Probabilities, not averages

Over the years, we are constantly trying to remind readers of the major blind-spots within the conventional buy-and-hold investment theory community.  One in particular is their indifference to market risk at all times regardless of circumstances.   Market timing, they say, is a fools game that simply does not play out with the law of averages.

But averages are not the laws of gods.  They are benign numbers that provide some value, but when it comes to predictive value and especially regarding investment performance and volatility tendencies, over-used as they are, they stupidly numb us the reality of the past and lead us blindly into the future.

Look at averages this way:  If you put one foot on a block of ice, the other on the hot coals of a fire, on average you’re comfortable.

Thanks to a 30 years of ever-increasing manipulation and intervention into markets and economy, both today are a centrally planned tangle of dependency and distortion.  The pricing mechanism that should be sending economic actors useful information about scarcity and demand has been washed out with massive monetary and credit intervention, with the chief of all prices — the interest rate that IS the price of money – rendered meaningless. (Other than to encourage  the bamboozled  economy at large to push full speed ahead allocating capital in places it otherwise would never go.)   And because the fuel for this activity is and expanding monetary and credit base, the policy is inherently the centrally planned looting of We The People’s capital and savings; nothing short of redistribution writ-large enabled by a legalized form of central bank counterfeiting where benefits accrue to the enabled elite at the expense of the plundered.

And so our economy languishes on and on with regular reports of lethargy that are followed by threats of more prolonged policy intervention, which in turn perversely push asset prices higher on the expectation that this fresh, hot money will  drive the bid higher and higher.

But we are told to ignore this tenuous reality — that asset pricing today is not driven by actual economic  activity but rather by policy largess.  We are told that no matter how bad things may appear, we’re incapable of sniffing them out better than the market as a whole, and that  the law of averages say that timing is a losers game.

But if we engage brain, are we to assume that centrally planners are now infallible?

Bill Bonner, always a insightful writer, addresses this point head on:

Imagine the drunken imbecile who puts a bullet into a revolver, spins the chamber, and puts the gun to his temple.

“There’s only one chance in six that this will kill me,” he says.

Statistically, he is right. The odds are in his favor. But what a bad bet!

The true measure of risk involves more than just statistical probability. The frequency needs to be multiplied by the gravity in order to get the true picture.

The typical investor is in his 50s. If the next stock crash is followed by a big bounce… like the other two crashes in the last 20 years… he will be glad he paid no attention to our warnings and just kept his money in stocks.

But what if the stock market crash of 2016 is more like the crash of ’29… or the bear market of ’66? He could have to wait 20 years to break even.

Or if it is like the crash that happened in Japan in 1990, he’ll still be waiting in 2042.

Don’t be a Goldman Muppet as an investor.  These markets are not normal, there is nothing real about valuations today.  Be careful.