There is No Such Thing as a Free Lunch

September 1, 2013


Investment Newsletter for the end of August, 2013


In economics, there is no such thing as a free lunch.  Every benefit has to come with a cost.  In my world, the price of the great profits of the last few months is greater risk.  The Dow was up 600 points in July.  It was up almost 2400 points July year to date.  That would be 18% profit for 7 months.  I have been warning for months that these numbers were irrational and that a reckoning was coming.  Well, part of the lunch bill came in August.  The Dow was down 690 points.  August year to date was now a profit of 1706 points.  That would still be an extraordinary profit for eight months (13%).

The month to month fluctuations do not matter much.  They are emotionally driven.  The market is made up of multitudes of buyers and sellers.  They felt good about the market and saw it going up.  Greed comes in and the market goes irrationally high. The market then starts dropping and fear kicks greed out of the chair.  Neither greed nor fear are intelligent motivators when making investment decisions.  But they exist and they move the market in short swings.  I also know that it will swing the other way soon enough.

So how do I make money from others being irrational?  How do I make a profit from most people overreacting?

First, I try to always take a long term view.  As you all know, I do not rush into or out of the market based on what happens in the market.  I do not put much value in monthly results.  I model the allocations and plans for all clients for a ten year investment window.  I presented plans to you using ten years of statistics.

Second, I fight the emotional impulse.  I manage as coldly as I can.  I am, however, aware that the vast majority of investors are usually wrong.  They over react in both directions.  That means, there is money to be made in market crashes.  I have agreed allocations with all clients.  If the market crashes, the allocations demand that I buy more.  If everybody says I am wrong, that is even better.  My world is a bit lonely.  Almost all of you saw that I sold equities in your accounts over the last few months.  I honored the allocations even though everybody was making lots of money.  The result is that everybody else lost more money in August than you did.

At this moment, the Middle East is about to blow up.  Maybe we will bomb Syria.  Maybe Iran will missile attack Israel as a result.  Maybe Iran will shut the gulf.  I know two things.  If these very bad things happen, 1.  The market will have an irrational scare.  1000 or 2000 points down as the fear makes intelligent people run away.  2.  Even if the gulf is shut, the disruption would only be for a few weeks.  1000 or 2000 points down would be an extreme over reaction.  It might take a month to correct back up, maybe it will take half a year.    Sounds like a place to make a profit.  I do not want a war to happen, but if it does I will be buying immediately.  The bargains will be sweet.

Thank-you for your business and support. Call me with anything you need.

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