Controlled Burn?
Posted on Sunday, August 23rd, 2020
My wife said to me the other day that I looked uptight. (She can read me like a book. She knows what I am thinking before I do.)I asked her what she meant. She said, “You get really uncomfortable when you are making too much money”. That’s so right. If prices are falling and I am losing money I see that as an opportunity. If markets are falling and we are losing money that means people are throwing opportunity at us and we just need to have the courage to catch it. When we are making too much money too quickly prices are probably rising too quickly and need to correct. This market has a way of humbling us all. Seeing your balances rise very quickly means that it may be time to brace for a fall. Trees don’t grow to the sky.
Mark Spitznagel is a hedge fund manager who has made his mark in a way different than most. He makes his money making longer term bets with out of the money options. In plain English, he places highly leveraged bets on a looming outsized move lower in the market and he is willing to stay with that trade over long periods of time. I am currently reading his book the Dao of Capital. One line that struck me is that you have to love losing money and hate making money. That is the key to the cycle. If you can love losing money you are prepared for the opportunity to buy cheap stock. If you hate making money you are prepared for the cycle to turn down.
For me, everything in the market over the last 1-15 years has been mathematically and/or scientifically based. It is the quants – the math and physics Ph.D.’s – who are in charge of markets and that means that their computer programs are in charge. Those computer programs are rooted in science and math. Markets tend to revert to the mean over time. We can see from the March selloff that for every action there is an equal and opposite reaction. For Spitznagel, one of his tenets is that stability breeds instability. Like a sandcastle or a forest floor the buildup of an inherently unstable structure will, at some point, bring it to an unstable state and eventually to the point of collapse. Over time if the buildup of kindling on the forest floor is left undisturbed the resultant fire will be larger than it would have been if authorities had employed a system of controlled burns. That is where we are in the market. Don’t think like a human and get caught up in the fear surrounding the economy and the virus. Price is the only thing that matters. Computers can’t get this virus and buy because others are buying. Why do you think Tesla is up so much? People are buying it because other people are buying it. There is no magic here. People have bought into the cult of personality but the reality is that computers are buying it in front of other computers and day traders while traders buy up out of the money options forcing others to buy to cover their short positions. There has not been a controlled burn in some time. It may be that time if only a small fire. Let’s see if volatility picks up next week.
The success lies in patience. We wait until the decision becomes evident with price as the ultimate arbiter. Like we said last week – The mania can go further than you think but at some point the music stops. This market can and probably will go higher as markets can remain irrational longer than you can remain solvent… We stay long equities but a little less so.
The S&P 500 was up a slight .7% last week so chalk another one up for the bulls as they were able to keep the market at all time highs. Chart gurus target on the S&P 500 is still 3500. We closed at 3397. TESLA was up another 24% this week while Apple tacked on another 8%. Quant gurus say that next week has the potential to unlock the market. It has been relatively stable. It now has potential (as it seems to every September) to move with more volatility after this week’s option expiration. That move can be up or down. A small fire would be healthy.
Stay safe.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.