Don’t Go Getting Cute with Giant Moves

Most readers will by now be well aware of the cliff that the precious metals stepped off last week.

I’ve got a few thoughts related to this.

When looking rationally at our private equity portfolio of companies we are funding via PP’s, or in fact any unlisted and illiquid investments, we don’t consider daily, weekly or even monthly fluctuations. Why should we consider treating listed, liquidly traded securities any differently simply because they are jumping around on a quote screen like epileptic jelly beans? What’s fundamentally different? Nothing!

If we have some concerns regarding our private equity deals we simply sit down and ask ourselves typical questions such as:

  • Is management executing?
  • Is the macro reason for investing still valid?
  • Is there any change in the landscape that needs addressing? (things such as regulatory changes, etc.)
  • Can I add value in any way?

Simple enough stuff. So let’s apply it to the epileptic jelly bean market.

What’s changed? Are Governments suddenly reigning in their spending? Are Eurozone banks recapitalized and in better shape this week? Are Greece, Spain, Italy, Portugal et al in better or worse shape this week? Have central banks been abolished?

When markets move like this it’s because people are forced to buy or sell, it’s usually not because they want to. Leverage is a double edged sword. Liquidity is found in US Dollars and debts are still settled in dollars.

A Review Of The Market Action

So now that we have put pricing of securities into context let’s review market action. What’s quite possibly more troubling than the cliff face that the precious metals just stepped off, is the action of doctor copper. It is indicating that the market doesn’t believe in the recovery of the economies of the world. It means demand is falling, and in Fed speak it translates into “Aghh the deflationary spiral…” Helicopter Ben is watching, and he’s about as smart as drywall.

Some predictions if I may:

  • The sun will rise tomorrow.
  • Birds will fly.
  • Fish will swim.
  • Feeble minded louts will encourage reckless behavior and tell you it’s for your own good.
  • Central banks will continue to destroy their respective currencies in an effort to fight a market desperately trying to reset values.

It’s a shame really, since if a sensible person tries their hand at something and fails miserably he’ll stop doing it. He might even get depressed and have his self esteem shattered (Not to worry, men can deal with this… We can become alcoholics and get into bar fights.), but instead these folk have no shame and continue with mindless destructive policies. We’d all be better off if they were found on a park bench clutching a brown paper bag.

It’s like these guys are living in a desert but intent on outlawing sand. It’s not going to work anymore than banishing sand from the Sahara would. The sand doesn’t care and neither should we. In fact we should be grateful for the setup since it makes predicting the outcome much easier than might otherwise be the case.

We remain long stupidity and short common sense.

Perspective is always a useful thing to have. As such I present to you a forest. The earlier graph above was of a tree.

Warning: Financial Leverage Is A Killer

Markets are usually forward looking, however occasionally they overstretch themselves and provide us with an opportunity to buy things that we had always wanted but weren’t comfortable buying at higher valuations. In the short term anything can trade anywhere, and the more central banks and governments regulate, legislate, provide liquidity and mess with the market the greater the volatility we experience. Leverage is a killer. If you’re used to trading with leverage change your game plan to accommodate for a new world.

From a practical viewpoint we know that these actions will be destructive and especially so for the currencies involved, and this is why we are long stupidity and short common sense.

One of the giant moves we’re personally focused on is to be seen in the context of the widespread destruction of currency units. Invest accordingly.

– Chris

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

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BK
BK
10 years ago

A very helpful article for the amateur investors who read your site. Most of us were never taught how successful investors deal with the turbulence of the past week. As a result, we amateur investors decide during downturn like this that our basic investment thesis was wrong and we sell out our position.

Your article reminds me of the excerpt from the book “The Big Short” when clients invested in the Hedge Fund shorting Mortgage Debt became convinced they had to pull their money out and that real estate would never go down. Luckily for those Investors they were contractually obligated to stay invested.

Investing is hard and people aren’t generally wired to deal with the uncertainty!