Aug 25, 2020
“Investor, please meet TINA. TINA, please meet investor. I doubt you’ll like each other, but you’re going to have to get along.”
T.I.N.A. = There Is No Alternative
If you are hearing this acronym for the first time, there are a few things you must understand about it that has now become common in the investment-industry lexicon:
• Interest rates for “risk-free” investments (i.e. US government bonds) are low, almost negligible
• Said rates are going to stay low for a while
• Investors need return
• Therefore, there is no alternative than to take risk (or more risk) to get sufficient return
Let’s define risk as buying securities that hold the potential to lose nominal value. We say nominal, because even a “risk-free” security can lose value on a real basis if inflation is higher than expectations and the return fails to maintain the purchasing power of the original investment.
And, of course, there is a spectrum of risk within the universe of investment options, moving from lower risk investments (investment-grade bonds), to medium risk investments (below investment-grade bonds), to higher risk (stocks). There are certainly investments that are riskier than stocks, but we’ll save that conversation for another day.
So, here’s the issue: investors NEED return to support things like a retirement lifestyle or to meet certain contractual obligations in the future (like a pension plan or life insurance). When you can’t get that return in safe investments (i.e. bonds and cash) you feel the need to increase your allocation to riskier investments (stocks).
When interest rates are negligible and the extra return an investor gets from taking credit risk (i.e. the risk of default) is low, the desperation for return drives investors into the stock market. Hence, There Is No Alternative (TINA). You’re basically stuck buying stocks to get any semblance of a meaningful return on investment.
But there’s a little more at play…
When the stock market doesn’t have enough companies positioned favorably to continue growing profits (this is what drives higher stock prices over time), then investors’ dollars continue to funnel into the smaller and smaller list of companies that do have a potential (or perceived potential) to deliver long-term profits. Enter yet another acronym: FANGAM (Facebook, Apple, Netflix, Google [Alphabet], Amazon, Microsoft). This is not the first time you’ve heard us talk about this, and it probably won’t be the last.
Here’s why we are talking about this: The way the stock market is behaving right now (somewhat ebullient) is not necessarily because of some excessively optimistic mania. Rather, this rally is supported by the fact that there is money seeking return wherever it can be found (and a lot more money than you’d expect thanks to the massive monetary AND fiscal stimuli). The bad news is that there is likely a sizable imbalance being built (which has to revert eventually, we just don’t know when). The good news, however, is that when you look at much of the other businesses that are not in the FANGAM group mentioned above, many of these stocks are still priced somewhat more appropriately for our current state of affairs, which is still a troublesome economic contraction.
This means that many of these stocks will recover when the economy recovers, and as long as they have the wherewithal to survive and have a place in our modern economy, they should deliver decent long-term returns. It is likely that we still will see a wave of bankruptcies and business closures; however, innovative, conservatively financed companies in critical industries will ultimately thrive and will ride the wave up throughout the recovery, which will happen at some point.
Now, we wait.
