Brain Damage
Pfäffikon SZ, Switzerland – The start of 2015 shows us that market players are clearly nervous. They have become disoriented by the increased volatility and increased uncertainty. The result is that they’re disregarding many interesting investment opportunities and fleeing to so-called – exorbitantly expensive – safe havens. Many market players think the financial markets are rational. This is a process which starts early in school when we’re taught that we’re able to understand – almost – all economic concepts. This school of thought has its roots in the 1930s, also known as the Great Depression. By better mapping the economy it would supposedly become easier to comprehend.
Cute mathematical models
Ever since then any analyst, investor, pension director or CEO, utilizes mathematical models, statistics, benchmarks and ratios. I have thereby taken note that the average CEO is put under pressure by a peculiar phenomenon, which is the imminent rise in profits and dividends. This process can blow over onto his or her inferiors and all of a sudden we have a complete bloodline which thinks in the same peculiar manner. Pension fund managers are seeing their responsibilities increase, while realizing that their bond portfolio is on a dead-end course. They are in a tricky situation. The investor tries to make the comparison without having correct information. The quality of the returns is much more important than the returns themselves. The demise of many different speculators in the Swiss Franc is tangible evidence thereof.
Drunk psychopath
When one goes back in history, two matters are crystal clear: the economy cannot be made and markets are certainly not rational. “Mr. Market is a drunk psychopath.” says successful investor Warren Buffett. Critics claim that central bankers are the culprits of bubbles and collapses in financial markets. This is a fallacy, I refer the reader to the Dutch tulipmania in the years 1634-1637. In those days there was no central bank whatsoever. Central bankers adjust course where necessary and accept any consequences as part of the job. Something these bankers repair afterwards. The Fed took certain drastic measures in 2008 and today the US economy is performing moderately well, a lot better than the European economy in any case. The ECB decided yesterday to inject 1.140 billion euros into the European economy. Doing something is a lot better than doing nothing.
Value
The current geopolitical tensions in combination with a declining oil price and zig zagging currencies offer many opportunities for investors with a long term vision. The key question, however, is: What is something really worth? The problem is that market players get used to certain market circumstances relatively quickly, and start treating them as normal. The mistake they make is that they do not adequately research where the hidden undervaluation – or worse, overvaluation – is located. The problem is that this cannot be filtered out of a bunch of mathematical models, statistics, ratios or benchmarks. In my opinion it requires more historical research in order to place certain situations in proper perspective. The drawback of this method is that it takes a lot of time, experience and patience. Patience is something investors have less and less of these days, whether or not they’re being chased by a society panting down their necks.
Promising
When you know what you own and you concentrate it in a disciplined fashion, you are in very promising position. Time, in this case, is your ally. The hard part is that you must hold true to your own starting points and must have faith in the homework that you’ve done. What the masses yell or write is not relevant. The market of 2015 and 2016 will, sooner or later, cause brain damage to even more market players because of its whimsical nature which remains poorly understood. The trick is not to let it get to that point, so that in thirty years you can enjoy your carefully outlined investments. The returns must come from decent long term investments and not from complicated swaps or a 1:200 leverage. One wrong trade in those scenarios is enough to wipe you out financially. The first month of 2015 being a testament to this possibility.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
