debt and equities markets.

Life would probably be a lot easier if I would read only about the investment markets or about the economies of the world and not both. Yet the two are linked together and historically have succeeded and failed collaboratively.

We live in interesting times where one notion of intelligence is Orwell’s doublethink – the ability to accept two conflicting sets of views at the same time and still retain your sanity.

It would seem that the performance of the investment markets, at least in the United States, and the conditions of all the economies of the world are at odds these days. The world economies are propped up with monetary and fiscal stimulus programs, while the fundamentals continue to deteriorate as politicians are unable and/or unwilling to make the changes required because those changes are unpopular with the voting public.

I am talking about decades’ worth of political promises made to the electorate by politicians (who are mostly dead or retired) that are now coming due just at the point that the means to fulfill the promises is failing.  Greece has already failed financially and is asking its bondholders to take an 85 percent haircut (euphemism for taking an 85 percent loss voluntarily) just so the Greek government can continue the business of being a practically insolvent nation.

I have an investment tip for my readers: Don’t buy Greek bonds. As we are required to say, past performance is not a guarantee of future performance, so I could be wrong with this recommendation.

As governments flounder with their spending and funding issues, the private sector, which supports all the government spending, is not doing all that badly and is still advancing, albeit at a snail’s pace. Equity valuations are either high or low, depending on which analyst you are listening to today and the U.S. stock market is advancing so far this year, in spite of a number of economic gurus calling for a recession later this year.

Is the stock market right or are the economic gurus right or are they both right? We might just have a rising stock market with a recessionary economy.

All this makes me feel like one of those professional drivers who make cars do things for advertisements that you should not try at home. If you are a novice at investing, don’t try and understand this stuff, you will only get a severe headache and be wasting your time. Find something fun to do, like walking your dog, playing with the cat or taking your spouse out to dinner.

Which brings me to the real point of this article: There is no formula or investment strategy you can employ to get through this market environment. The problems we are dealing with today predate computer models and the historic solutions employed years ago might not be effective in our current circumstances.

What you have to do, indeed what you must do, if you are to have a chance at being successful, is pay constant attention to your portfolio. You must monitor the value of your holdings, eliminating non-performers (and the justifications for holding non- performers) and keep the value of your holdings on an upward and to the right trajectory.

I don’t know of a better way to avoid unpleasant outcomes or a better way to manage portfolio valuation risk.  Risk, of course, is unavoidable and can only be managed. There are no riskless investments. Further, if you have money, no matter where it is invested, it is subject to some kind of financial risk. The questions become, 'Are you managing the risk or hoping that things will just turn out all right?'

Like I said, we live in interesting times. I cannot retire now because the investment game is just much too interesting. Mine is a job where boredom never seems to occur, even after 47 years. 

Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at [email protected]
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