Ten problems – and ten solutions

“I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

“That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”

• Jason Zweig, ‘Saving investors from themselves’.

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In the spirit of Jason Zweig’s quote above, and with the gold price having recently coasted up through $2,000 per oz., we republish a commentary originally distributed back in April 2012. That it is even more relevant now than it was some 11 years ago is surely sufficient reminder that most temporary financial problems end up metastasizing into near-permanent predicaments.

With his recent book ‘The beginning of Infinity: explanations that transform the world’ David Deutsch has created what seems little short of a masterpiece.

Deutsch is a computational physicist. For the layman, this means that, unlike an economist, he actually has a clue what he’s talking about.

In his words:

“It is inevitable that we face problems, but no particular problem is inevitable. We survive, and thrive, by solving each problem as it comes up. And, since the human ability to transform nature is limited only by the laws of physics, none of the endless stream of problems will ever constitute an impassable barrier. So a complementary and equally important truth about people and the physical world is that problems are soluble. By ‘soluble’ I mean that the right knowledge would solve them. It is not, of course, that we can possess knowledge just by wishing for it; but it is in principle accessible to us.”

Admittedly, Deutsch is referring to problems that can be observed, studied and resolved scientifically. But just because the scale of his landscape is cosmic and ours inhabits the more narrowly quotidian range of the investible does not invalidate the application of his method to the more behavioural problems of the financial. If human brainpower can split the atom, it can surely devise a prudent way of navigating through the investment excesses of these dismal times.

To solve a problem, you first have to identify it correctly. Know your enemy. Here, in no particular order, are our suggested big problems afflicting the investor’s world of today:

1. Too much debt
2. Insufficient economic growth to service that debt
3. Too many functionally insolvent banks
4. Too many off-balance sheet claims against finite government (taxpayer) resources
5. Central banks have utterly exhausted their armoury of the conventional and are now making it up as they go along
6. Uncontrolled and possibly uncontrollable monetary stimulus, in a general environment of fundamentally unsound money
7. Widespread currency debasement
8. Vast manipulation of all major asset classes courtesy of Problems 1-7
9. No objectively and unimpeachably safe havens
10. Politicians.

In the spirit of William of Ockham, the simplest investment response can be assumed to be the best. Nature may abhor a vacuum, but in the world of investments, there are no automatic penalties for non-participation in ugly markets. So if we take violent exception to a given asset or asset class, the simplest response is surely just to avoid it. (Note: institutional managers, especially product specialists and closet or explicit index-trackers, may not be able to operate to similar rules.) So at the risk of vast over-simplification, here are our responses:

1. Problem: Too much debt. Solution: Avoid crappy bond markets.
2. Problem: Insufficient economic growth to service that debt. Solution: Not actually our problem – we are investors, not policy-makers.
3. Problem: Too many functionally insolvent banks. Solution: Ditto. But avoid crappy banks (that is to say, most of them – either as potential cash custodians or, just as importantly, as equity or bond investments).
4. Problem: Too many off-balance sheet claims against finite government (taxpayer) resources. Solution: See 1.
5. Problem: Central banks have utterly exhausted their armoury of the conventional and are now making it up as they go along. Solution: See 2.
6. Problem: Uncontrolled and possibly uncontrollable monetary stimulus, in a general environment of fundamentally unsound money. Solution: Spend more time focusing on investments incorporating fundamental quality, creditworthiness, lack of counterparty risk and scarcity. E.g. precious metals in physical form.
7. Problem: Widespread currency debauchery. Solution: See 6.
8. Problem: Vast manipulation of all major asset classes courtesy of Problems 1-7. Solution: In this environment, investments are only to be owned, not rented. Lombard Odier’s CIO Paul Marson cites a coinage from the earlier, more successful version of Warren Buffett: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.” Perhaps the most heavily manipulated market is that in crappy government debt, courtesy of the uneasy fusion of insolvent governments with insolvent banks, and helped on its way to untenably low yields by an institutionalised and largely price-insensitive agency player marketplace focused on benchmarks. Private clients need not participate in this market, except to laugh at the other players. But spillover from monetary stimulus is undoubtedly triggering waves in equity markets. To avoid sinking, focus on valuation, not momentum. If renting turns out to be unprofitable, investments will end up being owned anyway.
9. Problem: No objectively and unimpeachably safe havens. Solution: Notwithstanding the lack of “true” safe havens, bullion probably comes as close as we can get in this fallen world. But see also sensibly priced businesses with a genuine commercial edge and principled, as opposed to Wall Street-style, leadership.
10. Problem: Politicians. Solution: Elections. Not the finest answer, perhaps, but the only printable one we have.

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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.