The only underpriced asset is risk (or, where to invest in difficult times)
Posted by Warren on September 16, 2008
Last spring, a friend of mine at a hedge fund was complaining that he couldn’t find any undervalued assets. Everything was over-priced – stocks, bonds, real estate, commodities, high-yield bonds, the dollar, the Yuan, gold, emerging markets equity, emerging markets debt, timber. Every imaginable asset class was fully priced. That is, except for one – risk.
The investing world learned this the hard way in 2007, and I believe they will continue to learn this through the remainder of 2008. If I had to make a prediction where the next bubble may lie, it would be in the market for risk. The cost of debt and equity will continue to rise, and investors will demand premiums for risk no less ridiculous than the premiums paid for dot com stocks in 1999.
My advice, get in on the bull market for risk! Go forth and buy straddles, have your bankers structure synthetics, do whatever you need to. But do not forget, risk is still the underpriced asset.
