I once had a friend, a millionaire trader, by the name of Jim. I wrote about him in my book “Sell the Pig”. He was the smartest trader I ever met. He would never buy anything unless he knew who he was going to sell it to, hopefully, before he owned it.
Jim traded on the stock exchanges before the advent of computerized trading, but not before the institutionalization of money. He taught me many things about trading, but nothing about investing. He showed me how to do a commodity straddle, an incredibly complex set of transactions that had the effect of deferring (not eliminating) taxes, and he showed me how to bet on the outcome of share prices without going bust in the process. (before the advent of Index shares)
One I remember was called ‘Nikkei Puts’ as opposed to ‘calls’ In the simplest of terms this was a bet that the stocks that made up the Nikkei Index would go down before they went up in value, at a time when that Index was at an all time high. I made money on this one.
I recently read Michael Lewis’ wonderful book ‘Flash Boys’ the story of high-speed computer trading and how it affects the little guy in the Stock Market. Great stuff and well worth a read. In Jim’s time what the ‘Flash Boys’ are now doing was called ‘Front Running’ a practice that was frowned upon by regulators who could levy hefty fines and even suspensions. on practitioners. No so any more, apparently.
This all got me thinking about the obvious. The ‘ little guy’ or person, to stay politically correct, has not got a chance in today’s financial markets. The institutionalization of money has seen to this, and computers and the use of mathematical algorithms have finished the job.
Now it is very difficult for an individual to save on their own behalf. In fact the practice is belittled by the chattering class, who are selling a service that herds savers together as a single group, all of whom, now need a ‘financial advisor’ ( another word for salesperson)
If we are to believe what we are told, by never-ending slick ads, is that these people, or institutions, will diversify our portfolios, and provide rates of return that are, on due reflection, unlikely. or maybe, impossible.
The true historical, long-term real rate of return on capital is 3.5 – 4.0% before inflation. This figure can be confirmed, by non-believers, by taking a look at Endowment Funds run by Private Universities, and Charitable Trusts, that are investors in perpetuity. Of course there are some that do better and some others who do much worse. Then there are the Pension Funds, who use all kinds of mathematical hieroglyphics, to prove a point that they have miscalculated or screwed up in the past, and now need to take more risk in order to increase their rate of return.
Even more scary is the consideration that our Central Bankers and Senior Government Officials, now consider a 2% rate of inflation to be the desirable norm.
To my Grade 5 mathematical way of thinking, this means that if I buy a Government Bond to hold to maturity that yields less than 6% I am going to get screwed. Unless I am willing to trade or lever my investment all of which sounds to me rather like betting on the Eight the Hard Way on the crap tables.
Unlike the good old days, when a saver could buy a Government Savings Bond, a secure very liquid investment at any bank with no commission of fees involved. Now it takes an appointment with an advisor and a plethora of forms to even get started.
There is a very good reason for this. Money management has become an incredibly profitable business and one that generates a lot of taxes, that go toward paying for the Welfare State. Unlike many other forms of endeavor, these taxes tend to stay home. Just how profitable can be evidenced by the fact that the last time the U.S. Government ran a surplus in its current account was during the Dot Com Boom in the years of the Clinton Presidency. The time of ‘Irrational Exuberance’ and easy money.
I suspect this might also be the reason why financial corporations, rather than individuals, have borne the brunt of punishment for transgressions committed during the housing bubble debacle. Love or hate them, we need them in order to pay the bills.
So we had all better get proficient in playing Eight the Hard Way. That is a side bet that the shooter will make the point eight by rolling two fours before he rolls a seven or snake eyes.
All simple but very hard to do.