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Caesarian Sections

July 31, 2012

Once upon a time not too long ago, we were instructed to “leave our chickens and produce at the gate”, and then, basically, to “get lost”. It was not wise to ask for payment of our lord or squire nor should we expect it in those dangerous times.

But what about now? What about the money that we routinely give to our banks, insurance companies and mutual funds on the reasonable expectation that we will get it back when we need it and that it will be worth at least what we gave if not more? And we do give it. It’s in the contract regardless of deposit insurance, segregated funds, and the hope that our long term equity returns might exceed inflation (which, of course, is not guaranteed by deposit insurance or the segregated funds of the insurance companies either).

It’s a subject that we have addressed in good faith and cannot avoid in the context of risk management and the business of societal innovation and enterprise in these Letters. Please see, for example, The Secret Life of a Portfolio Manager or Adrift and Starving on the Risk Appetite, July 2012, for more background on this subject. It’s also obvious that many a contract is now before the Courts or the Government and Regulatory Authorities as hapless investors try to recover some of their money which is just gone, isn’t it.

In the absence of enforceable guarantees, we can only be assured of probably losing our money and the one consumer product that we routinely buy with no guarantees, warranties or assurance of serviceability for the customer, is our investments. Would we be that hopeful if we were told that we would probably lose some of our money no matter what we do and that’s the way it is?

For example, the four major North American equity markets in Toronto and New York have a current market capitalization of about $20 trillion distributed over less than one thousand companies, each with a market capitalization of $500 million or more (and, mostly, a lot more) and none of that money is guaranteed nor can we expect to get it back. In effect, millions of investors are willing to buy the current market for $20 trillion but who will buy it from them and be willing to pay more for it? Just to keep up with inflation at 2% per year, we’re going to have to put in another $400 billion this year in basically the same companies and, of course, it’s well known that the market itself can be up or down 2% on any day for any number of reasons, some of which seem to stretch out for decades into the future.  For example, there’s not much to buy that has a price to earnings ratio of less than twenty and who knows anything about next year let alone twenty years from now?

Ask your investment advisor to explain how less can be more, especially if there are fees and loads not tied to performance. And ask for guarantees such as something simple and reasonable as “3% plus inflation, every year, no matter what” guaranteed. If we all do it, then most of what passes for investments today will be as obsolete and distasteful as castle and keep and one would hope that the market will eventually actually be worth what we’re willing to pay for it.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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