What Do We Do Now?

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On
a hot summer day some years ago, I invited a friend who was visiting
from Europe to join me for a weekend at my home on Lake Travis.
He had never been inside a small aircraft before but he felt assured – he
said afterwards – on account of my experience, training, and undoubtedly
the two recent transatlantic crossings. He asked no questions and
took no particular interest in the technical details of the fifty-minute
instrument flight to the Hill Country – one that I had made countless
times before.

It
was a typical Texas summer afternoon. There were cumulus clouds
and some convective activity everywhere but no dreaded thunderstorms
on the planned route. Shortly after takeoff, we were in the clouds
and in a few minutes, we leveled out at 12,000 feet – still in the
clouds. I switched on the autopilot, took out some coffee and we
talked about family and work. From time to time, I glanced at the
stormscope as a precaution against entering a fast forming thunderstorm.
It was clear. A bit bumpy but clear.

It
was not to be.

Just
sixty miles short of my destination, and while I waited for Austin
Approach Control to clear my initial descent, all hell broke loose.
One can best describe it as if the giant arm of a mythical King
Kong grabbed the aircraft and started shaking it violently. Violent
updrafts and downdrafts made any attempt to control the airplane
very difficult. Blinding rain hit the windshield. My friend and
I had found ourselves in a thunderstorm that had just erupted – moments
earlier undetectable. I had found myself in a situation all pilots
are trained to avoid; conditions under which even a slight error
in judgment can be fatal.

You
can't freeze and you don't have any time to evaluate your situation.
You cannot think of all the available options. You have to do something – NOW!
The forces of nature can break up your four thousand pound aircraft
like a little toy. It was quite instinctive.

Slow
down the machine.. power down.. gear down.. speed brakes up.. keep
the wings level.. a slow agonizing turn 180 degrees back to where
we were coming from – remember the air was smooth.. hold it.. now
in smooth air.. power up.. speed brakes down.. landing gear up..
now you can breathe again mister..

We
landed uneventfully, only slightly delayed. Was it luck? Not. It
was mere instinct brought about by training, knowledge, understanding,
humility, and fear.

Even
in Texas, the chances of being just in the spot where a convective
cell (thunderstorm) is about to erupt are very small. One can be
flying for years and never experience it. But, it happened to me.
The weather circumstances were such that it could happen even if
the possibility seemed remote.

I
was reminded of this incident recently as I sought to find words
of advice for Mr. Smith, a successful entrepreneur whose financial
health was damaged. He showed me his investment portfolio and simply
said "What do I do now?"

Mr.
Smith had invested in Dell Computer Co., at $52 per share,
now at $18; in Cisco Systems at $68, now at $12; in Lucent
at $60, now at $6. Et cetera. It was a long list. When things started
breaking apart last fall, he decided to "average down"
and when things got even worse, he decided since so much was already
lost, all he could do was wait and hold tight. He could not make
a 180-degree turn as I did in the skies over central Texas. He was
caught in a thunderstorm without training, without instincts and
without a sense of direction.

"I
was very greedy" he admitted.

"That's
not bad" I replied and then mimicked Gordon Gecko's "Greed
is good. It is the oil of progress."

"How
could anything like this happen, Tony?" Our Mr. Smith was not
even vaguely familiar with the concept of a thunderstorm. In his
mind, the notion of risk was totally suspended – "everyone was
doing it.. and I was doing so well!"

I
have noticed that many of the people who are generally good at what
they do, entrepreneurs, physicians and others, often project their
ability in their chosen profession to a near omnipotence in other
fields of endeavor in which they have no understanding or skills
with which to measure risk. They ultimately fail. Always. I am very
good at reading financial statements, ergo, with a bit of light
reading I could manage to extract my own tooth. Not very funny,
but it happens all the time.

"Such-and-such
firm has research that advises their clients to do so-and-so"

Perhaps
the first thing you can do is to stop listening to the same people
to whom you've listened in order to get here. They are either incompetent
or dishonest. Perhaps both. The make earnings pronouncements only
to revise them time after time. They have never been right in the
past. Why trust them now, or ever again? Turn off the television
Mr. Smith and cancel your subscriptions. You must think for yourself.

"You
think I should sell now?"

Selling
because securities are low is not a good reason any more than buying
because they are high. The question you have to ask yourself is
"if you had x dollars today would you buy this security now?"
If the answer is yes, it may be better to hold it. If the answer
is no, then you should think it over. Investing is not the casino
it is made to be. This represents your savings, Mr. Smith.

Will
it ever get back to $x?

The
price a security once traded at has no significance to its value.
Even if it does get back to the level you bought it, it may not
be in our lifetime. Better to ask yourself whether an alternative
investment made from the proceeds of the sale of this one is better
suited to achieve your purposes in the long-term.

Prices
are so cheap now. Should I use my remaining cash to take advantage
of this?

Why
do you feel compelled to do something? How do you know they are
cheap? Cheap as to what? If they thought their business was to improve
in a month or two why are they firing their people? Have you considered
doing nothing? Jumping out of a fast moving train is one thing.
Jumping onto a fast moving train makes no sense. There'll be another
one behind it.

Should
I reallocate my investments?

For
what purpose? To what end? If there is only one thing you must learn
from this experience is the need for investment policy. Not in connection
to what everyone else is doing but only in relationship to what
you think is important. Having an investment policy means that you
are never sorry. It forces you to look at the world and be disciplined
and brutally honest in your assessment. It provides you with confidence
and reasonable expectations. It gives you flexibility and it forces
you to appreciate the humility that comes with uncertainty. Lack
of investment policy is what ails the world today. We aren't talking
about moms and pops who put their savings in the mutual-fund-of-the-day.
We are talking about very smart people who are making increasingly
larger mistakes which are largely avoidable. Investment policy is
like a beacon in the night. An anchor, if you may.

It
pains me to observe company managers operating in a similar fashion.
Their corporate business had until recently become the promotion
of their common stock. They made decisions designed to propel their
common shares ever so higher so that they can benefit from the exercise
of their options. You can't manage a corporation with a long-term
horizon by seeking to maximize next quarter's profits. But they
did. And when the bubble burst we found ourselves swimming with
debt, no profits, no prospects, no reserves, and no substance.

So,
first decide where you wish to go and what risks you are prepared
to take in getting there. Then examine your investments to see whether
you have the appropriate vehicle.

Mr.
Greenspan is doing all he can to revive this economy. Do you think
that he will lower interest rates further?

We
don't have enough time for me to tell you what I think of Mr. Greenspan's
work. Suffice to say that the Fed created this mess to begin with.
They created credit to save the banks and more credit to save us
from Y2K and more credit to finance, rescue or save their friends.
We have become perpetually addicted to credit. At some point, this
extraordinary money creation will translate itself to the highest
price inflation we have seen in generations. Make no mistake: creating
money from nothing is a subtle but real form of confiscating our
savings. The best thing the Fed could do is nothing. Let the markets
determine what is the right level of interest and let failing companies
fail. By propping this and that and by intervention in the free
markets they have destroyed money, capital and confidence. An easier
monetary policy having failed, they will resort to spending programs
to provide employment and stimulate the economy. The Japanese have
tried them all for more than a decade now. The problem Mr. Smith – the
very large problem is that we are dealing with dishonest money.
Yes, all this money pumping will eventually lead to some marginal
increase in business activity without cleansing the system from
the excesses of past sins.

Should
I invest in energy? Oil and gas?

My
principal suggestion is never to invest in anything you don't understand
or don't feel comfortable with. As to energy, I am an enthusiastic
investor for several reasons. (a) Despite the consensus opinion
as to lower economic activity which would reduce the demand for
oil in the short-term, the demand for energy is surely likely to
increase in years to come; (b) the considerable dependence on OPEC
oil will at some point force the government to stop interfering
with North American exploration. This should be a bonanza for American
and Canadian producers who have managed to stay solvent and rich
in reserves; (c) the risk for Middle East oil interruption by terrorists
or one kind or another is and will remain very high. The slightest
problem will bring about a disruption in the delicate delivery balance;
(d) Oil and gas are real assets and Mr. Greenspan can't print them
at will as he can with your money savings. I am betting they will
appreciate in value against paper money in the years to come. It
is a safe bet Mr. Smith. A smart bet.

The
market was up yesterday. Perhaps I should wait a little bit, right?

I
can't advise you on that. The stock market may in fact have days
of natural and righteous rebounds. Only to be followed by further
declines. The risks are still on the downside everywhere. Pockets
of opportunity do exist as they always do. People are as irrational
with their selling as with their buying securities. Yet, to find
these inefficiencies requires work and patience. Faith, yes. Hope,
no. If you are patient and have some cash, I can promise you considerable
value in the years to come. But there is no hurry and no contest
to see who first finds the end of the bear market.

An
epilog

The
thunderstorm experience of years ago required four distinct but
certain elements: (a) the knowledge to recognize that we had stumbled
inside a brewing storm; (b) the knowledge of what the storm could
do to us; (c) the skills to stabilize the aircraft and steer it
in the desired direction and (d) the decision to get immediately
out of there. The actions that followed were a matter of instinct
but instinct was a result of knowledge, vigilance and skill. Not
a matter of luck. I see no difference between this and Mr. Smith's
situation. He is still alive and has more money left than most people
will earn in their lives. Yet he is indecisive and relies on the
cacophonous voices of roulette table dealers in blue suits and big
advertising budgets. I have a feeling he will become an excellent
investor in the future. Just as bold but more wise.

I
invited him for a flight to the Hill Country. He'll probably ask
his wife if it's safe to fly with me. He will think about it.

And
that is a good start.

September
28, 2001

Anthony
Deden (send him mail)
is
executive director of Sage Capital Zurich AG, an independent investment
management firm. He makes his home in Houston, Texas, and in Zurich,
Switzerland.

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