Our expectations are already lowered for general market returns. When expectations are this high, our fear of losing overcomes any fear of missing out. We still see a high probability of an economic downturn and remain defensively positioned for that reason as well, and we continue to hold some cash and hedges that should protect our portfolios when everybody else’s expectations are lowered.

Only time will tell whether today’s lofty index valuation levels represent a grand illusion relative to prevailing and forthcoming economic underpinnings. Either way, our macro and micro analysis suggest that investors are simply too optimistic about stocks generally, boosting overall risks. Market declines may be closer than they appear.

As value investors we gravitate to undervalued securities—those that are inexpensive relative to our fair market value (FMV) assessments, because they are out of favour or underestimated. Similarly, we steer clear of those that are popular and dear.

We look to avoid overly popular companies that are priced too high, susceptible to decline, and result in misery.

Animals hibernate for self preservation—to conserve energy during adverse conditions. But then they emerge, ready for the more bountiful period that awaits.

While we still see an economic setback ahead, and a commensurate market reaction, we expect markets to discount the pending recession, and then once again focus on recovery. In the meantime, we are hibernating—hedging portfolios (afraid of market declines) and buying undervalued, high-quality, recession-resistant companies below our estimated FMVs.