“LIQUIDITY IS BEST ACHIEVED WHEN ALL PARTIES HAVE EQUAL INFORMATION, BUT PREFERABLY WHEN THEY’RE EQUALLY IGNORANT.”
Abubble is only a bubble if you’re standing on the outside jealous of missed profits. Those on the inside see a different world – they’re benefiting from soaring markets. Over the last few months investors have witnessed what happens when a “black-swan event” flies headlong into a bubble. Investors should be honestly staring at the mirror reflection of their own fear and greed, soberly assessing their risk appetites and lifestyle needs. Don’t be fixated on guessing the next “risk on or off” trade in the middle of irrational markets and history-changing events.
Online trading during the boredom of self-quarantine has wreaked huge losses for some in areas such as oil. Who would have thought oil prices would drop below zero after falling from US$35 to US$25 per barrel overnight? Evidently, many individual investors became overwhelmed by the alcohol fumes from their hand-sanitiser lotion; they (and their trading platform) didn’t imagine the consequences of negative oil prices and the implications of having to take physical delivery of a commodity. The collective result of these trades and outcomes has broken several online retail trading platforms owned by Chinese banks, requiring them to be rescued.
Online trading seems so easy, because the front-end interfaces, solutions and execution seem so convenient. But the same rule applies to short-term speculation as long-term investing: If you must trade, do it with an edge. Ask yourself, what particular advantages – information, experience, insider knowledge – do you have over the rest of market in this trade? Otherwise, you’re randomly punting along with the rest of the market and will lose at some stage.
You either employ time or timing. If you’re trading, then your market timing had better be exceptional because few investors can consistently time a trade over long periods. You’ll probably experience better results if you invest long term, ignoring the volatility, in well-run and superior companies.
Rumours and horror stories of a new breed of leveraged products punishing greedy and gullible investors around the world (again) have resurfaced. Since the 2008 global financial crisis, investors have been willing to bear or ignore any risk to achieve high yields. Lawsuits will represent the tip of the true extent of the losses. However, more than a decade of low to negative interest rates has tested the patience of not only average investors, but also wealthy individuals and family offices that cannot countenance leaving money in the bank earning nothing.
Everyone is forced into the public and private markets, stumbling into many contrived, illiquid, high-risk schemes to seek interest income – only to lose entire investments. Expect this phenomenon to continue, as interest rates will have to stay low to fuel economic growth after Covid-19.
Don’t expect financial service regulators and governments to protect you from your own greed and shortcomings. Despite all the questions you were repeatedly asked about understanding product risk, forms you completed and signed – and even a voice recording of your affirmation – investors, financial advisers and salespeople can’t help but to consummate these lucrative instruments.
It’s not only a matter of “a fool and his money being lucky to get together in the first place”, but also that of clients always wanting to take the risks they want to take. And if banks don’t provide them with the opportunity, they’ll find another institution to service them.
Fear, desperation and greed are elements of a cruel con that sells its own legitimacy. The key to deceiving people is knowing what they believe and what they want to believe. In this market, a low-risk way to generate high yields is the ultimate mirage. Salespeople unwittingly fall into the same self-deception because it’s not enough that your client believes it; you have to believe it yourself. And the fees are respectably high and reassuringly expensive.
Oil prices fell about 22 per cent and the yields on 10-year and 30-year US Treasury securities fell below 0.4 and 1.02 per cent respectively. The S&P 500 is only down 10 per cent to 15 per cent from its top, depending on when you measure it. Stocks aren’t cheap. Warren Buffett observed that he doesn’t see any bargains out there. Markets are cautiously optimistic as investors are writing off the rest of 2020 and valuing companies on 2021 earnings. Fiscal stimulus and monetary easing will shoulder the economy and lost income to individuals and businesses.
Rates will be indefinitely stuck at or near zero as central banks cannot normalise them now. That supports valuations for the structural growth companies, such as technology. Risks not being factored in currently are a second virus wave, trade war escalation and corporate tax hikes if Biden wins. So some caution is necessary before jumping into equities. Yet equities are the only way to generate dividends, income and returns for retirement.
A central banker sarcastically told me: “Liquidity is best achieved when all parties have equal information, but preferably when they’re equally ignorant.” Ignorance, fear and loathing are peaking today. It takes courage to exit an investment early in a rising market and risk feeling foolish by giving up gains. Still, one risks much more by drowning at the bottom. An investor’s gut instinct is a tyrant. Intuition is both inherently unpredictable and, as a basis for investment, inherently illogical. Yet we’re all vulnerable to our inner voices during times of great uncertainty.