#28. Today I Thought....
"Go to bed smarter than when you woke up." - Charlie Munger
Happy Wednesday,
Welcome back to the newsletter experiment intended to have you sit, think, and get lost in your own thoughts. The purpose is for me to set out time daily to sit and think (i.e. writing) and in the process of sharing my thoughts, I'm hoping you'll go down a journey of your own.
You can find past thoughts here.
Today I thought about….The Market Makes Sense.
One of the duties of teaching one’s parents how to invest in equities is addressing their continued concerns of “people are saying the market will crash…what do we do?” It’s true the recent market run-up in the Fall of 2020 after the COVID sell-off in March of 2020 seems unprecedented.
But then again, I imagine every run-up each and every decade ago had investors saying “This is unlike any other time in history!” They say it like it’s something profound but isn’t it actually normal that no two crashes are the same and no two recoveries are the same?
It makes me think that one’s reaction should always be “It doesn’t make sense….for now….so let’s see if I can make sense of it.” A part of me believes the markets should always give a sense of “it doesn’t make sense.” Maybe there are a few people who can make sense of it all but I imagine it comes after a lot of work and the majority of people telling them they are wrong on their view.
After rewatching The Big Short for the fifth time (this might actually be my favourite movie), it still feels difficult to grasp how no one of importance was sent to jail for negligence and how such stupidity pushed a system so far in ‘08. To push it further…..not only did none of the bankers go to jail, but they were bailed out and paid handsomely.
Reminds me of the recent news of Goldman Sachs paying $2.5b for participating in the 1MDB scandal in ‘15. I don’t believe anyone from Goldman went to jail for enabling this ~$4.5b fraud to happen either.
Underlying the frustration with what happened in ’08 and to the investors who bet against the housing market is an implicit trust in the system. The belief that banks were responsible and that if companies and people don’t pay their debts then it should result in bankruptcy or some kind of penalization.
Yes, some banks failed. But most are still around. Yes, those who shorted the housing market ended up making money but it’s only because the banks they were betting against allowed it to happen as they tried to cover up their mistakes.
It felt eerily similar in 2020. A number of businesses were impacted by global COVID-related shutdowns. Supply chains were disrupted and industries like travel were decimated. This may not have been fair to companies who didn’t commit any fraudulent acts.
However, there were many companies that were in difficult positions from taking on too much debt. They borrowed more money than their business model could handle in tough times and lavishly spent it all…many on poor places for capital allocations like buybacks, dividends, and useless investments. Even at individual levels I read and heard about people who had multiple properties mortgaged for Airbnb operations who were now having a difficult time meeting the payments as travel went to zero.
That’s the thing with leverage. You have to be prepared to get burned if you play with fire. It seems that low-interest rates have once again made people forget how dangerous debt actually is. Some say the search for yield forced the use of debt…but we’re all adults here and no one is forcing anyone to go out and take on leverage.
But once again, the gov’t came out with bailout money (~$4t…that’s trillion... for the U.S.) for companies and individuals. I’m quite on the fence about it. A part of me believes they did the right thing by helping everyday people out, especially those who lost jobs because of forced shut downs. But a part of me is upset at companies getting bailout money they don’t intend to use on actually helping their employees. Maybe it’s a case by case situation after all. One that I can’t generalize on. But I do believe the management who fucked up should’ve been made responsible.
What is clear is that simple arithmetics don’t apply to the financial system. Just like 2+2 won’t equal 4, a company that can’t pay its debts won’t go bankrupt. It creates a system where there are beliefs of rules but the orchestrators will tweak the rules when needed.
This reminds me of one time when I invested in a company where the debtors forced it into bankruptcy instead of liquidating the assets. A class-action lawsuit was filed and I haven’t kept up with it because it was too small an amount. But it was an interesting experience where sometimes, a company can be forced into bankruptcy even if it could pay its debts.
As I look at the future, a common concern I hear is about the rate of money we’re printing as part of the COVID stimulus. Not just in North America but globally. There are all kinds of opinions of hyperinflation, the U.S. dollar devaluing and losing sole-reserve currency status, deflation etc…. All kinds of views. Many views seem to tie the system to follow a set of governing rules.
But the more I think about it…. we can’t expect the system to do anything we expect it to. The U.S. gov’t effectively providing universal basic income was not something people predicted would happen. But it did. Funny things have happened before and whatever most people believe will happen to the future economy and stock market….whatever most people think is likely probably won’t be what happens.
I think we need to be prepared for something weird happening again. Maybe the world gov’ts will wipe off debts from all the money printing. Maybe the stock market will continue to run up for another decade. The more I hear people talk about the market due for a correction…… it makes me wonder if what’s happening right now actually makes a lot of sense….we just don’t know why just yet.
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