Keep Calm And Carry On: Bonnie Baha’s Last Column
Courtesy of Joshua Brown, The Reformed Broker
My friend Loren Fleckenstein (DoubleLine Capital) sent this over to me and now I want to share it with you – Bonnie Baha’s last column for Forbes just went online and will be published in the October 4th issue of Forbes Magazine, I believe.
For those who hadn’t heard, Bonnie passed away at the end of August in a tragic accident while dropping her son off at college. It was shocking and extremely sad for anyone who had the pleasure of knowing her, as I have for the past few years. In a touching development, it turns out that her last column carried a message of hope and courage in the face of adversity. It’s called ‘Keep Calm And Carry On’ and it deals with the difference between the risk of individual securities versus that of the various asset classes that make up the investing universe.
I hope that you can find a few moments to read it. Like everything Bonnie did, it’s both thoughtful and poignant.
Keep Calm And Carry On (Forbes)
***
Keep Calm And Carry On
By Bonnie Baha, Forbes
Excerpt:
You often make money when you buy, not when you sell. In a knee-jerk reaction to Brexit, panic-to-quality trades sent the yield on the ten-year U.S. Treasury to an all-time low of 1.36% on July 8 from its New York close of 1.75% hours before the votes were tallied. Stocks and below-investment-grade credit sold off. In a few weeks the panic trade unwound. The Treasury market stabilized, credit rebounded and U.S. stock indexes rallied to new all-time highs. Remember, markets almost always over-react to surprises.
Let’s distinguish, though, between asset classes and individual securities. If bad news emerges on a company whose securities are held in your portfolio, revisit your investment thesis. Beware of wishfully thinking that you can hold on until the “inevitable” rebound occurs. This is called the fallacy of time diversification, and it can lead the complacent into riding that “single name” all the way to insolvency.
However, investment cycles with respect to entire asset classes behave very differently from the individual securities they comprise. Entire asset classes (stocks, bonds, real estate, commodities, etc.) go through periods of undervaluation (as well as overvalutation). But rather than vanishing in insolvency, they eventually undergo “mean reversion”: Prices reverse from extremes, and revert toward their long-term historical valuation trend….
Read the whole article at Forbes.
