On risk taking, being greedy when others are fearful
To buy, or not to buy, that is the question
In capitalism it makes perfect sense that when there is a crisis, and many cash out at a loss because they need instant liquidity, i.e., money, those that are better-off, the unaffected (not 'needy') are therefore at advantage. It’s not fair but such is the current system; the whole notion of those already more vulnerable having to pay a higher interest rate is unfortunately an obvious cornerstone of credit markets, perhaps exacerbating inequality (explaining why it’s trending upward). Without democratic action, there are no brakes on how bad it can get, and history is full of examples where it led to tragedies, but more on that in later posts.
No event had shown better, how those already better-off are rewarded during a crash, than recent start of pandemic in 2020. Some saw unexpected expenses like having to care for an elderly relative, spending on safety measures, while facing lower income, e.g., after losing job or losing rent (it not coming in from tenants), etc.
Those unaffected and with a cash cushion like Berkshire Hathaway or long-time savers were in contrast rewarded – with more opportunities to deploy their capital, taking advantage of their ability to take risk in a moment when others have to worry and cannot even afford more risk. It’s not just fear for them.
Such a broad picture should really be a part of like 101 basic risk management, as something of a common sense.
Enter 2022
But is the current downturn also a similar opportunity offered by the market?
As W. Buffett had warned "several times in history whole stock markets went to zero". Nowadays, he is said to be active in the market, in contrast to 2020 when he was challenged for not buying, even by his close friend and colleague C. Munger (according to the most recent interview from their mutual contact M. Pabrai).
In this blog we do not share the same confidence in the current moment. Dollar cost-averaging a broad index on the way down is part of the strategy, but our deployments were bigger in 2020.
Think of what you own: a share in a company gives you ownership, and in the U.S., perhaps thanks to the rule of law and constitution this actually matters. But even in some developed countries property or investor rights can get tricky (e.g., with a new politician voted in next election), while in often less democratic EMs they may become non-existent overnight (due to transfer of power or new decree of the person “in charge of everything”).
Sometimes rushing to buy low may not be justified. At times information can change every day or even every hour. Lower price is better, but even better is to have confidence that one is indeed buying cheap not just low, which requires proper valuation and ideally also some understanding of motives behind price action that can be indicative of entering a different scenario affecting future cash flows.
Macro scene (is it now finally what’s behind the dip?)
Private system (commercial banking) activity is key to money creation. With QT (quantitative tightening) and banks regulated away from coming up with something new, perhaps it was awaiting, to use as money elasticity tool, a digital solution coming from tech sector or open source? This is just speculation behind this unusual interest around new asset type. Nevertheless, with EM collapses, equity rotation, commodity shocks, a real monetary stimulus is indeed required now, and whatever ECB and BoJ continue to offer may not be enough on a global scale. Inequality-driven speculative excesses today (not just in new assets) outweigh those of 2007 and repercussions to already fragile economy can be monumental. We may be in a loop of market being disappointed of economy, and economy getting further hit by wealth-effects (negative spillovers from the market), and so on.
Perhaps it's already a long depression, but the public got so used to it, that Fed is now pushed to fight glimpse of inflation instead (which may be here mostly due to oil “shaleshock” and supply bottlenecks created by governments last year, and is rather insignificant following a low base of disinflationary decade and is much less of a problem than perpetual lack of growth in the real economy, a never-closing output gap after the '08, which only for a short-term was getting smaller due to some growth that appeared after 2020, again, off the unusually lower base).
The system is therefore signaling to investors a potentially misled policy action, and upsets market expectations of system’s rationality or overall soundness. Hence, a triple whammy: pricking asset bubble, deepening depression, and at least short-term monetary error from public’s pressure to focus on actually the lesser of all evils? And as we wrote, unlike after '08, now even China won't be compensating for the global growth, instead being focused on domestic financial stability.
A game of life of unknown unknowns
I feel like market timing is more about understanding what's going on. With previous shock it was clear (even at the time) that, for example, humanity is better prepared to a health crisis than in past centuries where we last saw something like this. Using Donald Rumsfeld’s terms, it was more of a “known unknown”. Whereas today we have new unknown unknowns that keep surfacing almost regularly, and like clustered volatility or icebergs are predictive of more to come, possibly in even more exotic lifeforms.
Therefore, most recent weeks are uncharted waters: markets drop and rotate from growth (with trillions lost, possibly forever, which will have repercussions), central banks suddenly pursue diverging policies (Japan, ECB, vs Fed), U.S. reliving a cold war again (and it looks like sanctioning is a new normal in developed world – not unthinkable that it may soon expand to go after e.g., fraudsters, tax evaders or polluters, etc). After all, there is already a lot of division and discontent, forcing leaders to act quickly.
Summary
To sum up we repeat that of course, we are rewarded for ‘time in the market over timing the market’. It’s better buying cheap, always planning what to own, but market timing is not as simple as acting on a dip, it's about understanding new information and others' reaction to it, to have some idea of where we are what is possibly to come next.