In summary, Mr. Market has delivered a rude wake-up call, and the month of May has been a painful reminder of how humbling the investment business can be.
Tactically, I plan to sit tight with my current positions (about 50% net long exposure) and to wait out the increasingly emotional backdrop of fear and loss of investor confidence.
Based on their relationship to corporate profits, sales, private market values and interest rates, stocks are inexpensive and, from my perch, provide a floor to equities. Indeed, relative to interest rates (government and nongovernment), equities have rarely been so cheap. We are back to the elevated risk premiums that existed all the way back in 1975 -- the following two years resulted in +30% and +20% yearly returns in the S&P 500. Risk premiums are even higher than at the generational low in March 2009! A longtime acquaintance (whose input I value) reminded me over the weekend that depending upon which interest rate one uses, "the equity risk premium today is 2.0-2.5 standard deviations above its long-term mean and lies at the third-highest level in the last 52 years."
As the wise man once said, though probably not referring at the time to Mr. Market: "This too shall pass."
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