It seemed like a bad joke. Earlier this year, a Dutch biologist had developed a strain of bird flu that is both deadly and very contagious. We are not sure if this danger was being hyped, as so many flu stories are; but reports were saying this virus could kill half the earth’s population. The concern is that it could find its way into Jihad terrorists’ hands and become a biological murder-suicide weapon. Doesn’t this seem crazy? And – the U.S. government provided financing for the research to develop it! Sit and ponder this for a while: how did this super virus come into existence?
It was intentional. Some person or group of people intended to develop a virus capable of killing half the world’s population. I am certain the American government officials who financed the research and the genius biologists who developed the virus had concocted an excellent-sounding reason to work on such a project. It must be akin to the intention of Albert Einstein when he worked on his nuclear physics project: his discoveries led to the development of the atomic bomb… another case of good intentions gone wrong.
What’s needed here is a committee of Irish philosophers headed by the notorious Mr. Murphy, namesake of that famous law. Their job would be to look at these projects with an eye to Murphy’s Law: if something can go wrong, it will go wrong. Surely these great scientists can envision the impact of their own discoveries on the war-like tribes that currently inhabit this earth! It seems like a bad joke where nobody’s laughing.
But the scientific community isn’t the only one to indulge in extreme naiveté. The financial community has taken us to the edge. In the greed-inspired mortgage fiasco in the first few years of this century, American mortgage lenders blew the brains out of the mortgage and real estate markets in the USA. To make matters worse, greed-inspired investment dealers sold that mortgage paper to banks all over the world. The consequence of this wild irresponsible action was the mortgage crisis of 2007-2008. And the consequence of that mortgage crisis was that many Canadians saw the value of their RRSPs drop by 30 to 40%.
2011 revealed yet another example of financial craziness. This time it was whole nations who went crazy. They call them the Euro pigs: Portugal, Ireland, Italy, Greece and Spain. Their governments borrowed so much money that now they're unable to pay it back. And the European banks who own these nations’ debt instruments are in deep trouble. We've got another banking crisis on our hands. It seems like another bad joke; but once again, no one's laughing.
Do we live in the age of naiveté? Do people not realize the consequence of their own actions?
Our government tells us that Canadians are seriously in debt. Mortgage debt, credit card debt, personal loans: Canadians are in over their heads. On average ordinary Canadians have borrowed way more than they can afford to pay back. My friends in the consumer banking business tell me that the worst offenders are lining up to get even more in debt. Apparently they just don't get it. Apparently the concept of paying back your debts is not a part of their repertoire.
The underlying theme of this financial naiveté is that, when they borrow money, people aren't thinking about paying back their debts. Whether it's American homebuyers, European countries, or Canadian consumers, they all seem to have forgotten that debt has to be repaid. And in doing so they've created a financial super virus.
In my investment book, Beyond the Bull, I talk about having personal investment techniques. An investment technique has two parts: buying and selling. It's just like a loan: the two parts of a loan are borrowing and paying back. In the same way that borrowers sometimes forget about paying back, investors can sometimes forget about selling out.
Selling out is the investment equivalent of a flu shot. You can’t lose money in a stock market decline after you’ve sold your stocks. You become immune. If your investment technique has a provision for selling, there's no need to lose money if the stock market goes down. In the same way, there is no need to miss out on making money when the stock market goes up if your investment technique has a provision for buying. Good investors plan the buying AND the selling.
Good consumers plan the borrowing AND the paying back.
I wonder what good biologists do. Do they plan the sickness AND the cure? It's obviously wiser for them to plan the cure first, then the sickness. That would be like a good investor planning to sell his investments before he buys them. Such wisdom is rare.
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
This article and others by Ken are available at http://kennorquay.blogspot.com.
Contact Ken directly at ken@castlemoore.com.
Friday, April 13, 2012
Tuesday, March 13, 2012
Things are not as they appear: your champagne glass is full of beer.
Last week I drove past a bright neon sign that read: Gentlemen's Club. But it's really a strip joint. The words gentlemen's club allowed the patrons to imagine they were something they were not, as they indulged their basic cravings. It was all about appearances and feelings.
Today's banking crisis is all about appearances too. Modern banking is based on faith. When I borrow money from the bank, the bank has faith that I will pay it back. They also have legal remedies to make sure I pay it back. That's why modern banking works. It appears that honourable gentle people are borrowing money from honourable banks. It's all about appearances and feelings.
But now that the banking system is in trouble, the mask is coming off. We're beginning to see there may not be as much honour there as we had thought. Perhaps the gentlemen of the banking industry are not gentlemen at all.
First there were the robo- signatures in the US mortgage business. In the greed-inspired feeding frenzy that preceded U.S. sub prime mortgage blow-up, it got so crazy that many bank executives didn't even sign the mortgage papers. They used mechanical signature machines to sign for them. A few years later when foreclosure actions were in full force, some lawyer challenged the actual mortgage document. He argued it was not valid because the signatures were not valid. And the judge ruled in his favor. The mechanical robotic signatures did not hold up in court. The registered contract that protects the bank from borrowers who can't afford to pay them back had failed. And all those so called gentlemen who borrowed all that money and could no longer afford to pay it back, receive a huge free benefit.
Then there was the Iceland melt down. Iceland's government guaranteed the repayment of certain bail out loans received by Icelandic banks. The lenders who bailed out those Icelandic banks were assured that the Icelandic government stood behind those bail out loans. But when the Icelandic banks went broke again, and it was time for the people of Iceland to make good on their guarantee, the people rebelled. In the referendum of March 2010 the Icelandic people decided to renege on their guarantee. Iceland’s elected government were gentlemen when they needed the money, but turned out not to be so gentlemanly when they had to pay it back.
Apparently ordinary borrowers are not the only ones who stop being gentlemen when circumstances permit. Whole countries can stop being gentlemen too. Consider the Greek sovereign debt fiasco. Last week the Greek government “negotiated” a deal where about 90 billion Euros of Greek debt disappeared. That’s right; the Greek people now owe 90 billion Euros less than they owed the week before. And, they claimed the banks accepted the golden fleece “voluntarily.”
It appears that the gentlemen of the banking profession are neither gentlemen nor professionals. American bankers loaned money to thousands of people who couldn't afford to repay their mortgages. Icelandic banks set up lending portfolios on such thin ice that they went broke twice. And now the Greek people have decided they no longer have to pay back as much money as they borrowed.
In my investment book, Beyond the Bull, I suggest that deceit is an important part of the stock market.
As we strip away the grey suits and the distinguished looking gentlemanly faces, we see that banking, too, is not what it appears to be. Bankers have consistently loaned money to people who could not pay it back. The Gentleman’s Banking Club is just another neon sign.
Today's banking crisis is all about appearances too. Modern banking is based on faith. When I borrow money from the bank, the bank has faith that I will pay it back. They also have legal remedies to make sure I pay it back. That's why modern banking works. It appears that honourable gentle people are borrowing money from honourable banks. It's all about appearances and feelings.
But now that the banking system is in trouble, the mask is coming off. We're beginning to see there may not be as much honour there as we had thought. Perhaps the gentlemen of the banking industry are not gentlemen at all.
First there were the robo- signatures in the US mortgage business. In the greed-inspired feeding frenzy that preceded U.S. sub prime mortgage blow-up, it got so crazy that many bank executives didn't even sign the mortgage papers. They used mechanical signature machines to sign for them. A few years later when foreclosure actions were in full force, some lawyer challenged the actual mortgage document. He argued it was not valid because the signatures were not valid. And the judge ruled in his favor. The mechanical robotic signatures did not hold up in court. The registered contract that protects the bank from borrowers who can't afford to pay them back had failed. And all those so called gentlemen who borrowed all that money and could no longer afford to pay it back, receive a huge free benefit.
Then there was the Iceland melt down. Iceland's government guaranteed the repayment of certain bail out loans received by Icelandic banks. The lenders who bailed out those Icelandic banks were assured that the Icelandic government stood behind those bail out loans. But when the Icelandic banks went broke again, and it was time for the people of Iceland to make good on their guarantee, the people rebelled. In the referendum of March 2010 the Icelandic people decided to renege on their guarantee. Iceland’s elected government were gentlemen when they needed the money, but turned out not to be so gentlemanly when they had to pay it back.
Apparently ordinary borrowers are not the only ones who stop being gentlemen when circumstances permit. Whole countries can stop being gentlemen too. Consider the Greek sovereign debt fiasco. Last week the Greek government “negotiated” a deal where about 90 billion Euros of Greek debt disappeared. That’s right; the Greek people now owe 90 billion Euros less than they owed the week before. And, they claimed the banks accepted the golden fleece “voluntarily.”
It appears that the gentlemen of the banking profession are neither gentlemen nor professionals. American bankers loaned money to thousands of people who couldn't afford to repay their mortgages. Icelandic banks set up lending portfolios on such thin ice that they went broke twice. And now the Greek people have decided they no longer have to pay back as much money as they borrowed.
In my investment book, Beyond the Bull, I suggest that deceit is an important part of the stock market.
As we strip away the grey suits and the distinguished looking gentlemanly faces, we see that banking, too, is not what it appears to be. Bankers have consistently loaned money to people who could not pay it back. The Gentleman’s Banking Club is just another neon sign.
Tuesday, December 27, 2011
Weapons of Mass destruction: Real ones this time!
Our American neighbours have suddenly become quite respectful. When North Korean dictator Kim Jong II died a few days ago, they approached the Chinese government and held a meeting about the possible risks associated with the transfer of power to the Korean heir to the throne. Both nations are concerned that there could be political unrest in North Korea. And North Korea has nuclear weapons.
Those of us who grew up in the cold war know that these risks are real. In the 1960’s they built fall-out shelters and the Distant Early Warning Line. Remember the Diefen-bunker? It was a radiation-proof fortress built in a desert near Brandon Manitoba to house government officials in event of a nuclear attack. Remember “the hole?” It is a mile-deep tunnel drilled into the Canadian Shield near North Bay Ontario. It was built to house the NORAD command centre: they said it could withstand a direct nuclear hit. In the 1960s, Canadians were ready for trouble and made an effort to defend themselves.
Am I ready? Are you ready? Of course we’re not ready! The previous generation was ready because they survived the depression and the war. We survived rock and roll and the “dot.com” bust. For us, nuclear weapons and political unrest are part of information overload. We’ll just keep on dancin’ and see what happens.
In my investment book, Beyond the Bull, I discuss how information overload destroys your long term rate of return. The key to improving your long term return is to be constantly looking for specific economic information that is relevant to your specific investment techniques. Anything that is not what you are looking for is irrelevant overload. But if you have no pre-planned investment techniques, all economic information becomes equal in value. None of it has value because it’s not tied to your action plan.
Americans have military techniques: when they, or their allies, feel threatened, American aircraft carriers move into the region near the threat. In this case, they’d like to move those carriers into the Yellow Sea. The Yellow Sea borders both Korea and China: hence, they are being very respectful to China. Perhaps those carriers that have just been freed up from supporting U.S. operations in Iraq will find their way to this new theatre.
Similarly, Canadian pension plan managers have investment techniques: when one area of the investment world is underperforming, they like to redeploy their investments to more lucrative assets. For example, their stock market assets have produced a low rate of return since 2000, bonds have produced a good solid rate of return, and gold has been stellar. They would like to move assets from the stock market to bonds and gold. But it takes even longer to move a giant pension fund out of the stock market than it takes to move a fleet of aircraft carriers. The pension funds are so big that their selling can drive the stock market down. They have to make their moves stealthily, under cover of bullish rhetoric and strong earnings.
Investors with less than $50 or $100 million don’t have to pussy-foot around like that. We can switch from stocks to bonds to gold and back easily. What most of us are missing is neither intelligence nor liquidity. Most of us need investment techniques that will help us separate valuable information from noise. Most of us need to be like the American military or the Canadian pensions: we need to know what kind of information we are looking for and how to act when we find it.
Those of us who grew up in the cold war know that these risks are real. In the 1960’s they built fall-out shelters and the Distant Early Warning Line. Remember the Diefen-bunker? It was a radiation-proof fortress built in a desert near Brandon Manitoba to house government officials in event of a nuclear attack. Remember “the hole?” It is a mile-deep tunnel drilled into the Canadian Shield near North Bay Ontario. It was built to house the NORAD command centre: they said it could withstand a direct nuclear hit. In the 1960s, Canadians were ready for trouble and made an effort to defend themselves.
Am I ready? Are you ready? Of course we’re not ready! The previous generation was ready because they survived the depression and the war. We survived rock and roll and the “dot.com” bust. For us, nuclear weapons and political unrest are part of information overload. We’ll just keep on dancin’ and see what happens.
In my investment book, Beyond the Bull, I discuss how information overload destroys your long term rate of return. The key to improving your long term return is to be constantly looking for specific economic information that is relevant to your specific investment techniques. Anything that is not what you are looking for is irrelevant overload. But if you have no pre-planned investment techniques, all economic information becomes equal in value. None of it has value because it’s not tied to your action plan.
Americans have military techniques: when they, or their allies, feel threatened, American aircraft carriers move into the region near the threat. In this case, they’d like to move those carriers into the Yellow Sea. The Yellow Sea borders both Korea and China: hence, they are being very respectful to China. Perhaps those carriers that have just been freed up from supporting U.S. operations in Iraq will find their way to this new theatre.
Similarly, Canadian pension plan managers have investment techniques: when one area of the investment world is underperforming, they like to redeploy their investments to more lucrative assets. For example, their stock market assets have produced a low rate of return since 2000, bonds have produced a good solid rate of return, and gold has been stellar. They would like to move assets from the stock market to bonds and gold. But it takes even longer to move a giant pension fund out of the stock market than it takes to move a fleet of aircraft carriers. The pension funds are so big that their selling can drive the stock market down. They have to make their moves stealthily, under cover of bullish rhetoric and strong earnings.
Investors with less than $50 or $100 million don’t have to pussy-foot around like that. We can switch from stocks to bonds to gold and back easily. What most of us are missing is neither intelligence nor liquidity. Most of us need investment techniques that will help us separate valuable information from noise. Most of us need to be like the American military or the Canadian pensions: we need to know what kind of information we are looking for and how to act when we find it.
Monday, December 12, 2011
Greco-Roman Economics: Tragedy or Comedy?
Greece and Rome, once cultural centres of the western world, have become modern day theatres in the drama of world economics. The tragedy is the outrageous debt levels Italy and Greece chalked up and the naiveté of those who kept on lending them the money. The comedy is the performances of politicians and labour leaders scrambling to centre stage to present their lines on how to solve the problems.
“To be or not to be…” That is the question the European unity is asking itself. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous debt levels and, by opposing them, give rise to a sea of troubles… The economic scene has dramatically shifted since last summer’s performance by Americans when they faced their country’s debt downgrade. One after another, self-righteous Senators and Congressmen marched into the spotlight and delivered their scathing political lines. I am told that, in international investment circles, Americans are considered to be narcissists: they focus too much on themselves and have surprisingly little interest or expertise in non-American economics. It must be difficult for them to see their stocks and bond markets rocking and rolling to the beat of a European concert. They are not used to having Greek and Italian politicians move their markets.
American politicians, like Canadian investors, are not in charge of this drama. We are part of a supportive audience, applauding on cue, anxiously waiting for the next act.
I wonder what’s going on back stage. I’m wondering if, while all eyes are focused on the obvious, if there’s not something subtle going on behind the scenes.
Subtlety #1. Consider, for a moment, the basic plot of both 2011 Econo-plays: Down Grade America, and The Wheels Fell Off the Euro Van. In both cases, governments spend far more that they earn. In both cases, they have to spend less – and (horror of horrors) they may have to raise taxes to earn more. Both these economic actions (austerity and increased taxation) tend to cool off an economy.
Subtlety #2. Pension fund managers, the ones who control many hundreds of billions of dollars in investments, like to have lots of money invested in the best performing financial assets, and much smaller amounts in the weaker performing assets. Since the year 2000, gold has been the best performer, bonds have been great supporting actors and the stock market has been the worst. Pension plans would dearly love the stock market to go up. But, when economies cool off, stock markets usually cool off too.
Subtlety #3. The Stock markets have been particularly volatile since this year. January 2011 saw the S&P500 at 1260 and it’s around 1260 now. (For you historians, it was 1260 in January 1999 too.) There have been wild up moves and wild down moves this year, but no real progress in either direction.
I am wondering if our friends, the pension fund managers, are taking advantage of the wild ups and downs of this year’s stock market drama, to quietly achieve their goal of reducing their stock market holdings. Pension funds like to move stealthily. Because they are so big, they need time to accumulate and distribute their gargantuan positions. And the Greco Roman drama being played out now, along with all its volatility and emotion, is giving them what they need: the opportunity to sell without being noticed.
Individual investors or small institutions like CastleMoore don’t need time. We can sell out or buy in quickly, whenever we observe danger or opportunity.
In my investment book, Beyond the Bull, I wrote about developing investment techniques: pre-planned procedures that you will follow so you can buy when opportunity presents itself or sell when markets become dangerous. Our techniques will be different from the techniques of the mega investors because we have liquidity and they don’t. But 2011’s wild gyrations and Greco-Roman Euro-drama have given them just what they need: an emotional distraction that allows them to quietly distribute billions of dollars of stocks. Readers who have access to your pension plan’s investments, check to see if they have reduced their exposure to the stock market in 2011. It’s what their prudent management plan should call for. The process of institutional selling in sideways markets is called “distribution.” It is always followed by a bear market. 2012 could prove to be a dramatic year too.
“To be or not to be…” That is the question the European unity is asking itself. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous debt levels and, by opposing them, give rise to a sea of troubles… The economic scene has dramatically shifted since last summer’s performance by Americans when they faced their country’s debt downgrade. One after another, self-righteous Senators and Congressmen marched into the spotlight and delivered their scathing political lines. I am told that, in international investment circles, Americans are considered to be narcissists: they focus too much on themselves and have surprisingly little interest or expertise in non-American economics. It must be difficult for them to see their stocks and bond markets rocking and rolling to the beat of a European concert. They are not used to having Greek and Italian politicians move their markets.
American politicians, like Canadian investors, are not in charge of this drama. We are part of a supportive audience, applauding on cue, anxiously waiting for the next act.
I wonder what’s going on back stage. I’m wondering if, while all eyes are focused on the obvious, if there’s not something subtle going on behind the scenes.
Subtlety #1. Consider, for a moment, the basic plot of both 2011 Econo-plays: Down Grade America, and The Wheels Fell Off the Euro Van. In both cases, governments spend far more that they earn. In both cases, they have to spend less – and (horror of horrors) they may have to raise taxes to earn more. Both these economic actions (austerity and increased taxation) tend to cool off an economy.
Subtlety #2. Pension fund managers, the ones who control many hundreds of billions of dollars in investments, like to have lots of money invested in the best performing financial assets, and much smaller amounts in the weaker performing assets. Since the year 2000, gold has been the best performer, bonds have been great supporting actors and the stock market has been the worst. Pension plans would dearly love the stock market to go up. But, when economies cool off, stock markets usually cool off too.
Subtlety #3. The Stock markets have been particularly volatile since this year. January 2011 saw the S&P500 at 1260 and it’s around 1260 now. (For you historians, it was 1260 in January 1999 too.) There have been wild up moves and wild down moves this year, but no real progress in either direction.
I am wondering if our friends, the pension fund managers, are taking advantage of the wild ups and downs of this year’s stock market drama, to quietly achieve their goal of reducing their stock market holdings. Pension funds like to move stealthily. Because they are so big, they need time to accumulate and distribute their gargantuan positions. And the Greco Roman drama being played out now, along with all its volatility and emotion, is giving them what they need: the opportunity to sell without being noticed.
Individual investors or small institutions like CastleMoore don’t need time. We can sell out or buy in quickly, whenever we observe danger or opportunity.
In my investment book, Beyond the Bull, I wrote about developing investment techniques: pre-planned procedures that you will follow so you can buy when opportunity presents itself or sell when markets become dangerous. Our techniques will be different from the techniques of the mega investors because we have liquidity and they don’t. But 2011’s wild gyrations and Greco-Roman Euro-drama have given them just what they need: an emotional distraction that allows them to quietly distribute billions of dollars of stocks. Readers who have access to your pension plan’s investments, check to see if they have reduced their exposure to the stock market in 2011. It’s what their prudent management plan should call for. The process of institutional selling in sideways markets is called “distribution.” It is always followed by a bear market. 2012 could prove to be a dramatic year too.
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.
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.
Monday, October 24, 2011
Blue suit protesters
Have you ever meet one of those old fashioned 1960s left wing “save the world” radicals who seem to get off on protesting? They love to raise their voices in righteous outrage at the latest atrocity. They love the lime light – they love the sound of their own voices blended with a thousand other voices, all yelling in unison over some noble cause. The 1960s protest movement was associated with being young and hip and anti-war. But that’s all changed: the new generation of protesters is all about fiscal fairness and economic conservatism. And their leaders inhabit high places. Last weekend’s G-20 meeting illustrates the new era of protesting. This time it’s the blue suit boys protesting against the left-wing radicals. Canadian conservative finance minister Jim Flaherty protested the precarious predicament in Europe brought about by left wing Greeks building their economy on a mountain of debt. And that Olympian mountain of debt is threatening the world’s banking system. Greece’s problems are our problems.
What’s their problem? It’s simple. The Greek people collectively owe so much money the only way they can make their interest payments is by borrowing even more! It’s like kiting, on a grand scale. Kiting is a pre-bankruptcy phenomenon where an individual is so far in debt that he borrows on one credit card to make a payment on the other one. He keeps going back and forth between the credit cards alternatively borrowing from one in to make a payment on the other, until he max’s them all out and can no longer make any payments. There are only two things the kiter can do: dramatically decrease his spending and make payments from his earned income – or go broke. That’s the situation Greece is in right now. And, it appears that the old fashioned left wing style of protest is still alive and well in Greece. Unions are out if full force, shouting angrily that they don’t want to dramatically decrease Greece’s spending. Their problem is they don’t want to take the decrease in standard of living that is required to keep their economy going. And our problem is, when the Greeks default on their debt payments, the world’s banking system takes the hit.
That’s why Jim Flaherty and the G-20 blue suits are protesting. We are in trouble because of Greek monetary mis-management. But it’s not just the Greek borrowers who caused this problem. Who loaned them the money? What lender would advance money to someone they knew couldn’t pay it back? What kind of banker lends money without doing a credit check on the borrower? From one angle, the European bankers did it to themselves! If they had been more prudent in their lending practice, they wouldn’t be in the jam they’re in. Perhaps borrowing from the Greeks would have earned the banks an extra ¼ of 1% interest. That might have seemed like easy money for the Euro-banks if they didn’t check out the credit risk. Jim Flaherty and the blue suit protesters were waving their placards at loose lending as well as blatant over borrowing. The whole thing stinks.
And the stench seems to have crossed the Atlantic. A good old fashioned anti-establishment “Occupy” protest is spreading all over North America: the Occupy Wall Street movement. Young activists are raising their voices in unison, calling for an end to corporate greed. They could easily add sovereign debt greed to their list if indignities. But, it all makes sense, doesn’t it? Irresponsible mortgage lending almost broke the banks back in 2008 and 2009. Those same banks that had loaned American homeowners more money than they could afford to repay, were the ones that almost went under in the American sub prime mortgage fiasco. And now, in late 2011, the Euro-banks are threatened by irresponsible sovereign debt lending. And the Occupy protesters seem to have picked up on that vibe. Somehow, they seem to have recognized that same thing that Jim Flaherty and the blue suit boys have recognized. The big banks went way too far.
Now what are we supposed to do? It’s clear that the banking binge of the early years of the twenty first century has led to the current monetary morning after. It’s equally clear that there’s not a thing an ordinary person can do about it. We can’t save the world. But we can save ourselves.
In my investing book, Beyond the Bull, I outline a five step program for investment survival. Step 2 is having a plan and step 3 is acting on that plan. Protesters all over the world are warning us that there is danger blowing in the financial winds. And so far, the blue suit boys have muddled through it all and kept the boat floating. Each of us has to do the same thing in our personal financial world. This is the time to adjust your investments – the time to take less risk than you have ever taken. Once your financial house is in order, once you save your own world, you can pick up your placard and joint the blue suit protests.
What’s their problem? It’s simple. The Greek people collectively owe so much money the only way they can make their interest payments is by borrowing even more! It’s like kiting, on a grand scale. Kiting is a pre-bankruptcy phenomenon where an individual is so far in debt that he borrows on one credit card to make a payment on the other one. He keeps going back and forth between the credit cards alternatively borrowing from one in to make a payment on the other, until he max’s them all out and can no longer make any payments. There are only two things the kiter can do: dramatically decrease his spending and make payments from his earned income – or go broke. That’s the situation Greece is in right now. And, it appears that the old fashioned left wing style of protest is still alive and well in Greece. Unions are out if full force, shouting angrily that they don’t want to dramatically decrease Greece’s spending. Their problem is they don’t want to take the decrease in standard of living that is required to keep their economy going. And our problem is, when the Greeks default on their debt payments, the world’s banking system takes the hit.
That’s why Jim Flaherty and the G-20 blue suits are protesting. We are in trouble because of Greek monetary mis-management. But it’s not just the Greek borrowers who caused this problem. Who loaned them the money? What lender would advance money to someone they knew couldn’t pay it back? What kind of banker lends money without doing a credit check on the borrower? From one angle, the European bankers did it to themselves! If they had been more prudent in their lending practice, they wouldn’t be in the jam they’re in. Perhaps borrowing from the Greeks would have earned the banks an extra ¼ of 1% interest. That might have seemed like easy money for the Euro-banks if they didn’t check out the credit risk. Jim Flaherty and the blue suit protesters were waving their placards at loose lending as well as blatant over borrowing. The whole thing stinks.
And the stench seems to have crossed the Atlantic. A good old fashioned anti-establishment “Occupy” protest is spreading all over North America: the Occupy Wall Street movement. Young activists are raising their voices in unison, calling for an end to corporate greed. They could easily add sovereign debt greed to their list if indignities. But, it all makes sense, doesn’t it? Irresponsible mortgage lending almost broke the banks back in 2008 and 2009. Those same banks that had loaned American homeowners more money than they could afford to repay, were the ones that almost went under in the American sub prime mortgage fiasco. And now, in late 2011, the Euro-banks are threatened by irresponsible sovereign debt lending. And the Occupy protesters seem to have picked up on that vibe. Somehow, they seem to have recognized that same thing that Jim Flaherty and the blue suit boys have recognized. The big banks went way too far.
Now what are we supposed to do? It’s clear that the banking binge of the early years of the twenty first century has led to the current monetary morning after. It’s equally clear that there’s not a thing an ordinary person can do about it. We can’t save the world. But we can save ourselves.
In my investing book, Beyond the Bull, I outline a five step program for investment survival. Step 2 is having a plan and step 3 is acting on that plan. Protesters all over the world are warning us that there is danger blowing in the financial winds. And so far, the blue suit boys have muddled through it all and kept the boat floating. Each of us has to do the same thing in our personal financial world. This is the time to adjust your investments – the time to take less risk than you have ever taken. Once your financial house is in order, once you save your own world, you can pick up your placard and joint the blue suit protests.
Wednesday, October 12, 2011
Apple - Rim
What marvelous creatures we investors are: so different and yet so much the same. Consider the pickle barrel that Steve Jobs and Jim Balsillie were in before Jobs’ untimely death: Jobs was the Chairman of Apple Inc. (AAPL), Balsillie of Research in Motion (RIMM). Both are/were billionaires because of their ownership of industry leading high tech firms. Since mid-2008, Jobs had seen his AAPL stock rise from under $165 per share to over $400 per share. Balsillie saw his RIMM drop from almost $150 to under $22 in August -2011. (These prices are all in US dollars) Jobs got way richer at the same time Balsillie got way less rich. Yet both are way richer than most of the readers of this article.
Big institutional investors like pension plans and mutual funds might own shares of both AAPL and RIM – and their holdings have been affected by the rise and fall of these two high tech giants. Although the professional decision makers for these mega investors may not personally own the shares, they participated in the rise and fall of these two high tech stocks. And their decisions to buy or sell their clients’ shares affect the rise and fall of AAPL and RIMM share prices – and they also affect the rise and fall of the financial net worth of Jobs and Balsillie.
Then there are the ordinary investors who may own shares of AAPL or RIMM. Most of us can buy or sell our whole position without affecting Jobs’ or Balsillie’s net worth at all.
Isn’t it fascinating how different we all are with respect to AAPL’s rise and RIMM’s fall? Different, yet, somehow, the same. Jobs and Balsillie were both Chairman of the Board and significant shareholders of their respective companies. One is a hero; the other – somewhat less than a hero. One became a lot richer than he was – one, somewhat less rich.
The mega-money portfolio managers are in the most interesting predicament. Imagine sitting at their computer screens, managing multi billions. Imagine you managed a huge portfolio of high tech stocks in June 2008, and your clients had approximately equal portions of RIMM and AAPL. Now, because of the rise and fall of these two giants, they have 20 times as much AAPL as RIMM. As the manager of these mega-funds, what should you do? One possibility is to readjust your holdings so you have equal amounts again. In this case you would sell a few gigs of AAPL and use the proceeds to buy RIMM. They call this “rebalancing:” it’s the kind of thing value investors do when one stock runs way too high and the other way too low. The mega-money managers realize that years from now AAPL might not stay the hot-stock darling it is today, and RIMM might not remain the ugly sister. Because their positions are so big, the mega-bucks managers can’t really sell out of the market all together. So they adjust the percentages of their holdings, maintaining a diversified portfolio at all times. It’s the prudent thing to do.
And what about you? What should you do? Most professional advisors encourage small investors to behave like large investors. Ordinary investors are encouraged to own large diverse portfolios and let the professional mega managers run them. That’s what the mutual funds business is all about. Small investors trying to behave like big investors.
But that is a serious error.
In my investing book, Beyond the Bull, I encourage readers to develop their own way of investing and to take advantage of their edge. Small investors have one huge advantage over mega-money. Liquidity. We can buy or sell RIMM or AAPL without affecting the price at all. So, why would we have owned a single share of RIMM since June 2008? Why not just sell out and be done with it? Why not just own AAPL, and nothing else, and get richer like Steve Jobs did? In fact, why would we ever own any investment that is not in an up trend? Why should we behave like mega-money at all?
We are all the same, yet so different. If we are high tech genius’, we should start a high tech company and get rich like Jobs and Balsillie. If we love the markets, we should get a high-priced job with a mega-money pension fund manager and prudently rebalance our way to the top of the heap. And if we are an ordinary investor, we should figure out how to tell an up trend from a down trend. Whatever of these three we pick, we can be successful in the world of money.
Big institutional investors like pension plans and mutual funds might own shares of both AAPL and RIM – and their holdings have been affected by the rise and fall of these two high tech giants. Although the professional decision makers for these mega investors may not personally own the shares, they participated in the rise and fall of these two high tech stocks. And their decisions to buy or sell their clients’ shares affect the rise and fall of AAPL and RIMM share prices – and they also affect the rise and fall of the financial net worth of Jobs and Balsillie.
Then there are the ordinary investors who may own shares of AAPL or RIMM. Most of us can buy or sell our whole position without affecting Jobs’ or Balsillie’s net worth at all.
Isn’t it fascinating how different we all are with respect to AAPL’s rise and RIMM’s fall? Different, yet, somehow, the same. Jobs and Balsillie were both Chairman of the Board and significant shareholders of their respective companies. One is a hero; the other – somewhat less than a hero. One became a lot richer than he was – one, somewhat less rich.
The mega-money portfolio managers are in the most interesting predicament. Imagine sitting at their computer screens, managing multi billions. Imagine you managed a huge portfolio of high tech stocks in June 2008, and your clients had approximately equal portions of RIMM and AAPL. Now, because of the rise and fall of these two giants, they have 20 times as much AAPL as RIMM. As the manager of these mega-funds, what should you do? One possibility is to readjust your holdings so you have equal amounts again. In this case you would sell a few gigs of AAPL and use the proceeds to buy RIMM. They call this “rebalancing:” it’s the kind of thing value investors do when one stock runs way too high and the other way too low. The mega-money managers realize that years from now AAPL might not stay the hot-stock darling it is today, and RIMM might not remain the ugly sister. Because their positions are so big, the mega-bucks managers can’t really sell out of the market all together. So they adjust the percentages of their holdings, maintaining a diversified portfolio at all times. It’s the prudent thing to do.
And what about you? What should you do? Most professional advisors encourage small investors to behave like large investors. Ordinary investors are encouraged to own large diverse portfolios and let the professional mega managers run them. That’s what the mutual funds business is all about. Small investors trying to behave like big investors.
But that is a serious error.
In my investing book, Beyond the Bull, I encourage readers to develop their own way of investing and to take advantage of their edge. Small investors have one huge advantage over mega-money. Liquidity. We can buy or sell RIMM or AAPL without affecting the price at all. So, why would we have owned a single share of RIMM since June 2008? Why not just sell out and be done with it? Why not just own AAPL, and nothing else, and get richer like Steve Jobs did? In fact, why would we ever own any investment that is not in an up trend? Why should we behave like mega-money at all?
We are all the same, yet so different. If we are high tech genius’, we should start a high tech company and get rich like Jobs and Balsillie. If we love the markets, we should get a high-priced job with a mega-money pension fund manager and prudently rebalance our way to the top of the heap. And if we are an ordinary investor, we should figure out how to tell an up trend from a down trend. Whatever of these three we pick, we can be successful in the world of money.
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