IT DOESNT HURT AS MUCH

An interesting insight into personal investment psychology.

 

I have just missed the biggest up move in half a century, and it has happened in the space of about 6 months. In theory as a fund manager I should be absolutely gutted, yet I really am not. Yes I am hurting because I have been trying to short the market into the oncoming steam train so that hasn’t been nice but that is more about the pain that comes from being early in a trade, not the missed trade that so often hurts like hell.

 

I think it is vitally important to first look at the prelude to this rampant market, the runaway market comes on the back of a “once in a century” (we know that in reality they happen more often than the statistics would have us believe) bear market that in many instances dropped indexes 70% top to bottom. The rally of 50% plus has to be seen in the context of a market slaughter. We remain in many instances below 50% of the previous highs so whilst there would have been a fantastic story to tell if one had been short at the top and long at the bottom, being short at the top still remains the most profitable trade, even after having to suck the wind of this foul smelling bull.

 

There is a further level of context to be brought to the proverbial butchers table; if you are one for investing with higher probability odds of success then turning bullish over the last 3 – 4 months is simply like a lamb going on a jog through an abboitir. It was only in March of this year that the world’s financial system was technically insolvent, and even today I argue the system is technically insolvent, there is no way of responsibly repaying all this debt backed by inflated assets on corporate balance sheets. There is only the hope of governments being able to borrow money from equally suspicious governments and structurally flawed institutional investors (who “have to” put a pre-described amount of money to work). There is only so much the central banks can do by way of stimulus before eroding the purchase power of their currency so all that remains is the hope of a miracle or the inevitable doing the hard yards.

 

What has changed in terms of fixing the ills that got us into this proverbial mess; I would argue in terms of actions taken nothing. However, the system has delivered its own changes and that has been the reduction in credit growth. Once again this isn’t because banks or other shadowy banks wanted to lend less, on the contrary they have tried everything in their power to try and lend as much as before the only difference is the level of confidence in the system has lowered the level of credit available in the system as the margins required for this increased level of distrust has lowered how much the system/multiplier can “juice”.

 

So coming back to my original statement of the fact that it doesn’t hurt as much, the reason is because there is solid rational ground for having sidestepped this bull market in favour of better risk rewards. Does this mean I would have done everything the same, of course not. We always live and learn, but I can state for sure that I have absolutely no regret for not getting firmly behind this bounce; which after all may turn into a dead-cat with no more lives.