Wednesday, November 30, 2011

Singin’ The Blues Again.

In August we observed that the Mediterranean region had become a hot-spot of human activity. On the north shore we had the debt burdened nations of Greece, Italy, Portugal and Spain rocking the European banking system. On the south shore we had the nations of Egypt, Libya and Tunisia violently turfing out the military dictatorships that had dominated them for so long. Crisis sometimes brings out the worse in people. When we observe the hot-heads on the north shore or the civil warriors on the south shore, we know we are not observing harmony, cooperation and understanding.
As a financial philosopher, I am concerned about two things: will the bad energy that surrounds the Mediterranean spread? – And what should we do to protect ourselves?
My first concern seems easy to answer, doesn’t it? It’s already spreading. From a sociological point of view, the “Occupy” movements seem an extension of Mediterranean unrest. In the USA, the emergence of The Tea Party, a protest movement of the right, seems like a reaction to corruption and incompetence in the status quo. In Canadian politics, the demise of the Liberal Party and the Parti Quebecois in this year’s federal election could be interpreted as discontent with the establishment. A good observer can make the case that the hot-headed rebel spirit that has affected the Mediterranean region is spreading.
In a September article I commented on the late Col. Muammar Gaddafi, wondering if he had a good “plan B.” Now that he’s been hunted down and executed, we see his plan B wasn’t effective. Now I wonder about Bashar al-Assad of Syria. He’s in a deep hole right now: even his plan A seems unbelievably bad. Former Egyptian dictator, Hosni Mubarak is also in serious trouble. On trial for crimes relating to the deaths of the protestor/revolutionaries, his fate seems unavoidable.
Contrast the Plan B’s of these dictators with the plan B of arch-villain, Adolph Hitler. When Hitler’s reign ended, he disappeared. Some say he was killed, others say he escaped. But we don’t really know. Whatever Hitler’s Plan B might have been, it seems a lot more effective than Gaddafi, Assad, or Mubarak’s plan B.
My concern is your plan B. As the bad energy of the Mediterranean continues to spread through our complex world of international finance, how will you escape the ravages? The answer, of course, is quite simple: a good financial plan B involves selling your down trending investments and buying securities in up trends. In the August 2011 stock market selloff, we were told that gold and bonds were safe. But the truth is gold and bonds were going up as the stock market came down. The level of risk or safety in a given investment is a matter of judgment. The price trend is a matter of mathematics. But, whether you are making a judgment or following a mathematical model, in times of danger, your plan B must include a plan to sell. Whether you judge a given investment to be too risky or whether you see it’s in a down trend, you’ll sell it. So, in reality, there is no need for me to be concerned about your plan B – it’s easy for ordinary investors to sell.
The problem lies with those who cannot sell: the big pension funds and the big mutual funds. Because of their sheer size, their selling drives the market down. If they are too aggressive in their selling, they can cause the markets to go lower. Their plan B’s are different from ours: they try to ride out the storm. That’s why they use economic forecasts. That’s why they diversify. That’s why institutional money managers are so expert at understanding the underlying value of the investments they own. The tools of illiquid investors are diversification, financial analysis and economic know-how. They don’t need to develop skills on when to sell out because they never sell out.
Expertise on knowing when to sell is left to smaller investors and smaller investment managers. It’s our advantage in down trending markets.

1 comment:

chrispycrunch said...

The prevailing investment approach is to buy and to sell into trends and momentum. Today's run illustrates now that resources and gold are the ones to take a long position on.