First, do nothing

Why action is over-rated

https://www.pricevaluepartners.com/first-do-nothing/

“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good..

“Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”

• Jason Zweig, personal finance correspondent, The Wall Street Journal, ‘Saving investors from themselves’, 1 July 2013.

Get your Free
financial review

At the end of 2019, Deutsche Bank’s chief economist, Torsten Slok, issued a list of ’20 risks to markets in 2020’. That coincidence of dates was handy, otherwise we might only have had 19 of them. His list contained the following ‘red flags’:

• A continued increase in wealth inequality, income inequality and healthcare inequality;

• A ‘phase one’ trade deal between the US and China remains unsigned;

• Trade war uncertainties continue to weigh on businesspeople’s willingness to undertake capital investment;

• Ongoing slow growth in China, Europe and Japan;

• US impeachment uncertainty and a possible government shutdown;

• Anti-trust, privacy and technology regulation;

• In the aftermath of the US Presidential election, foreign investors lose their appetite for US debt;

• MMT (Modern Monetary Theory) is unleashed at a fiscal level in the US and / or Europe;

• US government debt levels cause long term interest rates to rise;

• The US T-bill (short term government debt) market wobbles;

• The Fed is reluctant to cut rates during an election year;

• A credit crunch impacts lower rated corporate credit;

• A credit crunch impacts lower rated consumer credit;

• Creditworthiness across the corporate sector continues to decline;

• More negative-yielding debt encourages global investors to scramble for yield;

• A decline in corporate profits impinges on stock buyback activity;

• The global auto industry contracts;

• House prices crash in Australia, Canada and Sweden;

• Brexit uncertainty persists.

As lists go, we suppose it could have been worse. If tasked with the same exercise, this correspondent would have offered the following, altogether briefer, list of threats to markets back in 2020:

• Deutsche Bank itself;

• Any combination of stock markets, bond markets and / or currency markets all crash.

Our point being, admittedly with the benefit of four years’ worth of hindsight, that one ‘red flag’ conspicuous by its absence – on both lists – was something called Covid-19. And the second ‘red flag’: grotesque mass governmental and legacy media overreaction to same. And back in the more innocent days of 2019, the word ‘plandemic’ had yet to be coined..

The composition of Deutsche’s list neatly underscores the absurdity of trying to make big macro predictions about the markets. Markets will do whatever they will do, and there’s frankly not much the rest of us can do about it, other than commit to the sort of sensible, diversified, long-haul investing that Jazon Zweig alludes to above.

(The biggest mistake we made over the past decade was in allowing a big macro prediction – that continued uncontrolled money-printing by the world’s major central banks would result in ever higher gold prices as a precursor to a messy outbreak of inflation – to cause us to lose sight of the valuation case against owning gold stocks during the most recent gold bear market, from roughly 2012 to 2020. By allowing a narrative to hold sway, we somewhat lost sight of the fundamentals. That narrative seems even more powerful and relevant today, but what we’ve learnt is to treat commodities companies in exactly the same way as any other type of listed business so that we try not to overpay for them beyond their inherent worth.)

But narratives are powerful, which is presumably why Mr. Slok compiled his list, even though many of his predictions were repetitious, and some of them so vague as to be essentially irrelevant to investors (“I could have sold, but I didn’t because of all that darned Brexit uncertainty..”).

Covid-19 is a good example of one of Nassim Taleb’s ‘black swans’: something with a dramatic (at least initial) impact that absolutely nobody saw coming. The thing about Torsten Slok’s black swans is that they are not black and they’re not swans, so much as vague misgivings about things that many were already worried about. If we were to add a serious contender to his list, it would be the unintended consequence of trillions of dollars having been committed to notionally low cost but indiscriminate index-trackers, especially in fundamentally illiquid asset classes (like low grade debt), ahead of a sustained shift in market dynamics. Why ? Because the ETF (exchange-traded fund) investor base, together with the institutional base that runs them, has yet to be seriously tested by a major market correction.

Jason Zweig, again:

“The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.

“In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.

“It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.

“My job, as I see it, is to learn from other people’s mistakes and from my own. Above all, it means trying to save people from themselves. As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.””

[Emphasis ours.]

There’s a reason why Zweig highlights Ben Graham. Just as there’s a reason why we slavishly follow just about everything the great man said. Because he’s one of the smartest investors that ever lived. Consider just how similar that “investor’s chief problem” quotation is to the advice from the great physicist Richard Feynman:

“The first principle is that you must not fool yourself – and you are the easiest person to fool.”

There, in a nutshell, is why traditional (Keynesian, and neo-Keynesian) economics has no practical application in the real world. The real world is complex and unforecastable. Not least because we are complex and unforecastable. If you are determined to spend time in the study of finance, at least take the time to engage with behavioural finance, so that you can appreciate some of the dangers that arise when otherwise smart people start to make decisions about money. It is not Deutsche Bank’s 20 risks that you need to immunise your portfolio from. It is you yourself.

Which is one reason why we continue to view Warren Buffett’s punch card metaphor as one of the most powerful in the context of all investing:

“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it—so that you had 20 punches representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.

“Under those rules, you’d think really carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

There speaks someone with an appreciation for human nature. The problem, and our collective problem, is that all the forces of our modern culture and our digital age are conspiring against that 20 punch card lifetime scenario. Trade execution on stock exchanges has become all but completely free. And every minute of every day we are bombarded with informational noise.

Which is why any investor who seeks meaningful long term investment success now has to be highly discriminating about handling newsflow. What was previously a funnel – in a period of informational and data scarcity – now has to become a filter of ideas and commentary instead. Please note that we’re not advocating investing in a vacuum. Far from it. But as Rolf Dobelli cautions in his excellent essay Avoid News, not all informational sources are created equal:

“In the past few decades, the fortunate among us have recognized the hazards of living with an overabundance of food (obesity, diabetes) and have started to shift our diets. But most of us do not yet understand that news is to the mind what sugar is to the body. News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. Unlike reading books and long, deep magazine articles (which requires thinking), we can swallow limitless quantities of newsflashes, like bright-coloured candies for the mind.

“Today, we have reached the same point in relation to information overload that we faced 20 years ago in regard to food intake. We are beginning to recognize how toxic news can be and we are learning to take the first steps toward an information diet.

“This is my attempt to clarify the toxic dangers of news – and to recommend some ways to deal with it. I have now gone without news for a year, so I can see, feel and report the effects of this freedom first hand: less disruption, more time, less anxiety, deeper thinking, more insights. It’s not easy, but it’s worth it.”

There is one risk factor that Torsten Slok fails entirely to mention, and that is the elephant in the room of climate change. To our way of thinking it is not climate change itself that is the problem, but rather the risk that governments and lobbyists will continue to use the threat of anthropogenic (man-made) climate change to seize ever greater amounts of other people’s power and money.

We recommend Gregory Wrightstone’s book ‘Inconvenient Facts: the science that Al Gore doesn’t want you to know’ to anyone who wishes to be more informed about the issues surrounding climate change, and to a topic which we are increasingly minded to believe does not yet involve so-called ‘settled science’.

The green lobby would have us believe that carbon dioxide is almost literally evil. Wrightstone stands a good chance of convincing you otherwise (unless your mind is already made up on the issue). We have no dog in this fight, other than to seek an informed and most importantly properly scientific view on the debate. Within his book, you will learn some interesting ‘inconvenient facts’, among them:

• Carbon dioxide is not the primary greenhouse gas. (Water vapour is.)

• The warming effect of CO₂ declines as its concentration in the atmosphere increases.

• First and foremost, CO₂ is plant food, and without it, all vegetation would die.

• Our current geologic period, the Quaternary, has the lowest average CO₂ levels in the history of our planet.

• Modern warming began long before SUVs or coal-fired plants..

We could go on, but Wrightstone does.

This is not to say we support environmental degradation, or pollution, or the destruction of wildlife. We are all for a sustainable lifestyle on a sustainable planet. But we think we are capable of recognising a gigantic confidence trick when we see it, and when governments which desperately need money are presented with an effortless way of raising taxes further, we start to feel protective about our wallet..

We were recently taken somewhat aback by coverage of a book by Anglia Ruskin professor Patricia MacCormack suggesting that ‘the only solution for climate change is letting the human race become extinct’. Professor MacCormack comments:

“I arrived at this idea from a couple of directions. I was introduced to philosophy due to my interest in feminism and queer theory, so reproductive rights have long been an interest to me – this led me to learn more about animal rights, which is when I became vegan.

“The basic premise of the book is that we’re in the age of the Anthropocene, humanity has caused mass problems and one of them is creating this hierarchal world where white, male, heterosexual and able-bodied people are succeeding, and people of different races, genders, sexualities and those with disabilities are struggling to get that.

“This is where the idea of dismantling identity politics comes in – they deserve rights not because of what they are, but because they are.

“The book also argues that we need to dismantle religion, and other overriding powers like the church of capitalism or the cult of self, as it makes people act upon enforced rules rather than respond thoughtfully to the situations in front of them.”

For any interested readers, it’s called The Ahuman Manifesto, and the hardback’s a snip at £72. Buy now while humanity lasts.

Back to the real world. And a spoiler alert. Wrightstone summarises his argument in Inconvenient Facts as follows:

“..the first and most important conclusion is that the correct policy to address the non-problem of man-made global warming is to have the courage to do nothing.”

And we suspect few would choose to disagree with his endorsement of the scientific process and a basic tenet of English law:

‘Audiatur et altera pars’

Or, in plain English:

‘Let both sides be fairly heard.’

Strange, isn’t it, that a proffered solution to so many of our problems is: to do nothing. A little like Blaise Pascal’s observation that all of humanity’s problems stem from man’s inability to sit quietly in a room, alone.

………….

As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:

Get your Free
financial review

…………

Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.