Dat Crazy Market

Dat Crazy Market

DIS and DAT - Dat Crazy Market - Fall, October 2014

Our periodic communication that reminds you to ask, “Should I react to those headlines?”

"If you can keep your head while all others about you are losing theirs and blaming it on you.”
Rudyard Kipling

Dear Friends,

Last time the topic of “our prediction” was discussed.(read it at www.disria.com )Typically after one discusses their prediction the next words are something about Dat Crazy Market. Let’s discuss how one could attempt to do as Kipling suggest and keep our heads while market prices bounce frantically around.

In modern times a theory of market price has emerged, which in general terms is summarized by many to say that market price equals value and it is constantly accurate. In our years of experience, that theory is not useful in the practice of investing. In practice, we believe the market price is more representative of the immediate liquidity price. Now to be sure, the market wins, the market is correct, and you cannot argue with the market. BUT you do not have to participate in every “immediate liquidity” price that is thrown at you. In other words, you can wait until a different price appears somewhere in the future. A concept we use in portfolio management is thinking that it is more useful prepare for the hurricane before it hits. In practice we discuss with our clients the difference between short, midterm and investment holdings. For definitions sake, short term represents fixed maturities of less than 18 month duration. Midterm contains fixed maturities ranging between 19 months and 60 months. In our investment category are tools with either a longer maturity date or no maturity date at all. This mental separation is our attempt to create portfolios in which neither us, nor our clients become forced to accept every “immediate liquidity” price as a representation of value. They can choose to ignore them if they have their portfolio set up this way. So much for Dat Crazy Market which brings so much attention, excitement, fear, and joy!

Currently another market theory has gained popularity in academia. Generally the theory goes that investors like you and I are irrational in their investment behavior. After years of market participation we are not convinced that wanting to stop the pain of seeing ones portfolio balance drop in balance is irrational. We are also not convinced that one wanting to join the party of rising prices is irrational either. Like Billy Joel sung “I may be crazy”. We believe strongly that if one feels or is forced to liquidate in a short period of time, their thinking will be short term oriented toward liquidity, instead of long-term oriented toward value. Can you build portfolios that do not rely on short term fluctuations to provide for short term withdrawal needs? We think the answer is yes with the above allocation thoughts. Does this stop one from thinking or reacting to short term price fluctuations? Of course it doesn’t, market price changes can be brutal on the Psyche.

Let’s give thought for a minute to booms and busts. In boom periods, market participants are fearful of selling too early. The next “liquidity” price may be higher and they will feel that money was left on the table by selling too early. So there becomes a lack of sellers at the current price and the price rises in order to generate more trading (liquidity). The market participants which are looking to buy have a sense of urgency to buy immediately or risk that next price will be even higher in the future. This cycle perpetuates itself. This type of process is called a bull market, because bulls raise their horns upwards. This phenomenon is also the reason we believe in investing it is better to be patient, think long term, and ask if the current mania deserves participation.

Soon enough that price begins to fall. The reluctant sellers in the bull market now begin to realize that the immediate price for liquidity maybe lower in the near future. This realization causes sellers to fear the price falling further. They then decide to place an order to sell before it falls further. The buyers begin to recognize this pattern as well, causing them to postpone placing their buy order. This causes a lack of buyers at that current price and the price must drop in order to find more participants (increase liquidity). This cycle also perpetuates itself. This type of process is called a bear market, because bears scratch downward. Again this short term phenomenon is the reason we believe in investing it is better to be patient, think long term, and try to avoid participating with the crowd in these types of markets.

As we see in terms of speed, yes markets re act quickly. If efficient means fast then that is agreeable. If efficient means accurately matching price to value, we do not agree. Most market transactions are made based on an assessment of short term liquidity and not based on a determination of value. That’s all right with us, we will wait.

Hopefully this example will allow you to put market price fluctuations into a different perspective then the one that is most often passed around in the popular media. In our next Dis and Dat we will discuss how this market function relates to “The Problem”.

We wanted to post the full version(from Wikipedia) of Rudyard Kiplings’ “IF” for your reading.

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on!”

If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son.

RUDYARD KIPLING

See you next time.

James Pope

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