Been wanting to post the paragraph below from Tim Price’s blog post titled, ‘Politics of fear’. It captures, rather well, the situation in the world of investment advice and portfolio management today. At a personal level, it is one of the many reasons (but a rather important one) that I chose to leave the industry in 2011 July. Without much further ado, here is that paragraph:
Strange times and fundamentally distorted markets (see QE, again) require investors to possess unusual psychological fortitude. Two things are required to maximise the probability of meaningful capital growth or simply capital preservation in real terms within such a perilous environment. One of them is an attractive valuation at the inception of an investment. Pockets of value undoubtedly persist throughout debt and equity markets, though one may have to look harder than normal to identify them. (We leave momentum investing to others.) The other is patience. An easy philosophy to articulate, but a fiendishly difficult path to follow. [Link to full post]
All the emphases are mine.
What is the ‘perilous environment’ that Tim Price is referring to? You have to just read this long but well written post by David Einhorn on the Fed monetary policy. That captures the ‘perilous environment’ rather well. The turnaround in stock markets on Monday after the weekend political earthquakes in Europe is an example of not only this but also of the lack of patience in investors and the inability to look for values and wait for values to emerge.
Another example of the ‘perilous environment’ is the intellectual climate. TGS had commented on it on many occasions. Most recently, it was with respect to the column by Martin Wolf in FT titled, ‘Bonfire of Verities’. The blog post is here. That column by Martin Wolf has upset many. It is indeed incumbent on Mr. Wolf and his ‘subject’ – the central bankers – to reflect on that.
Most grating was Mr. Martin Wolf’s assertion that the world had disregarded the fact that central bankers saved the world from a second depression. They caused the crisis that made a second economic depression a near-reality. You cannot set the house on fire and then expect to be praised for bringing some water to put out the fire later. The interesting thing is that we are not sure if they had poured water or petrol on the fire!
This op-ed. piece by Martin Wolf has triggered a very interesting email exchange between him and Tim Price. Some angry words have been thrown around. But, there is a lot of learning for the rest of us. Read their exchange in this blog post by Tim Price.
Many of my friends have written – when I circulated it via email – that money is like military. The State would be loath to let go off it. The crucial difference, I guess, is that military has always been part of the State but money has not been.
But, more importantly, in the end, it is about sound money and not how we get there, as Tim Price notes in his exchange of emails with Martin Wolf.
No one – whether Austrian or Keynesians – should be hung up over the means. Economics is about people and societies. The end-goal of economic interventions is human welfare. Circumstances, context, culture and history matter. They dictate what means are adopted for that end-goal and when. For instance, sound money is the goal. ‘Gold standard’ is the route.
There is no need to be religious about Gold Standard or about the supremacy of the State over money. While the former produces volatile outcomes in the short-run, it is stable in the long-run. The latter is seemingly more stable but produces much more instability in the end, before self-destructing. In fact, it is the inherent short-run instability that delivers long-run stability (think of controlled avalanches).
Martin Wolf misses this point totally in his exchanges with Tim Price.