The Markets Achilles Heel

[John Hjorth]

Thats hilarious John.  At the very bottom, I was on vacation in Mexico with limited Wifi, trying to sell things at huge losses to buy Leaps in "higer quality" stocks. 

 

The most exciting few weeks of my life.  Not sure I want to relive it, though.

 

Thanks Uccmal,

 

It was meant that way, actually! :-)

 

On a more serious note, that particular topic here on CoBF is actually a gem - nothing less. You have mentioned earlier, that all the communication among board members back in those days was actually still here, so I looked it up - simply by looking up your board profile, and thereby your posts - it was quite easy to find within a few minutes.

 

To me, it is actually this boards long term memory. It's very important to me personally.

 

As I have posted earlier on this board, at that time I was a long term morgage bond investor doing absolutely no work related to investing using leverage [deferred taxes, in stead of paying down my debt] ending up messing up my underpants dearly in the process. I was not anywhere loosing my shirt after I lost my job, but I could calculate with reasonale precision when in the future I would end in the sewer, if I did not get a new steady working income.

 

The rest of my life I'll never forget how I felt in that period. Talk about blaiming yourself, calling yourself stupid ... - I really did, when I recognised where I had brought myself to.

 

Personally, I do not ever want to mess up my own underpants again for some prospect profit - quick or long term.

 

Personally, I think - perhaps - some board members on here are understating the importance of the issue in topic here, because it has been general backwinds on the bicycle path since February 2009 - with some bumbs along the way. Not anything near a major correction, or even a severe downturn - what ever might cause such - be it a lightning correction of a certain size based on instant change in investor sentiment, lemmings,  algos, or whatever - or caused by outside the market circumstances. [lemmings are the primary issue in this topic - I think much can be extrapolated from that situation to other market downturns, ref. the content of the 2009 topic on here, that I linked to].

 

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Some local news, topic related - you can read it, if you use the translation feature in Chrome:

 

From my broker:

 

From my broker: Invest in the whole world - now free of fees with Nordnet Markets.

 

Danske Bank:

 

Danske Bank rejects tax challenges with regard to the investor's reply to MobilePay.

 

That new initiative from Danske Bank is called June. It went from beta to live production environment 4th May 2017 - yesterday.

 

It's Danske Bank's latest move to do something with the approx. DKK 831 B sitting asleep for Danish households - with no or little interest - in Danish banks - Not only for Danske Bank's customers - but for all. You don't have to be a customer at Danske Bank to get this product. It's a front for Danske Bank's own ETFs, trying to pick up all those billions of DKK asleep at other banks, with the aim to rip off 0.8 per cent per year of the capital invested in this thing.

 

It's all based on ETFs.

 

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This will be the next big Danske Bank scandal - there have been many during the years - It's just soo lame.

[Parsad]

I agree Sanj that sometimes these things take a very, very long time to play out. And I really don't think the move to indexes is a fad though. In a downturn, the active funds (at least mutual) won't do any better, I'd imagine. And unless fees come down across the board, the hedge variety won't beat the market over the long term either.

 

Oh, I agree it's not a fad.  It makes long-term sense.  But you have a congregation of capital of enormous size going into them.  When a correction happens it will be bigger and faster.  The recovery will also be quicker.  Cheers!

 

Bogle talks about what happens if everyone starts indexing:

 

https://finance.yahoo.com/news/jack-bogle-envisions-chaos-catastrophe-markets-everyone-indexed-194610197.html

 

As he states, the likelihood of 75% of investors indexing is almost impossible.  But I would imagine that at even 25-50% of investors indexing, you are going to get compressions in cycles and greater volatility as investors exploit inefficiencies and opportunities. 

 

That doesn't even include what the psychological effect of a large correction would do as lemmings flee markets!  Great for the value investor when corrections happen, but difficult for them to keep up when markets are bullish.  Cheers!

[John Hjorth]

Thanks for sharing the Bogle interview, Sanjeev!

 

I still think a lot about this topic.

 

The one thing I've learned is that you will never have any idea where the "bottom" or "capitulation" is.

... What I don't think anyone really expected, and probably not even Prem, was just the sheer collapse in the credit markets.  I think Prem expected spreads to widen dramatically and significant tightening to occur.  But the seizing of the markets the way they did...I don't think anyone expected that.  After that, I think pessimism took a stranglehold to the planet, and fear became rampant.

 

The one thing we do know is that once fear becomes rampant, usually the least likely scenario, in this case optimism, is probably more likely the correct assumption.  But it takes time to prove this theory correct.  It doesn't happen overnight.  Just like it took Prem a couple of years to be correct on the downside, it will take a couple of years for Buffett to be correct on the upside.  Cheers!

 

So one thing is to be prepared for such a situation - the other thing is to play it right ... - to take advantage of such market situation.

 

- To me, the second part is like: "How the heck do you that?!", based on what Sanjeev posted then back in February '09... - most likely, time will tell! [-and that is for sure no kind of guarantee, that I will end up having played it right!].

 

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The situation for me has been, that I still - on overall family level - held quite some cash, untill the end of March this year, where a large cash pile ended up in the lap of the Lady of the House, as the major enheritance for her from the MIL estate. I only need to finish a transfer of the MIL stock portfolio, do a  tax return for 2016 for the late MIL and the estate for 2017 when it is fully processed, and some reporting to the probate court about the estate, for calculation of final inheritance tax, the cash for the inheritance tax, court fees etc. still in place in the estate, plus a cash buffer.

 

Honestly, it has almost been hauting me during April this year, how to proceed with the capital allocation for the Lady of the House going forward, at these market levels.

 

It is not "only" a cash pile and stock portfolio, it is basically the whole inheritance belonging to the Lady of the House, after her parents - the whole economic output of what her parents have generated [net] during two whole lives, including a small part inherited from their parents ... - it's not the time for me for making mistakes!

 

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Here is what I have come up with so far, personally:

 

1. Occam's razor: Keep it simple.

 

And accept the opportunity cost of keeping it simple and clear: Accept the material increased overall cash level, and do not go on a shopping spree. It is in the situation much more important to preserve the capital than to get it to grow at a satisfactory clip.

 

I have pushed the cash up in the high interest account of the Lady of House at the Danish branch of the Norwegian SAN  SCF sub, where it is right now pulling 0.9 per cent per year, allocating it to stocks right now - at these market levels - going forward in small drips over the next few years [4 to 5 years], with the opportunity to buy much more, when we end up in a downturn ["when", because we will - it's just a matter of time].

 

2. Identify the antifragile companies in the portfolio, and be prepared to load up on these in a downturn, and perhaps start selling the fragile ones now.

 

Antifragile:

 

a. Berkshire : From this angle, Berkshire seems to be a no brainer. I'll just continue to buy it in small drips, from now, and going forward.

b. Investor AB, Sweden  [iNVE A.STO] : The company has a commited and idle credit line of SEK 50 B from a consortium of banks - with no covenants. I feel confident, based on experience, that this company will play its hand right in such situation.

c. Schouw & Co. A/S, Denmark [sCHO.CPH] : I feel confident this company will try to take advantage of such a situation also, based on a large economic aquisition capacity right now [in the area of DKK 2 B], despite it has a lot to do right now with already made aquisitions.

 

Fragile:

 

d. Banks, in general [without having any clue to what extent]. For me, it's about primarily the SAN position.