An Investment Defense

The past does not promise the future.  People who rely on history for truth are doomed to disappointment.

No police officer believes much of history.  Why?  “Because I have heard two eyewitnesses to the same traffic accident and they do not even agree on the color of the cars and which way they were traveling.”  Understanding the nuance of things like the Vietnam war or the fall of Volkswagen stock is impossible.  We tend to overlook the context of complex events.

It gets worse.   Vitaliy Kastenelson recently pointed out that this is the time to be humble.  We do not know the future and given current market valuations, global uncertainty and central bank monetary policy, we cannot rely on the old to tell us of the new. It is a time to be defensive, but how?

The first common sense question to ask is do I really care?  If I am looking at the money to be useful 40 years from now, then the next year or two probably don’t matter much.  Easy to say, but harder to feel good if the market takes a 40% hit.  So I care at some level.

What could I invest in that might fall less, recover faster and/or recover farther?  Indexes in the giant economies will not fit here.  Their markets are huge and it takes a lot of enthusiasm to move them up.  Less to move them down.  Perhaps a market like Vietnam or Australia or Canada makes more sense.

There is a flaw in the small foreign market question. Canada might have decent reporting laws but many small countries do not yet have those.  Information does not mean the same thing and we tend to assume that our intuitive idea of fair is universal.  It is not. Be skeptical.

Intuition tends to make us think liquidity is universal, too.  Not so.  The total capitalization of the Vietnamese stock exchange is less than US$50 billion.  Not a lot more than Yum Brands, the operator of Pizza Hut, Taco Bell and KFC.  It is a mistake to equate the Ho Chi Minh City Stock exchange (HOSE) with the NYSE.  You can likely get in reasonably easily, but getting out can be problematic.

Precious metals could work, but they are hard to spend.  Good for capital protection maybe.

Defense just now is challenging.  Partly because we don’t want to give up illusions and partly because the old rules seem not to be present.

Vitaliy’s assessment.

“This is a time for humility and patience.  Humility, because saying the words “I don’t know” is difficult for us testosterone-laden alpha male money manager types.

Patience, because most assets today are priced for perfection. They are priced for a confluence of two outcomes: low (or negative) interest rates continue to stay where they are (or decline further) and above-average global economic growth. Both happening at once in the future is extremely unlikely.  Take one of them away (only one!) and stock market indices are overvalued somewhere between a lot and humongously (we don’t even try to quantify superlatives).  Take both away and…”

“Priced for perfection.”  We live in interesting times.

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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