Why listen to me? … take it as chest thumping if you want
Selection of a few excerpts from newsletters during the last decade are meant to illustrate the benefits of the broad-based, holistic, systemic approach. It’s also a demonstration of the falsity of claims that the current crisis was unpredictable.
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In a sense, recent and ongoing developments serve as ‘proof’(assuming the term can be used at all outside mathematics and logic) that my resistance during the years to be completely sucked into the mainstream of the financial industry was well founded. Instead of becoming a typical sales man, measuring my success entirely in income, whatever it takes, I remained fastidious and broad-based (not to mention: modest, … ). I rarely endorsed specific products or companies, and I have no reason to apologize for the few exceptions. On my website, in talking to people and in my occasional newsletters, for more than ten years now, I’ve been talking about many things most financial service providers (notice the avoidance of the term ‘professionals’) won’t, … at least not until now. A few examples:
- While I never claimed that I’m a big investment expert (admittedly, planning and insurance, the other two big pillars of financial services, were always closer to my heart than investing itself), nevertheless, it does feel good that I usually paid attention to the right sources and authorities. It is simply an overused lie that there were not sober analysis and warnings offered by anybody of what were to come. I started my very first newsletter, in 1998, by citing Prof. Paul Krugman, the Nobel laureate in economics in 2008, on long-term investing and the ‘inappropriate instincts’ of most investors, reinforced by the long bull market and seeming prosperity. I quoted him saying that ‘even though the latest headline numbers are all rosy at first glance, they actually foreshadow a day of reckoning’.
- In the second newsletter, I wrote: ‘ … we are witnessing more and more self-reinforcing cycles, sudden changes in the behaviour and cause-effect relationship of things that defy previous understanding. A well-known recent example of this was the avalanche in South East Asia, triggered by devaluation of the bath, the Thai currency, last year. And there are more and more such surprising ‘hot buttons’. As Time magazine put it, while an integrated global market was supposed to reduce volatility, what is happening is just the
opposite,. “There is still a herd mentality, only the herd has got very big and dangerous.”‘ [emphasis added now] On the following page, I referred to complexity theory and the importance of systemic approaches .
- Half a year later, in Issue #4, I quoted Mandelbrot, the father of fractal geometry, regarding the shortcomings or limitations of the ruling financial paradigm, modern portfolio theory. While he acknowledged that it has strong research and historical support, he added that it ‘poses a danger to those who believe in it too strongly’, [because it] reflects reality 95 percent of the time; unfortunately, the major events usually happen in the remaining 5 percent of the time.’ [emphasis added now]
- In the Dec 1998 newsletter, I warned against getting overly optimistic because of the sudden recovery of markets after that year’s correction in August. I wrote then: ‘While I still do not think that we are going into a long recession or major correction with very slow recovery soon, I think its probability is higher today than it was half a year ago. I think so because the gap between the happenings and mood of the stock markets, on the one hand, and the underlying real economy, on the other hand, has probably grown wider in the last few months. The sudden bouncing back of stock markets probably reinforced the blind faith of many people (see also: definition of ‘boom’: A momentary lapse in the collective sanity of a market, during which the promise of something for nothing prevails over the law that insists what goes up must come down.), while the economic prospects in the major markets have become less promising. All in all, even if we can avoid a serious recession, we probably do not have to wait for years for the next correction similar to the one we went through during the summer. Nobody can predict the time, duration, and extent of that next drop. What can probably be predicted is the continuation of the increased volatility experienced recently. This makes proper diversification and regular investment even more important than before’. [emphasis added now] In other words, the burst of the technology boom and the 2000-2002 bear market came not as big surprises to me. By this, I do not suggest that I was (can be) extremely good at forecasting anything, especially market turns. In fact, I personally lost ‘risk money’ of my own when I bet for the further decline of US markets in 2002 and 2003, not expecting the postponement of really serious reckoning by militarization and artificial inflating of the housing bubble.
- In the December 2004 newsletter, (’Dancing on the precipice’, on pp. 2-3) I went against the then prevailing view again, by stating that ‘the majority of opinion leaders and money managers are quite bullish again. Yes, once again, they might be right … for a while.’ Answering what is the real chance for successfully managing all the factors necessary to avoid major system problems, I said ‘it seems low’, and that ‘maybe the genie is already out of the bottle‘. In fact, it still wasn’t, suggesting that it will be all the more vicious when its turn comes finally. Almost one year later (Nov 2005) I reported on the ‘brewing perfect storm’, and the talks about changes in long-term trends in capital markets. I wrote (on p. 2): ‘These are precarious times also in the sense that the usefulness of relying on past experiences, patterns, and trends is often less reliable than before, … many ‘rules of the game’ are changing, so polish your crystal balls, … and fasten your seatbelt‘. [emphasis added now]
- In the Nov 2006 newsletter, I wrote about hedge funds that they ‘are more powerful, and they require better understanding and more careful treatment by their users than more mundane types of investments. They, in general, do deliver their mandate of increasing returns while lowering volatility; on the other hand, I’m not convinced yet about their overall, summary effect on capital markets. While many of the underlying elaborate financial techniques may enhance market efficiency, some others may endanger the whole system‘. [emphasis added now]
These few excerpts above are, I believe, quite representative samples of my work.
The only thing about the old newsletters that makes me really sorry is that I didn’t write more, and more regularly. There were too many distractions, sometimes (when I was still mutual fund sales licensed) even administrative hurdles, but the main reason is still that I’m a much more avid reader than writer about these issues. I think the newsletters are still useful, so I keep them all available digitally. The approach reflected in them is based on a preference for systemic thinking, coming most likely from my good schooling and long-term interest in social, global and ecological/environmental issues. In addition to the already mentioned Krugman and Mandelbrot, I’d like to pay tribute in this post to a few more people who I learnt the most from in the financial field and closely related areas, … offering readers a chance to follow suit, understand their situation better, and hopefully achieve a better life. The next section is completely devoted to these authorities, but there are references to some others in other sections as well.
After weeks of brooding, post was finally published on March 8, 2009