My advice is to stay out of the markets for a very long time - there are better places to invest in. Here is is the "What" and later the "Why"
So what do you do:
- Money and credit will get scarce - get out of debt or reduce debt if you can
- Reduce your expenses structurally - look at your cars - look at all the outgoings
- There will be no real return on conventional investments and it will take years for the adjustment to work its way through - so don't get sucked back in too soon and sell on every rally
- Your pension may not be a sure thing - think more about how you are going to spend the "Golden years"
- Invest in sure things such as reduce your use of energy - investments in cutting your oil use give you a cash tax free return
- Invest in you and yours - get real skills and real assets - learn how to do things that you now pay others to do - learn how to grow some food - do odd jobs - fix the car
- Invest in your friends and community - by working with them - for on our own we are not strong enough - volunteer for real work
- Pay more attention to your kids - better than paying school fees - do things with them
We spent thousands of years with this as our investment philosophy. It is a good one. It is both more rewarding and more fun than using the "market".
Why should you avoid the markets? Why not buy back in or stay in?
I think it is now clear that "All the kings horses and all the king's men cannot put Humpty together again" - In other words, the risk that has created this crisis can not be managed nor can it be unpacked.
Before it is safe to go back or to stay in, the people who lost sight of reality and the assets that are not real have to go first.
The whole system has to be cleaned up as it was after 1929. Reality in expectations and in regulation has to be restored.
It's not impossible. I used to be a money manager. At one point in the late 1970's I had nearly 2 billion under management. My clients who were large Saudi Arabian merchants and they taught me a good lesson. They told me clearly that they took a lot of risk in their business and that there was a lot of risk in simply living in the Middle East - they wanted me to keep their money safe.
One of them told me - "I don't want to hear that the market is down 15% and we are only down 10%. I don't want you to lose my money. I am paying you to keep it safe."
Good advice! Who wants to give up your money to a very very very well paid guy and have them lose it for you? But we have accepted that as normal!
Back then, it was possible to construct a portfolio that was relatively stable and would give OK growth. The risk could be diversified and balanced. Things were more simple. A Bond was either a direct obligation of a state, a province or a company. You could follow the risk. In the stock market, there were options but you could have a very safe strategy where you used options to sell the stock at a fixed price.
We had then a relatively straightforward risk to manage. It was humanly possible to manage the risk and to work for a reasonable return. You did not have to be a genius - you just had to work hard and be disciplined.
But in the last 5 years - I have pulled out of the market. The market had stopped being a market and had become instead a casino.
What happened? I think that our financial system has become disconnected from reality in every way.
In today's market, the risk cannot be managed or even known. It's not just that I can't do it - I don't think it is possible for any human.
The system is too complex. There are too many variables. The growth of synthetics - the growth of the giant ocean of money - the insanity of clients of clients who demand high returns all the time. Add to this a laissez faire regulatory system and you have a reverse casino or a reverse lottery. A system with small upside and huge downside designed in. The more you play the more you have to lose big. It's in the design.
You cannot follow the risk on derivatives or synthetics. People say that they can by using models. But as we are seeing at some point the models fail and then so does the whole thing. The synthetics also can't be unpacked. You can't take the sugar out of the coffee. If things go wrong there is no floor of value. The floor is zero.
No longer were able to follow the risk, investors and traders relied on the rating agencies. The rating agencies, who all got paid to do this - did the impossible. They assigned a AAA rating to lots of this paper. The investors and the risk managers allowed themselves to get snowed. They gave up their fiduciary duty to the rating agencies. They stopped thinking about the reality of risk.
They did this in part because, they, the investors, also thought that they should get returns that are way above a proper risk threshold.
This point is key. Over time you can only get so much milk from a cow. You can go to Vegas and have a great weekend and win a lot. But if you go every weekend and you put a lot of money down - you have to lose. Some collective stupidity gripped them.
My old Saudi clients - might have come from the desert but they were not fools. They understood risk and return very well. They held onto their discipline and they taught people like me. You don't need to be a math quant to know that crap smells like shit.
For understanding reality and having discipline are the hallmarks of sound investors. For investing is a long term thing. No one gets rich over night in the market without taking gigantic risk. No one can repeat that operation year in and year out and not lose. If you always punt - you lose.
Not only must investors be realistic and disciplined but so must the industry.
The industry was more disciplined then too. The system was designed to be disciplined. Just as ours today is designed to be the opposite. Then all the senior folks had grown up in the depression. We were a real partnership with all our own money in the firm. There was no bailout waiting in the wings and no pools of external capital.
The discipline was that this was our own money that we risked.
Secondly, we also had not been living in a prolonged boom where we no longer thought the rules applied to us anymore. I had joined in 1972. The crash of 1974 did not end until 1984. I had cut my teeth in along term bear market. We made good money but not mad money. If we did the wrong thing too much, we would pay.
We knew we were smart but we did not think we were masters of the universe - so we did not over sell.
How do we lose that discipline and that sense of reality? The design of partnership went out of fashion - except in one form - the exemplar of the street - Goldman Sachs. The rest of us sold out to gain access to huge pools of money. Now we could "Buy Business". The "BOUGHT Deal" was the beginning of the end. When we had no large pools, we had to do deal that we knew we could sell. Now we could use sheer power to buy the business. If you could not do this - then you became an also ran.
We no longer had to risk our money - we risked yours. It's easy to be the big swinging dick when you risk other people's money.
The regulatory system was weakened. We lobbied for it. We had the money to lobby and we bought the system - all in the name of an idea that does not work - that markets will self regulate. In fact the opposite happens. For a while the sensible look at the idiots and sneer. But then the idiots have the earnings and the sensible don't and with no regulation - the sensible have to become idiots too.
So when do you go back into the market? Maybe not for years.
All of the excesses will have to be wrung out of the system - as they were in the long haul from 1929 to 1954. Yes it took that long for values in the market to get back. Young men and women today, will be the hard nosed and disciplined leaders of the future. But not for years.
Most importantly - regulation has to be brought back - without it - the idiots always drive the system.
The street has to return to partnership and to the idea of agency - where being astute is the main attribute.
This wont happen overnight or easily. Old skills will need to be re-learned. Sheer desperation and circumstances will have to drive the way back. A government is required that will have the sense and the backbone to do what has to be done.
In the interim invest in yourselves - take back the reponsibility to grow your self and those close to you. Take back your power by breaking the chains of debt and expenditure.
