What do you believe?

I read an article on Seeking Alpha today simply entitled "FOMO or FUBAR" - that is, Fear of Missing Out, or Fouled Up Beyond All Recognition. It seems to me that question fairly well frames the range of opinions regarding the current state of the financial markets.

A couple years ago I commented that "in the financial markets, these periods tend to be accompanied by new theories which try to provide underpinnings to the price action that make them different – a.k.a. sustainable – this time around." Where one comes down the FOMO vs FUBAR debate ultimately lays with their belief or disbelief in these "this time it's different" arguments. For no doubt, we are traversing a unique, uncharted landscape.

To quote a separate article, "Any time someone starts off a sentence with 'In theory, we could...' you know that whatever comes out of their mouth next is probably going to be a crap idea." Yet both bulls and bears (ok, mostly the bulls) must frequently theorize to support their market position in these unprecedented conditions.

Of course, this debate is really only an issue for those who employ a more active, dynamic approach to asset allocation. It is less relevant to those with a static approach and prescribed rebalancings.

My natural state rests with the skeptics. It hasn't always served me well as an investor. And I've tried very hard over the past several years to consider both sides of the coin. But at my core, I believe the markets are (most often) highly efficient with regard to closing-up "cheap" buying opportunities, yet highly inefficient when it comes to allowing conditions to get overheated. In that asymmetry lays my cautious investing nature.

The challenge for today's bulls and bears is to earnestly question the basis for their opinions. Searching the internet for a writer that agrees with your particular viewpoint does not really qualify as "research" - come on, raise your hand, you know who you are out there! Behavioralists refer to this as confirmation bias.

This post would become unduly long if I tried to cover the myriad factors embedded in the market to debate - more for another time. In brief, though, equity returns are driven by earnings, an earnings multiple, and dividend payments. Fixed income returns should include a risk-free rate, an inflation premium, and a credit premium when applicable. Many of these inputs have reached extremes that require scrutiny.

My point here is simply to encourage readers to take an honest approach when formulating their investment opinions. The fact is that much about prevailing market conditions is different. How we invest around that requires disciplined thinking.

No doubt, nothing is easy these days. Tim Quast put it like this: "Rational signs come only from rational behavior." The Heisenberg put it more plainly: "Does anything still matter?"

Well, it's up to us to examine both sides of the coin with intellectual integrity, and make the smartest bets we can.