Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism.
“With so much stimulus being deployed, trying to figure out if the economy is in a recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” he wrote. “But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger”
He has a very valid point. How do you recognise the risk? If you’ve been driving blindfold in a car and not had a crash, do you start to think you will not have a crash? We all know driving with a blindfold is not recommended, for obvious reasons, as we have thought about risk. But in the current market, is it possible investors are not able to recognise the dangers?
There is much euphoria at the moment which is reflected in valuations. And we all know markets fall as well as rise. It, therefore, makes prudent sense to review independently your risk. Why independently? Because of existing conflicts of interest investors face. Here’s a question, when driving the car blindfold, and you asked the question, shall I keep driving? It depends on who you ask? If it suits the other person that you keep driving, you will get an answer that says, you keep driving. If you ask someone who is looking after your interests, they may tell you to stop and take the blindfold off before you continue your journey. Checking your portfolio needs talking to someone independent of your current arrangements.