Tim Price: I’ve been investing since January and I’ve never seen anything like it.

At the Sovereign Man website, Tim Price Director of Investment at PFP Wealth Management in the UK shares some important tips on investing in an environment resembling the pre-Asian crisis 

[Bold fonts mine. My comment are in unquoted sections and will deal with Philippines conditions unless stated otherwise ]

“I don’t know what to say. I’ve been investing since January and I’ve never seen anything like it.” – Unnamed Hong Kong housewife during the Asian financial crisis of 1997/8.

What follows is a continued personal perspective on some of the challenges facing today’s investor:

1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.

Note capital PRESERVATION should be the priority

2. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks, but to invest dispassionately.

In the Philippines, I have never seen so much or intense “passion” in the belief of a supposed "riskless" one way trade, based on a new “growth” paradigm. Even dissenting opinions are now considered a taboo!

3. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you’re doing it wrong.

When people argue that one’s position should echo with the crowd’s opinion, then this is about entertainment and or having a dopamine “trip”. One may add "ego trip" to that. In a bullmarket everyone is a genius. 

This certainly is not about investing but about social desirability bias.

4. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.)

Turn off mainstream media: newspaper, tv, radio, or even populist internet circles.

5. True diversification remains the last free lunch in finance.

When the rising tide lifts almost all boats there are very small windows for diversification

6. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: ‘homo economicus’ does not actually exist, and markets will never be wholly efficient until all people are, too. 

7. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” (Benjamin Graham)

The seventh rule will be discovered by crowd soon.

8. The general principles of investing are not arcane. They should begin with the avoidance of loss.

Again avoidance of loss is capital preservation

9. Starting valuation is the most important characteristic of any investment.

When a stock tout tells you that PERs of 30,40,50,60s+ and PBV 4,5,,6,7,8+ of mature companies represent a "buy", then this hasn’t been about investing. Rather this is about the delusional belief of a one way trade where “Growth” serves as a fictitious slogan for stock market prices rising to eternity. 

10. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital.

In the Philippines, the public sees little or no risks even even when money supply growth rate has soared to 30++% for nine straight months.

11. “Operations for profit should be based not on optimism but on arithmetic.” (Also Benjamin Graham)

The inflationary boom has lobotomized arithmetic, or most importantly, common sense.

12. Don’t buy poor quality investments pushed by sell-side interests; don’t overpay for quality investments.

Beneficiaries of  the inflationary boom naturally want the public to overpay for pseudo investments which they say is about "quality". But the real reason behind the spin is this that due to financial repression, negative real rates enables and facilitates the redistribution of risks and resources from the unsuspecting public to politically connected vested interest groups.

13. The ‘equity / bond / property / cash’ paradigm struggles fundamentally in an environment where all of these asset classes appear overvalued.

Again little window for diversification

14. Friends are unlikely to share their worst investment outcomes at the golf club.

The stock market is a social phenomenon. During booms, stock market becomes THE talking point in social gatherings. During depressionary busts, the stock market is seen as operating in oblivion.

15. Liquidity is overrated. For capital that can be safely committed to the longer term, it is irrelevant.

Central bank injected liquidity is the ultimate source of the boom-bust cycle.

16. Private investors are often poorly served by the asset management industry.

17. The medical profession has the Hippocratic Oath: first, do no harm. The asset management profession lacks such an explicit expression of fiduciary commitment to its clients.

For both 16 and 17 when asset managers commit resources of depositors to overvalued assets, this would account for as the Wolf of Wall street model. It’s a combination of principal agent problem (asset managers benefiting at the expense of depositors) and Keynes’ sound banker (lead the crowd during booms and hide under the skirt of the crowd during busts).

18. Private investors may, all things being equal, be better served by small, unlisted, private partnerships than by global, publicly listed, full service investment brands.

19. Rising compliance and regulatory pressure reduce variety in the asset management business. This is unlikely to be in the best interests of private investors.

Increase in regulations mostly skew the benefits to the interests of entrenched groups.

20. When interest rates are close to all-time lows and the printing presses are running, the merits of ‘deep value,’ profitable, well-managed businesses are more than usually compelling – compared to just about any other asset or asset class.

Value is a rarity in today’s central bank driven deeply overvalued global markets. As Warren Buffett aptly noted, it's only when the tide goes out do you discover who has been swimming naked. That's when value will surface.

21. Distrust anybody who claims to have all the answers. Especially today.

Oh yes, this is very important. Please do your own research based on objectivity, independence, “arithmetic” and common sense. And avoid the mainstream.

Do it in the way of value investor and mentor of Warren Buffett Ben Graham

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.