The ideal scenario right now for high-profile fund manager Geoff Wilson from Wilson Asset Management is for another global financial crisis to hit.
For him, that would be perfect.
For sure, shares would be smashed, property too, as he thinks valuations for both those asset classes are on the very high side.
But it would also mean he could start to spend some of the cash, as much as 42 per cent, that he has built up in his main fund.
And there’s nothing like a good crisis to help with a manager’s performance.
When stocks plunge 50 per cent or get sold down to a forward price-to-earnings ratio of one, as they did in the 2009, investors don’t have to wait long for the rebound to pan out.
If you get your timing right it can take two years to achieve returns that normally may take six years.
Although almost half the fund is in cash, some of the top stocks in WAM Capital include Eclipx Group, Nick Scali, Ardent Leisure, Century Australia Investments, ALS, Helloworld, Southern Cross Media and Aristocrat Leisure.
What worries Wilson now more than anything else, and a major reason why he holds so much cash, is how the world handles what he calls the great unwind.
How, after years of easy money and falling interest rates, will global investors deal with a scenario that’s never happened before?
That is central banks taking away liquidity rather than adding to it.
Ironically, for a value investor – who likes nothing better than getting something on the cheap – Wilson is betting that the end of this era, the end of all this cheap money, is now going to be a hindrance, not a help.
The $US185 trillion credit-fuelled bonanza of the past 20 years has deformed the investment landscape in many ways so perhaps it’s not surprising that eventually it creates a few problems when the trend starts to go the other way.
The Bank of International Settlements has been warning about it for years, while countries such as Saudi Arabia, Qatar, Kuwait, and the UAE, that accumulated as much as $US2.3 trillion in sovereign funds over the past 20 years or so, now have to start selling those assets with deficits tipped to get to double-digit levels in the next few years.
Rather than be concerned about a major meltdown, investors have pushed stocks up aggressively over the past two weeks since Donald Trump won the race to the White House.
The resulting higher valuations will need to be justified by higher earnings and a durable rebound in growth.
Value managers often like to see some irrational behaviour before they call the end of a bull market and maybe this post-election Trump buying, that has all four major indices on Wall Street at fresh record highs, is it.
As John Templeton would say, bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.
The Dow Jones hitting 19,000 for the first time ever could be described as euphoric and it’s certainly a milestone level for the blue-chip benchmark given the remarkable achievement has happened in response to a Trump victory.
Investors have jumped on the tax cuts Trump says he’ll bring in, but they have forgotten that he also wants to scrap trade deals, bring in big tariffs on China, break up big banks and audit the Federal Reserve.
Any other time those sorts of promises would make investors very nervous.
Then there’s the ongoing worries about burgeoning budget deficits and the upward pressure on bond yields that also loom as a potential headwind for sharemarkets.
All this is happening at a time when people are talking of a new era of lower returns, although it could also be more a case of lower prospects in the developed economies as they start to unwind the huge debt overhang.
The American unwinding so far has been very tiny, and paying this back will create a drag on growth – and on earnings and investment returns.
But investors always have a choice when it comes to money: they can save it, or invest it.
And since the bottom of the market in the March of 2009, if they have been fully invested in something like the S&P 500 price index, they have enjoyed an increase or more than 200 per cent over the past seven years.
Can it really keep going?