10 Random Musings From A Boomer Who Has Been In The Financial World For Three Decades

January 27, 2021

For some people, the current stock market environment has quickly become a very painful place to make a living. For others, it has become a very exciting, effortless and fun setting to bank some “easy cash.” Having spent decades dealing with multiple cycles, dislocations and market crashes, I would like to share some personal thoughts directed to this second group of aforementioned investors who are understandably enjoying this current period of money-making ebullience. I recognize that this group might find my perspectives ancient, obsolete and merely useless ramblings of someone whose better years are in the rear-view mirror. I understand this attitude as I was that same person who would have felt this way when I was in my 20’s, so I am not offended. Feel free to read no further or laugh at my obsolescence. Or you can consider that it’s hard to argue that even the best investors/traders may want to consider the contra argument to their investing actions, even if they choose to laugh at them.

The Fed, interest rate policy, and opportunity cost of capital are major factors of what drives the financial markets. It can make people look very smart or very dumb. If you don’t understand this and fail to incorporate the macro view as at least a factor in the financial world, you may be winning the game based more on luck than skill.
In my 35+ years in the financial world, every time somebody said four magic words to me, something eventually proved them very wrong. It might not have been right away, but it has happened every single time. The words are simple, and nobody says them to be evil. In fact, you don’t even have to say the magic words, you can just think them: “THIS TIME IT’S DIFFERENT.”
With very few exceptions throughout my career, the biggest determiner of long-term success in investing/trading has been an individual’s hubris:humble ratio. People with greater hubris believe they have all the answers because things are so easy and extra humble people always protect their downside because they know how fragile success can be. A high hubris:humble ratio always works perfectly until the moment it doesn’t. A low hubris:humble ratio may not be as much fun, but almost always results in long-term success. Long-term success is always better than short-term success. Look it up.
Leverage is a magic potion. It magnifies your brilliance on the upside, and it destroys everything in it’s wake on the downside. Leverage doesn’t discriminate between people who are good or bad, smart or dumb, or deserving or not. When leverage works its magic on the upside, it is your very best friend. When it turns on you during the bad times, the damage is often permanent. History is littered with once brilliant levered investors who stayed at the party too long and got the dreaded “margin call” which took them out of the game forever. You never want to be so invested that you cannot have enough staying power to maintain your investments because the only thing that is almost guaranteed is that as soon as your position is margined out by force, your once investment will then rally to a point where you could have told everyone how smart you were.
Momentum trading is legitimate and many long-term investors/traders have done remarkably well by avoiding fundamentals and just focusing on directional momentum. However, nobody “long-term” smart ever goes “all in” on one trading strategy, especially one based upon momentum. Can it really be a big surprise what happens when the momentum decides to suddenly change direction and travels at the very same velocity in the opposite direction?
It is really hard to argue with a straight face that smart fundamental research on any issue, relationship or investment will not improve your odds of a successful outcome.
Putting all of your eggs in one basket is usually great if you want to make a quick omelet with a lot of shells in it.
If you are investing because you think you are getting even with someone or trying to hurt a person you have never met, you might want to ask yourself, “Why?” I understand envy and retribution and the ugliness of income inequality. There are better ways to settle those scores. Always remember that there are often innocent casualties in every battle and in this one, most of the money lost besides the unloved faces of the fund managers is usually from endowments of universities and hospitals, pension funds for retirees, and other individuals that have done nobody harm.
Eventually, security prices return to valuations that reflect intrinsic value, direct comparable alternatives and future earnings power. This isn’t an idea to be debated. It is more productive to debate whether the sky is blue.
The power of masses can be incredibly consequential and hard to resist. Being in the middle of a winning crowd can also be incredibly fun, comforting, and rewarding. However, if you look back in history it’s easy to see that the masses periodically also made big mistakes like following the wrong leader(s), shattering important beliefs/institutions and destroying things of import and value. Independent thought can be very lonely, but there is a time to just not follow the crowd. I’m not saying this is or is not that time. Good judgement is identifying for yourself when it is that time. Easier said than done.

I am offering no specific investment advice nor judgement on what is currently occurring in the capital markets. Older and more experienced investors do not have a monopoly on anything. Progress occurs when new thinkers and actors bring ideas and methods that push the bounds of convention. This is a good and natural development and, more often than not, it results in the betterment of society. All I am suggesting is that it never hurts anyone to also reflect on past patterns, theories, and experiences others as they pave their own new path into the brave new world.

A friendly boomer,

Rich Handler

RICH HANDLER
CEO, Jefferies Financial Group
1.212.284.2555
[email protected]
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