Ralph Waldo Emerson wrote:
“A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict everything you said to-day. — ‘Ah, so you shall be sure to be misunderstood.’ — Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.”
Although many definitions have been offered for Mr. Emerson’s now-famous tome, I have interpreted it to mean: Think outside the box. Do not become chained to conformity and historical repetition. Use your own senses to determine what is happening and act/react accordingly. After all, the aforementioned passage is from Mr. Emerson’s essay “Self-Reliance.” The message of “Self-Reliance” was; there is a “need for each individual to avoid conformity and false consistency.”
For me, these are words to live by. For many professionals in the financial industry, consistency of thought or strategy, foolish or not, is a mainstay of their business lives. The group think on Wall Street is to stick with what works until it doesn’t then stick with it a while longer. As such, low U.S. Treasury yields and high earnings multiples among dividend paying stocks, such as utilities, are automatically viewed as fear trades. This completely ignores other factors involved in current asset allocations.
As I have stated many times in recent months, there is enormous demographic demand for interest-paying and dividend-paying investments. The greatest (non-central bank) demand comes from institutions such as insurance companies and pension funds. It is unlikely that these institutions are buying bonds and dividend stocks out of fear. It is far more likely that they are buying income paying instruments to generate income to meet actuarial needs. The last thing pension funds want (many of which are not particularly well-funded to begin with) is to burn principal. This is particularly true when one considers that life expectancy continues to increase. Still, the hobgoblins continue to wreak havoc on the minds of Wall Street strategists and pundits.
A popular metric which Wall Street analysts and strategists use to measure the attractiveness of stocks is the price earnings ratio (P/E). With the utility sector trading with a P/E of just over 20, the hobgoblins consistently whisper in the ears of many markets strategists: “That P/E is just too high, rotate into consumer cyclical and growth stocks before others do.” In my opinion, this is an example of foolish consistency.
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