By Dana Lyons, Tumblr
Investment in the riskiest assets has been on a relative decline, a development which has preceded previous major tops.
"For the moment all discipline seems painful rather than pleasant, but later it yields the peaceful fruit of righteousness to those who have been trained by it.” – Hebrews 12:11
About 4000 years ago, the world experienced its most significant “risk-off” event of all time. Angered by the peoples’ wicked behavior, God flooded the earth, wiping out the entire human race, save for Noah and his family. One might consider Noah the original risk manager. Rather than dismiss the risk of rain — an event that supposedly had never occurred up to that point — he built an ark that would provide protection in the event of a flood.
It certainly helped having an advisor with inside information like God who not only warned Noah of the flood, but was also in charge of its implementation. Even so, it must have taken some serious faith and fortitude on Noah’s part to continue executing his risk strategy considering how lengthy the effort was before it finally revealed any benefit. From start to finish, it took Noah 100 years to build the ark. Can you imagine the taunting he must have endured (e.g., the “perma-bear” accusations in the social media circles)? To his credit, none of that interfered with the implementation of his risk management process. And in the end, the man lived for another 300 years while everyone else ended up under water, literally.
We have been implementing our risk management process to manage investments for over 40 years. Over the course of that time, we have seen all kinds of markets. However, never have we seen anything like the recent environment. While storm clouds in the market have been accumulating for the past few years, there has hardly been any rain, save for an occasional drizzle (June 2013, October 2014). So while we have not been shy in pointing out the growing potential risk in the market (we are active risk managers after all), this risk has not yet mattered. In fact, it has been just the opposite: a nearly unprecedented 2-year increase in asset prices with hardly any drawdown along the way. For a risk manager, these 2 years may have felt like those 100 that Noah spent building his ark.