The NorthFork View

Well, here we are again – the government is shut down and we’re on the brink of hitting the debt ceiling limit, which would trigger a default on many trillions of dollars in Treasury obligations. (Talk about reputational risk!) It’s a good thing Jefferson, Madison, Hamilton, and the other founders didn’t play slash and burn politics or we still wouldn’t have a nation to call home.

Nevertheless, our energy cannot be consumed by speculating about what may or may not happen as a result of ongoing rancor among our elected officials (who are still getting paid despite the furlough of some 800,000 fellow government employees). Nor can we get caught up in rumors of an impending collapse of the U.S. dollar, or what may or may not happen in Syria or China or anywhere else, or whether some earthquake or asteroid is going to destroy life on Earth as we know it. We personally cannot control these things. We can only look to the horizon with our own eyes to act upon our respective futures. This is not to say we should ignore signals and omens, but we may not necessarily be very adept at recognizing, interpreting or even acting upon those that present themselves anyway.

Which brings me to the point of what we can and/or should try to control and what we can’t, especially as it relates to our financial futures. As any farmer will tell you, you can’t control the weather. But that doesn’t mean he or she isn’t watching it all the time. Yet, regardless of the forecast, farmers go through the same process every year: Prepare, Plant, Tend, Harvest. And guess what? Each year produces different results – some good, some not so good – but it’s guaranteed that if one doesn’t follow through on the basic steps of preparing the equipment and soil, planting the seeds, tending the crops and then harvesting them when they’re ready, there won’t be any yield at the end of the day.

To some extent, investing is the same. You need to know yourself and your goals. You also need to understand the alternatives at your disposal – without delving into an important discussion about market-based versus non-market-based alternatives. Regardless, knowing your choices is the necessary preparation. The planting is making the commitment (and taking the risk) by pursuing whatever course one chooses to realize those goals. Regardless of which tools one chooses, however, none of them turn straw into gold and there really aren’t any guarantees.

To this end, managing our assets between their planting and their eventual harvest is central to the realization of our goals as well. Many people claim that timing the market is critical to one’s success as an investor. For the vast majority of us, however, timing the market is not only impractical because it is complicated and expensive, but the results are often quite unreliable as well.

Unlike Warren Buffett, most of us don’t have scores of people working for us, nor do we have the means to use efficiencies of scale that can offset the costs of our transactions. The market expansion of the last several years has also likely created some capital gains that would create a tax liability if we exited and unless the wheels really come off the global economy (which, in the case of a default, being in dollar-denominated cash won’t help), time should help heal this set of challenges as well. Further, even though we may have chosen a good time to enter or exit the market or a given position once or twice, we need to be more than good, we need to be consistent. But there are very few people throughout history who can claim to have reliably timed the market or individual positions year in and year out. For the most part, they’ve relied upon time to generate their rewards.

So, in an admittedly weak continuation of the analogy, that’s the point where farmers either continue to tend their crops patiently and eventually reap their harvest, or they become commodity traders and speculate on future prices to try to maximize their yield. What I know of commodity and futures trading, however, is that you not only need to be aggressively vigilant, you also need to be willing and able to lose your shirt.

Rather than wonder whether or not you or I have what it takes to even beat the market (much less effectively use timing strategies) year in, year out, over the course of a lifetime, another way to look at it is that if all of the people who claimed to beat the market actually did so, the market would be priced much higher than it is. After all, if the market is just the aggregate of those who beat the market and those who didn’t, and we can simply get the market’s returns by staying with the market, then is it really worth the extra risk (or cost) – whether the risk comes from concentration in specific areas, or leverage, or outright speculation on market movements – to try to beat the market?

That is not to say that those who trade a given strategy or set of strategies shouldn’t pursue them. Nor is it to say that those who believe in those folks who trade a given strategy shouldn’t throw in their lot with them. In fact, I had a great conversation recently with a hedge fund manager who shared his strategy and its success. If you have an extra million dollars and are willing to share 20% of your gains (and are also willing to keep your money with him for a three-year lockup period), then you too can join the party. But again, there are no guarantees.

The current situation presents a perfect opportunity to test a hypothesis. Many people have claimed they “knew” the current market decline was coming, although many of those folks believed it was going to happen earlier in the year and for different reasons than those we’re now facing. Nevertheless, they are out of the market and feeling pretty darn good about it right now. However, unless they have enough in the bank to carry them through, they are going to have to do something to keep ahead of inflation (and maybe do much better than that) between now and the time they die.

Maybe they find the perfect solution – one that I’m simply not smart enough to know is out there. Or maybe they do dive back into the market before it does whatever it’s going to do in the future (history suggests it will continue upward over the long haul, albeit with perhaps a bit less upward slope than in previous eras, but past performance is no guarantee of future results). If they time it right, and if in the long run the benefits outweigh the costs, outstanding. But if they don’t come out ahead by a decent margin given the time and brain damage of figuring out when exactly to get back in, they’ve gone through a tremendous number of machinations when they could have simply staid the course, accepted the inevitable ebb and flow of the markets and patiently reaped their harvest some years down the road.

So back to our humble farmer. He or she doesn’t try to second guess the weather. And as much as I wonder if we should try, rarely has it resulted in a better harvest.

As always, thanks for listening and responding with your insights and concerns. And of course, feel free to unsubscribe using the link below.

All the best for a bountiful harvest,

Bill Stoddart

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