Posts Tagged ‘fear’

Should you follow Buffett and be greedy now?

Wednesday, February 4th, 2009

One of our readers, in response to yesterday’s article (Future is bleak for conventional investing), said

Mr Contrarian, you?re stating to sound like mainstream press.
It may soon be time to turn contrarian on the Contrarian Investor.

As Warren Buffet pointed out: ?Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.?

Today, we cannot resist poking another fun at this Buffett cliché (“Be fearful when others are greedy and greedy when others are fearful”). Two years ago, we were very fearful when others are greedy. Today, others are fearful and we have not yet turned greedy. So, are we turning mainstream?

First, for those extreme Buffett devotees (we do not know whether this particular reader is one) who like to quote this cliché religiously, there are something they fail to understand about being contrarian- there is a difference between a contrarian and a reverse conformist. A reverse conformist blindly takes the opposite position of the crowd indiscriminately. The moment the crowd turns fearful, a reverse conformist immediately flips to greed. A contrarian, on the other hand, is someone who is prepared to take an opposite position at the right time. As we said in What is this publication all about?,

… if you want to achieve excellence in your investment endeavours, you have to be prepared, from time to time, to go against the prevailing market trend with strong convictions.

Second, being contrarian does not merely mean taking an opposite direction from the crowd on the same road. Sometimes it means taking a different road. Some Buffett devotees who adhere to this cliché religiously can only think in terms of investing in stocks (listed securities) of public businesses. In other words, they can only think of investments in the context of a financial market. In reality, stocks is only one road of the many roads available to the investor. That’s why we said in yesterday’s article that

For others, it may mean investing outside the financial system. For some people, they may no longer see it appropriate to call it ?investing.?

Our point in yesterday’s article is that to be a successful investor, one has to look beyond the conventional realm of the financial markets in today’s economic climate.

Third, some of these extreme Buffett devotees fail to see there is one major difference between them and Warren Buffett- he has the big money and influence to cut deals in order to acquire entire businesses outright. Many of these businesses are private ones and inaccessible from the stock market. Most investors, on the other hand, can only access publicly listed businesses from the financial markets. That in itself puts most investors at a severe disadvantage. Think about this: If you own a fantastic private business that fulfils the Buffett criteria, would you want to turn it public (especially in today’s economic climate) and subject your business under legal and institutional straits jacket and put it under the watchful public eye? If you are to turn your private business into a public business, will you ensure that you will get the better deal than the public? This is something that the Chinese Sovereign Wealth Fund had to learn the hard way when it purchased Blackstone.

Next, we may trust that Buffett to be a better businessman than us. But does that automatically mean that he has a good understanding of the macroeconomic environment? In fact, Buffett is a lousy economist. The biggest mistake a Buffett devotee can make is to believe that Buffett is good at everything and believes that his circle of competency is greater than it actually is.

Next, some Buffett devotees fail to see that he has a blind spot- Warren Buffett is an American patriot who has a biased view in favour of America.

Finally, take note of this: Warren Buffett has never experienced the Great Depression for himself. Neither has he experienced hyperinflation of Weimar Germany. All his life, he lives in America as an American. Today’s America is at a turning point and there’s no guarantee that it will return to the America that Buffett experienced all his life. As we said before in Listening to ?wise? heads can be dangerous,

The point is, no matter how experienced a ?wise? head is, his experience is still confined to either (1) a specific market or (2) a slice of time in history. That is, all the experience that a ?wise? head has is still limited in the bigger scheme of things. Therefore, to stop thinking and extrapolate blindly from this limited perspective into the general is a dangerous trap to base one?s investment decisions on.

For all you know, the panic of 2008 may be the event that becomes the undoing of Warren Buffett’s reputation as an investor.

Fading glory of the financial services and ‘wealth’ management industry

Sunday, November 2nd, 2008

October has just passed and it will go down in history as one of the worst months in stock market history. Even many veteran traders have not seen anything that bad before. As Marc Faber said in a recent Lateline interview (on 13 October 2008),

As of last week, world stock markets became oversold. Statistically probably the most oversold condition in the last 50 years or so.

One good gauge of fear in the stock market is the Volatility Index (VIX) indicator. As you can see from the chart below, the VIX spiked to its record high level (since 1990) at above 80 in October.

VIX indicator since 1990

Consequently, such intense level of fear had provoked the government into making up policies as they go and then tweaking away the side effects as an after-thought. For example, when the government gave unlimited guarantee to bank deposits, fearful money began to defect away from investment funds into banks. As these funds reacted by freezing redemptions from investors, prompting a crisis on their investment business. Some of these investment managers then pleaded with the government to guarantee their investment funds. We could sense the underlying sarcasm of the government officials as they replied by ‘taunting’ these investment funds to become banks if they want to fall under the protective umbrella of the government.

The global financial market had never been subjected to so much fear for a very long time. The sheer terror of a global financial meltdown had provoked knee-jerk reactions from governments, regulators, central banks, investors, traders and the humble savers. Beneath the raging waters of fear, panic, reactions and counter-reactions, the many decisions made on the spur of the moment by governments, regulators, and central banks will be judged by history to be turning points. These decisions will have many long-term side effects that are not immediately apparent. At this point in time, although there are signs that the panic is starting to melt away and calm gradually returning to the market, the lingering smell of mass ‘wealth’ destruction will still remain for a considerable period of time.

As we mull through the long-term ramifications, our thoughts are drawn to the future of the investment and financial service industry. The first effect we can think of is the loss of trust and confidence on the idea of ‘wealth’ management. Much of the panic selling in October was contributed by investors redeeming their money from managed funds and stuffing them towards the proverbial cash under the mattress (i.e. treasury bonds, guaranteed bank deposits and even gold). The number one priority was not return on their money. Rather, it was return of their money.

Our stand is that the trust and confidence on the idea of ‘wealth’ management through ‘investments’ in financial assets was a misplaced one. The whole idea of ‘investments’ was based on a massive bubble. As we said before at Have we escaped from the dangers of inflation? in February 2007,

Today, the global spigot of liquidity (see Liquidity?Global Markets Face `Severe Correction,? Faber Says on the concept of ?liquidity?) is wide open, spewing out huge amounts of money and money substitutes into the financial system.

With all these flood of fiat money inundating the global financial system, we look at all these skyrocketing financial asset prices with a yawn. Price bubbles of all sorts are found everywhere in the world?from Chinese stocks, junk bonds to private equity booms. Back here in Australia, it looks to us that nowadays, everyone is ?playing? the stock market, many using leverages like CFDs and margin lending. We hear stories of novices ?investors? opening a trading account to ?learn? how to trade. The logic is simple: central banks around the world are hard at work ?printing? money. These monies first go to the financial system, creating price bubbles. The bubbles then attract speculators, gamblers and punters into the asset markets the way bees get attracted to honey. Soon, word get round to the masses and they want a slice of the action too.

Over the years, central bankers are creating copious amount of money and credit out of thin air. The masses then take on the delusion that these fiat money are real wealth. As we asked before in The myth of financial asset ?investments? as savings,

Can the printing of money, which spawns the growth of an industry to shuffle it, cause a nation to be richer in the long run?

There were so much money and credit conjured from thin air that an entire industry (i.e. financial service and investment industry) has to be bloated beyond its fundamental use in order to shuffle them. As we said before in Connecting monetary inflation with speculation,

Thus, by further inflating the supply of money and credit in the financial system at such a time, there comes a situation whereby there are excess liquidity without adequate avenues for appropriate investments.

Thus, the global credit crisis is a return back to reality as the masses wake up their idea that all these ‘wealth’ are illusionary. As we quoted Ludwig von Mises at The myth of financial asset ?investments? as savings, real wealth is based on real capital formation. Shuffling money and competitive chasing after assets with fiat money do not make a nation any richer.

Alas, there are still many who still do not get it, even when the threat of a Great Depression II is gathering at the gates of the global economy. For example, in Australia, the Opposition Leader, Malcom Turnbull still speak of the ‘savings’ trapped in investment funds due to the Australian government’s unintended side-effect bank deposit guarantee. The fact that he is using the concepts of savings and investments interchangeably to refer to the same thing shows that he has no idea about what he is talking about.

Dear readers, to be a successful investor, you have to understand the difference between savings and investments. We urge you to read The myth of financial asset ?investments? as savings. The entire superannuation and wealth management industry is based on the myth that investments (especially ‘investments’ in financial assets) are savings. Consequently, the build-up of mal-investments that such a myth introduced brought about the financial crisis that we have today. Real investment brought about real capital formation, which is the cornerstone of real wealth in the future.

As far as we can see, the bull market (in real terms) on financial assets is over. What comes next is either deflation or stagflation. The implication is that peak glory (2001-2007) of the financial service and wealth management industry will be history.