No Matter What Awful Thing Happens In the Market, Someone Makes Money

“Desperate times require desperate measures,” is a thought attributed to the ancient Greek physician, Hippocrates.  In medicine, there is no doubt a time and a place for desperate measures.  After all, life and death are not available together.

In financial situations though the situation is less clear.  Most of the desperate measures are near certain to lose.

I recall a client from the accounting practice, who sold his business in the mid 1980s.  The after tax proceeds were around $800,000 and the prevailing interest rate on riskless investments was about 12%.  $96,000 a year which was roughly his cost of living and therefore all was well.  However, October 1987 came along and rates fell precipitously to the point where he could only get around 7%.  $56,000 is a long way from $96,000, so what to do?

The desperate measure involved, without advice, investing $250,000 at 24% in a complex series of notes secured by the assets and profits of a currency trading scheme.  $60,000 a year from there and the other $550,000 at 7% would return income to its preferred level.  What could go wrong?

As you may have guessed, secured,and capable of enforcing the security and retrieving your principal, are logically distinct thoughts.  100% lost.

The question became how to generate $96,000 a year with $550,000.  Fortunately the client is old school and learns lessons quickly enough from his own experience.  Pity he could not learn from the lessons of others.

Eventually, lifestyle scaled back and the family home was disposed of.  The resulting lifestyle was not needy, but it was less than expectations and that is often the same thing.

The lessons are clear.

  1. There is no such thing as a secure deposit at three times the current market rate.  If someone is paying more, it’s because you are investing more than money.  In this case, acceptance of risk.  Lots of it.  Too good to be true is just that.
  2. Believing any investment environment is durable, is delusional.  Markets change regularly.  The various markets rhyme, but you cannot catch that until later.
  3. You should have a clear idea of what you will do if rates fall.  Do you find a new way to get income, reduce spending, consume capital, a little of each?  If you think it through the first desperate alternative may not be your preferred choice.  It is not all bad, taxes due are less when rates fall.  Manage after tax and it may give you clues to a more acceptable method.

People who estimate how they will behave under more than one set of conditions have a better chance of surviving when things go awry.  The plus side of all this looking for future trouble, aside from survival, is that opportunities often appear among the problems.

I am reminded of how George Soros made billions in 1992 by noticing that the British pound was overvalued relative to the Deutschmark and then investing accordingly.  Sometimes looking for trouble makes you money.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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