Saturday, May 23, 2009

Inflationistas v. Deflationistas , Uncertainty and Mental Models

My father sent me an interesting article from Hoisington Management.  You can view it here, and I’d encourage you to do so.  I think that the article is straightforward.  Upon reading it, and seeing the conclusion, I clicked on the linked.  Hoisington is a fixed income money manager.  Accordingly, I would expect their opinion to be nothing other than presented.

I don’t say that to impugn the article in any way, but rather to REMIND that point of view colors the processing of all of the information that is received.  (As I wrote this, I digressed into searching for ‘mental models’….I soon will own 2 books on the subject). 


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Provided I read these, I’m sure that I’ll write about them.  I’m intrigued by the subject for the reason that inflation v. deflation, bull v. bear and any other oppositional ideas are presented in ways that seemingly require us to choose because they are presented as mutually exclusive.  Is there really such a thing as elemental truths from opposing points of view that are truly mutually exclusive? 

Our job then as human beings is to mine for those truths and forget the buckets.  Hard to do, and I don’t pretend to be able to do that well. But this post is provoking a nascent interest in understanding it better.  This blog is named The Perplexed Investor, and certainly the space between to opposing points of view is where the state of being perplexed exists. 

I’m beginning to believe that being perplexed is a GOOD thing—particularly if the state of perplexion leads to discomfort. Why?  The only remediation to that discomfort is to investigate  and understand the issues at hand.  Understanding the issues does not mean that you resolve the conflicts.  However, understanding DOES mean that you are equipped to evaluate outcomes and make decisions that are appropriate for your situation.  Isn’t that the only way to become COMFORTABLE (in a discomfiting way).  That’s healthy dynamic tension.  It means that one understands that there is uncertainty and the state of being puzzled by it means that one isn’t duped into believing that there is one clear answer thereby occulting one’s view of other possibilities.  I’m listening to FSO and their military futurist guest.  I will likely go hide under a rock after listening to it. (I should be concentrating on this post).

I think that one of the most dangerous periods for new investors is when they are struck by the belief (pick a style) that there is a sense of a ‘holy grail’ for investing.  Buy and hold, value, contrarian, technical analysis or whatever else, are sometimes presented as seemingly holy-grails without an attendant presentation and/or understanding of the risks.

Ultimately, successful investing (living) is about managing risk and reward over a specific time horizon. And my new mantra is from Napier---in that to make money in the market, I don’t have to forecast the future accurately, only slightly better than the majority.  That sounds like a hubris-infused comment, but it is not meant to be. Education, flexibility, discipline and humility are armament against hubris.


Anonymous said...

The Holy Grail to Investing.

Developed multiple arbitrages for the financial markets. Arbitrages that produce just a few percent a year, to arbitrages that produce over 30 percent a year.

In 2001 i started developing, as of now, a dozen arbitrages. I lock in an X percentage, and Y time later, i close out the arbitrage. Over 30%/yr.

Risk-Free Investing is not only possible, but in abundance. Just that people are told and taught that it is impossible. No risk has been in front of all, but not seen.

The market is unlimited.

The Ultimate business solution that can be offered.

Say one can guarantee a return on investment of 40% a year, then a business could offer their product or service for free.

Lets say i had a solar company, and that company offers Alternative energy to both private and business sector's, then we end up with an interesting business solution.

Well, if i have a cost of $10,000 to install a solar system on a building, and able to sell the install for $20,000, i have $10,000 to invest(40% a year). The purchaser then finances the install over a period of time. I just keep investing the profit till the end of the payment schedule. Thus, the buyer never makes a payment, and gets the product at no cost.

Thomas Adair

russell1200 said...

Mr. Adair:

Your example essentially describes the large commercial construction market. When it works it works really really well. You are minting money.

But if you think there are no potential problems in your scenario you are seriously mistaken. And it happens that I am also familiar with the solar market you describe. There are many many land mines, and some of them could be very expensive.

Without even doing a google search: AIG has been a big insurers of solar panel construction, solar panels can last 20+ years but the inverters (convert ac to dc) are often only good for eight. Regulator requirements in a new type of construction are even more uneven than with more familiar types of construction. In some cases the entities created to pay out the above market rates that often go into the relatively short break even point have limited or uncertain funds going forward.

And it goes on...