Tag: finance

Excerpted from a Twitter thread by Garic Moran,

Polar opposites

My first job in the investment field was as an intern at a local brokerage firm in New Orleans in the summer of 1981. At that time the Federal Reserve was a couple of years into targeting money supply.

President Carter had nominated Paul Volcker Jr. as Fed Chairman in August of 1979. The dollar’s status as the reserve currency of the world was in serious doubt.

U.S. investors convinced that inflation would never come down were dumping Treasury’s at any price & panicking into Gold, which peaked in January of 1980 @ $875…

18 months later in the summer of 1981, all traders were transfixed Thursday afternoons with the release of the money supply report.

Interest rates & Gold would move the following morning, rates were floating; the Fed was targeting money supply!

The Fed had already allowed 1 recession in 1980; causing President Carter to lose the election (IMO).

By June of ’81, Fed Funds returned to 19%; a 2nd recession began. The greatest bond bull in history also began. As an aside; Michael Steinhardt was leveraged long Treasury’s & his partners thought he was crazy.

Peak inflation psychology was crushed by the Fed’s targeting of money supply! 3 1/2 years later I started with Smith Barney as a broker selling 30 year BBB Ga Power bonds yielding 13.5%. They were popular as money market rates & bank CD’s had plummeted; yet, investors were deeply skeptical of the BBB rating & concerned about the potential of inflation returning.

Interestingly, we were using leads compiled by people who had bought oil & gas limited partnerships in the late ’70’s., many of which had turned into horrible investments as Chair Volcker had defeated inflation.

Gold mining equities peaked at 8% of the S&P 500 in ’81 as investors paid up for miners after the peak in Gold with the fear that inflation would return. Today, Newmont Mining (less than .5%) is only miner in S&P 500.

Today is the polar opposite

U.S. investors have bought $250B worth of bond ETF’s, YTD. BBB credit has never been a greater % of bond fund holdings. Corporate debt to GDP is at an all-time-high.

Total Financial Assets to GDP have never been higher.

In 1980 Total Financial Assets to GDP bottomed at 2.7X; today they are valued at twice that level.

This summer Chair Powell said the last 2 recessions were caused by financial crises; he would not allow that again unlike Volcker, he has no tolerance for a recession & appears to be supporting the current President (IMO, just as Chair Yellen did with the previous President).

Investors have responded by bidding stocks to new All-Time-Highs & global bond debt is reported to be over $250T.

Incredibly many hedge fund managers are leveraged long negative yielding bonds; their partners have no fear of inflation (polar opposite).

IMO, we will all look back one day & wonder what Central Banks & investors were thinking when $17T of global bonds carried negative rates. Iit will be obvious that was the peak in disinflationary psychology.

So Chair Powell said he would not allow the greatest financial bubble in the history of the world to pop & cause a recession. By this September repo rates spiked as the supply of Treasury Bills from a run-away deficit soaked up liquidity in the financial system: the Fed responded with a Friday afternoon conference call where they unanimously approved $60B in monthly T-Bill purchases (monetization).

At the same time stress in the shadow banking community increased as leveraged loans default rates began to increase. Venture Capital Funds came under pressure as money losing Unicorns began to fail. Private Equity default rates are rising.

The Fed responded with overnight repo’s to provide financing to holders of worthless securities. With real corporate profits down 6%, YOY, stress in the most leveraged corporations in history will continue to grow. The Fed’s commitment to keep Financial Conditions will also continue to grow.

Since repogeddon in September, U.S. M2 has accelerated to a 13.8% annual rate.

They have committed to buying T-BIlls into Q2/20, the above chart will continue to rise. If you look closely at the below chart, M2 appears to be in the early stages of going parabolic.

Yet, I am not aware of any trading desks or investors who are transfixed to the weekly money supply reports. Indeed, disinflation psychology is at such extremes, investors continue to pile record capital into bonds that are yielding less than the current inflation rate. They have chosen to ignore that Cleveland Fed Median CPI is rising.

The Federal Reserve is now allowing money supply to grow at whatever rate it takes to stop “deflation”, but what they are really trying to stop is the greatest financial bubble (which they created) from popping; they have no tolerance for a recession.

There is no concern for the dollar as the reserve currency of the world or future inflation rates: polar opposites.

This is not investment advice; just an observation from 38 years of following capital markets & human psychology!

China is set to expand its bond market through a record sale of sovereign bonds in dollars, according to Bloomberg sources. 

The bond offering could raise up to $6 billion, would be one of the largest dollar bond offerings on record. The offering could be seen as soon as Tuesday. 

Sources said the Ministry of Finance is considering tenors of three years, five years, 10 years and 20 years: 

“It reaffirms China’s determination to develop an orderly offshore dollar bond market for Chinese issuers,” Anne Zhang, head of fixed income for JPMorgan Private Bank in Asia, told Bloomberg. “The new deal will further complete a sovereign curve,” she said.

The size of the issuance would be more than double last year’s size, and triple the amount from 2017. 

“The size is twice what it was last year, that just speaks to the fact that the past two years have been perceived as successful by the Ministry of Finance,” a banker working on one of the dollar bond deals told The Financial Times. He added that previous offers were “not enough to match demand.”

The Chinse dollar bond market is valued at around $740 billion, according to Bloomberg data, and is an important funding source for domestic borrowers. 

Dollar bond issuances slid in 2018 following the escalation of the trade war. Despite the further escalation of the trade war in 2019, dollar bond issuances have increased as US treasury yields have fallen. 

Dollar bond demand from Chinese borrowers has been elevated in 2019, so far there has been $195 billion in recorded issuances, already surpassing levels seen in 2017 at $211 billion. 

At least 53% of the dollar bonds issued this year have been investment-grade securities and 38% high yield notes. 

Property developers have been a huge source of demand for the dollar bond market this year with at least $78.5 billion of the issuances. 

Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong, told Bloomberg that China is expanding its dollar bond market for companies to have ample funding amid periods of uncertainty: 

While China has the world’s second-largest bond market, in some ways it remains relatively underdeveloped, according to Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. The country is still building out a domestic institutional investor base such as the pension funds and insurers that are a major feature overseas. Banks are the main holders of bonds onshore. “There is a good number of companies that do not have a funding channel at home,” Liu said. That’s why even domestic-focused enterprises can tap the dollar-debt market, she said.The record China sale isn’t huge relative to some other sovereign issues. Italy sold $7 billion of dollar bonds last month. Argentina sold $9 billion in January 2018.

And it makes sense why China is ramping up its dollar borrowing because once it displaces the dollar as a reserve currency with yuan, it would be cheaper to repay dollar debt as the dollar is crushed into oblivion. China is playing the long game. 

Submitted by Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein

Financialization has become a new feature and risk of monetary policy as decisions on policy rates and the balance sheet operate mainly through the portfolio channel.

At the center of financialization are actual and perceived changes in monetary policy interacting with equity prices. Investors see easy policy as cumulative and mutual reinforcing, but so too at some point could their reversals.

Financialization is to financial stability what inflation is to price stability. Both, financial and price stability are under the mandates of the Federal Reserve. Yet, policymakers have specific targets or objectives for inflation, but no such goal or gauge has been established for financial stability.

What constitutes the relevant metrics for financialization?

The concept of financialization is not new, and it has be defined in variety of ways and seen through different lenses. It is being used in this context to assess the changing and expanding tools of monetary policy working through the portfolio channel and its impact on finance (equity) in relation to economic fundamentals.

For example, the market valuation of domestic companies has skyrocketed in relation to Nominal GDP…

…. and aggregate operating profits (GDP basis) during the current economic cycle as policymakers have used the portfolio channel – with their new tools of forward guidance and asset purchases – to help achieve their mandated objectives on maximum employment and price stability.

Even with market valuations at lofty levels policymakers still decided to lower official rates three times over the past several months in order to show a commitment to achieving its price stability target. And the reduction in official rates also came with a commitment by the Fed chair not to reverse course and raise rates until inflation turns higher on a sustained basis.

Policymakers are effectively making investing and risk-taking far too easy since the most important item over time in the valuation of the equity market is the current and prospective level of interest rates.

It is far too soon to judge the economic and inflation effects from recent policy decisions, but the impact on finance has been swift and substantial. Updating for the gains in equity prices since June 30th the market valuation of domestic companies jumps to approximately 1.8X to GDP and near 20X to operating profits, close to levels reached during the dot.com speculative boom.

(Note: the ratio of market valuation of domestic companies to operating profits is not comparable to the P/E ratio used by analysts for individual companies or groups of stocks, like the S&P 500 index. Operating profits in the GDP framework differ from the reported profits of companies and companies also report their earnings on a per share basis.)

Financialization is an unfamiliar outcome of monetary policy. Asset price increases due to fundamental causes are desirable and pose no significant risk to economic or financial stability. Yet, gains that become unhinged from economic growth and operating profits and are based on speculation of any type – even ones tied to monetary policy – do pose a huge risk.

The transmission of monetary policy has fundamentally changed as it now operate mainly through the portfolio channel and with that comes new trade-offs. The new trade-off is easy money risks an increase in “financialization” and not general inflation. As such, policy decisions made solely to achieve the price stability mandate will eventually clash with financial stability, raising the risk of a bad outcome.

As a result of the holiday-shortened week and the truncated Treasury auction schedule, moments ago the US sold 2Y paper in what was a very solid auction.

The high yield of 1.601% was just fractionally higher than last month’s 1.594%, and stropped through the 1.605% When Issued, the 3rd consecutive stopping through auction. The Bid to Cover was also in line with recent auction, dipping modestly from 2.695 to 2.626, right on top of the 6 auction average.

However, while the headline numbers were solid, there was a notable change in the internals, where the near-record Direct takedown soared from 14% to 29.1%, the highest in nearly six years going back to December 2013. The offset was a drop in both Indirects, which dropped from 54.8% to 47.8%, the lowest since August, and below the 49.6% recent average, as well as Dealers, whose allotment declined from 31.22% to 23.11%, also below the 29.3% six auction average.

While there was no immediate explanation for the dramatic surge in Direct bidding, the stronger than expected auction did not spook markets, and the 10Y yield has continued to trade near session lows, at just below 1.76%, as stocks bond yields diverge for another day.

Considering its relatively tiny population of just 25 million, Australia punches well above its weight on the global stage. And as Washington maneuvers to check the growth of Chinese military power around the world, Canberra is becoming an increasingly important battleground in the war of influence.

Despite Australia’s economic synergies with China, the relationship between the countries has deteriorated as disturbing evidence of political and economic interference carried out by Beijing in Australia has come to light.

China’s efforts to infiltrate Australia’s political system and its intelligence community is a huge problem, not just for Australia, but for the US and many of its closest allies.

That’s because Australia is part of a shadowy and extremely powerful group called the Five Eyes intelligence alliance. Though it’s not widely known to the public, Five Eyes, which includes the US, Canada, New Zealand and the UK, is critically important. The alliance is already on edge over the possibility that Moscow may have turned a high-ranking Canadian intelligence official, who may have clued the Kremlin in to Five Eyes operations.

Now, Reuters reports, Australia’s domestic spy agency is investigating whether Beijing tried to get a sleeper agent elected to Australia’s federal parliament in what Australian Prime Minister Scott Morrison described as a “deeply disturbing” plot.

The case was brought to the public’s attention last night, when the Australian version of “60 Minutes” ran a report about the plot that was put together with several newspaper partners, including the Sydney Morning Herald. According to the story, Melbourne luxury car dealer Bo “Nick” Zhao was offered a “seven figure sum” by a Chinese espionage ring to run for a seat in parliament.

The Australian Security Intelligence Organization (ASIO) said it had launched an investigation into the alleged scheme long before the ’60 Minutes’ report. The agency said it’s taking these claims “seriously.”

“The reporting on Nine’s ‘60 Minutes’ contains allegations that ASIO takes seriously,” ASIO Director-General of Security Mike Burgess said in the statement on Sunday.

“Australians can be reassured that ASIO was previously aware of matters that have been reported today, and has been actively investigating them.”

In his statement, Morrison added that Australia isn’t “naive” when it comes to the espionage threats it is facing.

“I find the allegations deeply disturbing and troubling,” Morrison told reporters in Canberra, adding the government had beefed up Australia’s laws and security agencies to counter foreign interference.

“Australia is not naive to the threats that it faces more broadly,” he added, without commenting on the specific allegations.

In response to the growing international threat, Australia has been beefing up its counter-foreign interference efforts, bolstering cooperation between its intelligence agencies when it comes to foreign interference, particularly when it comes to elections.

Underscoring the stakes of international espionage, Zhao, the alleged would-be asset, was found dead in a hotel room back in March, after Australian intelligence reportedly found out about the plot. The circumstances of his death are murky, and incredibly suspicious.

These allegations surfaced just days after the media reported that an alleged Chinese spy, Wang Liqiang, is seeking asylum in Australia for his wife and family. In exchange, he is reportedly providing top-secret information about how Beijing runs its interference operations not just in Taiwan, but around the world. Wang appeared also appeared in the ’60 Minutes’ report, prompting a flurry of attacks from the Chinese media.

His claims are just the latest reminder that the US and Russia aren’t the only world powers that meddle in international affairs.

Wang Liqiang

For what it’s worth, Chinese media denounced Wang as a fraudster and insisted that if his claims really had any merit, Australian intelligence wouldn’t have leaked them to the media (since a counter-intelligence operation would presumably be more effective if Beijing wasn’t expecting it). Australia refused to comment on whatever counter-intelligence efforts may or may not be underway.

According to analysts at Rabobank, there’s a chance the international spat between the two countries caused by the Wang’s revelations, and now this reporting on Zhao, might provoke Beijing to threaten to stop buying Australian commodities.

Whatever happens, the story illustrates Beijing’s extensive reach. There’s little doubt Washington will be closely monitoring Australia’s response, whatever it might be. After all: An intelligence alliance is only as secure as its weakest link.

Since the beginning of the year, we’ve noticed an increase in unscheduled, ad hoc press events in the Rose Garden where President Trump addresses the media about an important issue of the day.

The press has been advised to remain calm, though White House reporters were summoned without being given any information about the event.

CNBC’s Eamon Javers also reported that the event will feature “an animal,” possibly a reference to the annual pardoning of the Turkey at the White House (which usually doesn’t take place until Thanksgiving day).

The White House is gathering reporters in the Rose Garden for an unscheduled event. No details about what we’re about to see, but it seems like we will hear from POTUS shortly. Stand by.

— Eamon Javers (@EamonJavers) November 25, 2019

We are told there will be “an animal” at this event. Press is advised to remain calm.

— Eamon Javers (@EamonJavers) November 25, 2019

White House press corps has been suddenly called for a previously unscheduled open press event in the Rose Garden

— Sara Cook (@saraecook) November 25, 2019

To 🚨 or not to 🚨?

White House announces unscheduled “open press event.” pic.twitter.com/xDrr5sq1Sj

— Niall Stanage (@NiallStanage) November 25, 2019

There are a number of issues that the president could address, from a potential presidential intervention to stop a Navy SEAL accused of posing with a dead ISIS prisoner from being kicked out of the elite unit, to the abrupt departure of Navy Secretary Richard Spencer that this controversy allegedly elicited, to the ongoing impeachment drama.

Or perhaps he intends to brag about today’s fresh record highs in the market, which he tweeted about a few hours ago.

Another new Stock Market Record. Enjoy!

— Donald J. Trump (@realDonaldTrump) November 25, 2019

Whatever it is, we’ll know soon enough.

Authored by Andrew Moran via LibertyNation.com,

The U.S. dollar has been as good as gold for the last 70 years, enjoying its hegemony as the international reserve currency. Despite the Federal Reserve destroying the greenback’s value over the last 100 years, foreign governments, central banks, and global financial markets have depended on the buck for everything, from its status as a safe-haven asset to its use in worldwide transactions. As the saying goes, all good things must come to an end, and it might be time to bid farewell to the dollar.

The War On The Dollar

In the last several years, the world has started to witness an incremental de-dollarization push by a handful of nations. The process of reducing dollar holdings, using local denominations, and taking part in currency swaps has become ubiquitous. Right now, it is only America’s so-called adversaries, such as Russia, Iran, and China, that are leading this movement. But the data suggest more states are gradually attempting to dethrone the dollar.

Today, the share of dollars held in global reserves has tumbled from 65.3% in the fourth quarter of 2016 to 61.8% in the second quarter of 2019. Meanwhile, the shares of allocated reserves are becoming more diversified as the euro, yuan, and yen have attained a greater representation in global reserves.

Major oil producers and some of the world’s largest exporters have halted the accumulation of U.S. debt securities. In October 2014, China and Russia signed a three-year ruble-yuan currency swap agreement worth up to $25 billion, aimed at increasing trade with these currencies. In September 2017, the Russian government approved legislation that made the ruble the main currency of exchange at all Russian seaports. Zimbabwe, Venezuela, and Iran have either diminished their acceptance of the dollar or have refused it entirely. Germany has requested a new independent payment system, suggesting that it wants alternatives to the buck.

With Iran isolated from the international community, a growing number of jurisdictions are getting frustrated because they want to do business with Tehran. This desire to conduct trade with one of the largest crude producers in the world might motivate governments and central banks to de-dollarize, says Anne Korin from the Institute for the Analysis of Global Security. She told RT last month:

“We don’t know what’s going to come next, but what we do know is that the current situation is unsustainable. You have a growing club of countries — very powerful countries.

Europe wants to do business with Iran. It doesn’t want to be subject to U.S. law for doing business with Iran, right? Nobody wants to be picked up at an airport for doing business with countries that the U.S. isn’t happy that they’re doing business with.”

Whatever the case, central banks have revealed their consternation as of late. According to the World Gold Council (WGC), central banks have purchased an all-time high of 375 tons of gold this year (so far). It might only account for one-fifth of the total global gold demand, but the trend does lead to some interesting speculations for these purchases. In the aftermath of the recession, these institutions were scooping up bullion to protect themselves from the uncertainty and chaos. Today, they may be preparing for another economic calamity or, perhaps, they are getting ready for instability that would transpire during the transition away from the dollar.

Will It Work?

A lot of folks from all political persuasions enjoy taking digs at the U.S. dollar. Considering the state of the basket of currencies, you can only wonder if the de-dollarization instigators know what they are getting themselves into. It is not as if they are begging for an end to fiat money and a relaunch of gold-backed money – or, free-market currency.

Let’s be honest: Compared to other currencies, the dollar is sound money. The yuan is crumbling, the ruble is worthless, the Canadian dollar is treading water, the euro is being systematically destroyed by the European Central Bank (ECB), and the Australian dollar seems fine where it is on the currency hierarchy. You could make the case for the Swiss franc to topple the dollar, but the issue is that the Swiss National Bank (SNB) is trying to curtail its immense demand and is debasing the franc.

International commerce might eventually warm up to an exotic currency dominating trade. However, people – investors, consumers, and entrepreneurs – are resistant to change. They like commonality. The U.S. dollar and the euro are successful because of familiarity – everyone knows how to trade them. It is a lot more difficult to trade with the ruble or other highly volatile currencies.

It is also important to remember right now that the U.S. dollar has lost much confidence in financial markets. The trade war, political turmoil in Washington, and contentious relationships worldwide – the buck has survived quite a bit in the last few years. It is why markets called it a Teflon-dollar. Even if Sen. Bernie Sanders (I-VT) or Sen. Elizabeth Warren (D-MA) were to win the 2020 presidential election, the world would still be enamored with the dollar.

Should the de-dollarization kick into high gear, it will still take decades for local currencies to overtake the buck. Of course, a dollar crisis, which is quite possible in the not so distant future, could speed up the move. The national debt has topped $23 trillion, the federal government is recording trillion-dollar budget deficits, and Washington faces more than $200 trillion in unfunded liabilities expenditures. It is hard to envision the greenback surviving another 50 years.

Bracing For Impact

As we brace for the dollar’s inevitable demise or as we perform an autopsy to find out what happened, there will always be a segment of the population that will try to blame one specific person. In this case, millions of Americans will blame President Donald Trump, even if the dollar’s evisceration happens in the next 25, 50, or 100 years. But the slow push away happened before Trump – and it will continue when he leaves office. It has been a collective effort involving the smartest men and women in the White House, on Capitol Hill, and within the confines of the Eccles Building. There is no creature from the black lagoon; it will be the entire population of the Swamp that will have triggered the dollar collapse.

China has issued a stark warning following a stunning landslide victory for pro-democracy candidates in Hong Kong’s first elections since anti-government unrest gripped the city several months ago.

Foreign minister Wang Yi emphasized that the city will always be ruled from Beijing, and said that ongoing violence and “attempts to disrupt Hong Kong” would not be tolerated, as several hundred people took to the streets in solidarity with protesters at Hong Kong Polytechnic University, which has been under siege by police for over a week, according to The Guardian.

Wang told reporters at the G20 meeting in Tokyo, adding “Any attempts to disrupt Hong Kong or undermine its stability and prosperity will not succeed.”

The election results pose a dilemma for Beijing, and Hong Kong’s chief executive, Carrie Lam. Hand-picked to rule by party leaders, she is widely accepted to have coordinated her hardline response to protesters with China’s top leadership.

Before the vote, Lam often claimed she had the support of a “silent majority”, as she refused to compromise. With that position untenable after pro-government candidates were swept from power across the city, holding on to barely one in 10 seats on district councils, she took a more conciliatory approach.

On Monday, she promised to respect the election results and “listen humbly” to the views of the public. Refusing to compromise would almost certainly inflame residents and protesters further, nearly six months into a deep political crisis. –The Guardian

And while Lam and Beijing figure out how to calm the masses, China’s autocratic president, Xi Jinping, is now faced with one of the most serious challenges to his rule since he took power in 2012. And as The Guardian notes, most Chinese media made no mention of Sunday’s sweeping victory for pro-democracy candidates – just that the polls had closed.

Following Wang’s comments, ministry spokesman Geng Shuang reiterated a warning to the protesters, saying “The most urgent task for Hong Kong at present is to stop violence, control chaos and restore order,” and that “The Chinese government is unswervingly determined to safeguard national sovereignty, and to oppose any interference in Hong Kong affairs by external forces.“

Authored by Lance Roberts via RealInvestmentAdvice.com,

Are you an “investor” or a “speculator?” 

In today’s market the majority of investors are simply chasing performance. However, why would you NOT expect this to be the case when financial advisers, the mainstream media, and WallStreet continually press the idea that investors “must beat” some random benchmark index from one year to the next.

But, is this “speculation” or “investing?” 

Think about it this way.

If you were playing a hand of poker, and were dealt a “pair of deuces,” would you push all your chips to the center of the table?

Of course, not.

The reason is you intuitively understand the other factors “at play.” Even a cursory understanding of the game of poker suggests other players at the table are probably holding better hands which will lead to a rapid reduction of your wealth.

Investing, ultimately, is about managing the risks which will substantially reduce your ability to “stay in the game long enough” to “win.”

Robert Hagstrom, CFA penned a piece discussing the differences between investing and speculation:

“Philip Carret, who wrote The Art of Speculation (1930), believed “motive” was the test for determining the difference between investment and speculation. Carret connected the investor to the economics of the business and the speculator to price. ‘Speculation,’ wrote Carret, ‘may be defined as the purchase or sale of securities or commodities in expectation of profiting by fluctuations in their prices.’”

Chasing markets is the purest form of speculation. It is simply a bet on prices going higher rather than determining if the price being paid for those assets are selling at a discount to fair value.

Benjamin Graham, along with David Dodd, attempted a precise definition of investing and speculation in their seminal work Security Analysis (1934).

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

There is also very important passage in Graham’s The Intelligent Investor:

“The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.”

Indeed, the meaning of investment has been lost on most individuals. However, the following 10-guidelines from legendary investors of our time will hopefully get you back on track.

10-Investing Guidelines From Legendary Investors

1) Jeffrey Gundlach, DoubleLine

“The trick is to take risks and be paid for taking those risks, but to take a diversified basket of risks in a portfolio.”

This is a common theme that you will see throughout this post. Great investors focus on “risk management” because “risk” is not a function of how much money you will make, but how much you will lose when you are wrong. In investing, or gambling, you can only play as long as you have capital. If you lose too much capital but taking on excessive risk, you can no longer play the game.

Be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest.

2) Ray Dalio, Bridgewater Associates

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

Nothing good, or bad, goes on forever. The mistake that investors repeatedly make is thinking “this time is different.” The reality is that despite Central Bank interventions, or other artificial inputs, business and economic cycles cannot be repealed. Ultimately, what goes up, must and will come down.

Wall Street wants you to be fully invested “all the time” because that is how they generate fees. However, as an investor, it is crucially important to remember that “price is what you pay and value is what you get.” Eventually, great companies will trade at an attractive price. Until then, wait.

3) Seth Klarman, Baupost

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

Investor behavior, driven by cognitive biases, is the biggest risk in investing. “Greed and fear” dominate the investment cycle of investors which leads ultimately to “buying high and selling low.”

4) Jeremy Grantham, GMO

“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.”

Successful investors avoid “risk” at all costs, even it means under performing in the short-term. The reason is that while the media and Wall Street have you focused on chasing market returns in the short-term, ultimately the excess “risk” built into your portfolio will lead to extremely poor long-term returns. Like Wyle E. Coyote, chasing financial markets higher will eventually lead you over the edge of the cliff.

5) Jesse Livermore, Speculator

“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”

Allowing emotions to rule your investment strategy is, and always has been, a recipe for disaster. All great investors follow a strict diet of discipline, strategy, and risk management. The emotional mistakes show up in the returns of individuals portfolios over every time period. (Source: Dalbar)

6) Howard Marks, Oaktree Capital Management

“Rule No. 1: Most things will prove to be cyclical.

Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

As with Ray Dalio, the realization that nothing lasts forever is critically important to long term investing. In order to “buy low,” one must have first “sold high.” Understanding that all things are cyclical suggests that after long price increases, investments become more prone to declines than further advances.

7) James Montier, GMO

“There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.”

“Cheap” is when an asset is selling for less than its intrinsic value. “Cheap” is not a low price per share. Most of the time when a stock has a very low price, it is priced there for a reason. However, a very high priced stock CAN be cheap. Price per share is only part of the valuation determination, not the measure of value itself.

8) George Soros, Soros Capital Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

Back to risk management, being right and making money is great when markets are rising. However, rising markets tend to mask investment risk that is quickly revealed during market declines. If you fail to manage the risk in your portfolio, and give up all of your previous gains and then some, then you lose the investment game.

9) Jason Zweig, Wall Street Journal

“Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

The chart below is the 3-year average of annual inflation-adjusted returns of the S&P 500 going back to 1900. The power of regression is clearly seen. Historically, when returns have exceeded 10% it was not long before returns fell to 10% below the long-term mean which devastated much of investor’s capital.

10) Howard Marks, Oaktree Capital Management

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”

The biggest driver of long-term investment returns is the minimization of psychological investment mistakes.

As Baron Rothschild once stated: “Buy when there is blood in the streets.” This simply means that when investors are “panic selling,” you want to be the one they are selling to at deeply discounted prices. Howard Marks opined much of the same sentiment: “The absolute best buying opportunities come when asset holders are forced to sell.”

As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

As I stated at the beginning of this missive, “Market Timing” is not an effective method of managing your money. However, as you will note, every great investor through out history has had one core philosophy in common; the management of the inherent risk of investing to conserve and preserve investment capital.

“If you run out of chips, you are out of the game.”