The curse of buy and hold

by Deepcaster

Investment Managers for University Endowments have, at the very least, a dual mission: to preserve the value of the Endowment and to make it grow. Major Universities have the wherewithal to hire the very best (ostensibly) talent in Investment Management.

Well that “Very Best Talent” performed poorly in the last six months of 2008. Clearly one of the reasons they did not perform well is that they were either explicitly or implicitly committed to “Buy and Hold” as the road to protection and profit. (If they had not been committed to “Buy and Hold” they would have gone into cash in the Summer, 2008 and avoided, at the very least, those losses - - Quod Erat Demonstrandum.) And, just as clearly, they were not committed to employing the “Downside Hedges” designed for Profit which Deepcaster, and a few others, repeatedly recommended.

Unfortunately, “Buy and Hold” rarely works anymore. Moreover, given the structural changes in our Markets and Economy, it is unlikely to work for several years, if ever again. Consider: The endowments of Harvard and Princeton reportedly dropped by about 25% in the last six months of 2008, and Yale’s endowment also reportedly lost about 25% of its value. Such losses resulted in Princeton having to sell $1 billion of debt recently. Harvard also recently sold debt - - to the tune of $1.5 billion. Cornell says its considering selling debt also because its endowment reportedly lost about 27% last year.

To be fair, many other Fund Managers outside the Universities were similarly disadvantageously committed to “Buy and Hold.”

Yet the Investment Management “Fraternity” just does not seem to comprehend that we are in a Brave New World for the Markets and Economy. They recently named one Mutual Fund - - Royce Special Equity Fund - - “Best in Class” for having lost “only” 20% in 2008! We suppose that is something of an achievement, sort of.

How could all these Hotshot University (and other) Investment Managers be so wrong? Answer: because we are in a Brave New World for investing in which investors must become long-term traders with a vision as we explain (along with Guidelines) below.

But first let us describe why “Buy and Hold” rarely works anymore, then we shall provide some guidelines for Deliverance from “Buy and Hold.”

The key reason that “Buy and Hold” does not work anymore arises from the Delusion that one’s Wealth resides securely in paper (or electronic) assets in general.

First, thinking one's wealth resides SECURELY in Paper Assets-in-general (or, even more intangibly, in electronic data stored on some remote server) is often unjustified, and, quite risky, as recent market savagings have shown.

Consider first that 'Paper/Electronic Assets' typically have NO INTRINSIC VALUE.

Indeed, Paper/Electronic Assets typically have no value at all unless they REPRESENT (or can, if liquidated, reliably generate) 'Purchasing Power' to obtain goods and services, or ownership rights in Tangible Assets.

Here we do NOT focus on Paper representing Ownership rights in Tangible Assets. We focus instead on publicly traded securities which, for example, typically represent
'Equity' Ownership in various business enterprises.

And we focus more narrowly on those Equities which, prior to the Takedowns in recent months, were thought to be secure Repositories of Wealth but which, as those Takedowns have demonstrated, were not!

We characterize these “Assets” as “de-legitimized Paper.”

As the recent market Takedowns have demonstrated, the value of equity ownership of de-legitimized paper measured in market terms is often not SECURELY determined -- it fluctuates according to the vagaries of the marketplace. Recently that market fluctuation has, for most such securities, been down by as much as 40% from highs just a few months ago.

Consider also that to have relatively secure REPRESENTATIONAL value a publicly traded security must:

1. Be able to be LIQUIDATED for SIGNIFICANT value (i.e. Profit, or, at least, not a significant loss) in the market, and/ or
2. Pay dividends, and/or
3. Have Genuine Appreciation Potential.

But as the recent Market Crashes show, many Paper securities do NOT RELIABLY have ANY of the above. They have thus been shown to be “de-legitimized paper.”

In addition, many publicly traded securities (i.e. paper) which can be liquidated for a NOMINAL profit (i.e. considering appreciation and dividends together) do NOT have a REAL Profit, but rather only an Illusory one, because of three additional factors:

 Inflation - - Investments, which are subsequently liquidated, must, to show a genuine profit, show a profit in excess of Real Consumer Price Inflation. But Real Consumer Price Inflation (as opposed to gimmicked “Official” figures) ranged between 10% and 13% annualized in 2008, according to the very credible statistics of shadowstats.com. (See Deepcaster’s article “Real Profits Require Real Numbers” in the Articles Cache at www.deepcaster.com.)

 Fiat Currency Purchasing Power Degradation: The U.S. Dollar has, over the past six years, lost over 30% of its purchasing power, notwithstanding its recent (and temporary) bounce, which Deepcaster earlier forecast.

 Market Intervention by the Fed-led Cartel* of Central Banks in the Precious Metals, Strategic Commodities, and Equities Markets. Such Overt and Covert Market Intervention has (and can still) convert otherwise “Safe Haven” Assets into quite vulnerable, and ultimately, de-valued “Assets,” for the short and medium term, at least.

*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2008 Letter entitled “Market Intervention, Data Manipulation - - Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”

Thus, to realize a Genuine Profit, an investment must overcome all six of the aforementioned, not to mention overcoming typical adverse market action as well.

Given the above hurdles and the magnitude of recent Takedowns, one inference is clear: Any 'Buy and Hold' Strategy is probably doomed to failure. Thus The Solution to the aforementioned Challenges must be A Strategy, A Golden Strategy.

Condensed into one sentence, that Golden Strategy is: Successful Investors must be long-term TRADERS with a long-term perspective.

For more specific detail on this Golden Strategy see Deepcaster’s 3/28/08 Article "Defeating the Cartel...with Profit" in the Articles Cache at www.deepcaster.com. Importantly, that Strategy must not only take account of Fundamentals and Technicals, but also Interventionals. In addition, there is a strong preference in that Strategy that one’s Paper Assets be linked to Tangible Assets as we describe below.

Generally speaking, but with the Major Caveats listed below, the more closely one's assets are linked to Tangible Assets, and especially to those Tangible Assets which are in great and relatively inelastic demand, the more secure and potentially profitable one's investments will be, in the long term.

This means, for example that investors should focus on Precious Metals, agricultural products, consumer staples, energy and similar tangible assets Sectors, BUT it is essential to consider the Caveats below.

Beware of Cartel Intervention in the Precious Metals Markets. Tangible Assets, and especially the Precious Monetary Metals Gold and Silver, are the “Mortal Enemy” of the private-for-profit Fed-led Central Bankers, as Deepcaster pointed out on several occasions. This is because if Tangible Assets, and especially the Monetary Metals Gold & Silver, become even more legitimized as Alternative Stores and Measures of Value to the Bankers “Paper Assets” (i.e. Treasury Securities and Fiat Currencies) the Fed and cooperating Bankers and favored Financial Institutions lose Power, Influence and Profit.

Therefore it is understandable that the Cartel* of Central Bankers, et. al., periodically makes major and often successful attempts to take down the prices of the Monetary Metals, Gold and Silver, as well as Tangible Assets such as the Ultimate Strategic Commodity - - Crude Oil.

Indeed, for example, in the week (ending 3/21/08) of the Bear Stearns collapse (when Gold and Silver should have skyrocketed), The Cartel effected a major Precious Metals Takedown with massive Market Intervention, as Deepcaster had earlier Forecast.

Therefore, regarding TIMING one’s purchases of these assets, and especially Precious Monetary Metals, it is essential to consider not only the Fundamentals and Technicals but also the Interventionals. Otherwise one and one’s Tangible Assets Portfolio can be caught in a Cartel-generated Takedown, with severely negative results.

The March 19 and 20, 2008 Takedown of Gold, Silver, Crude Oil, and Commodities in general are an Object Lesson in the still-potent Interventional Power of The Cartel.

However, such Takedowns provide a great Opportunity to acquire real Gold and Silver inexpensively. Thus, The Golden Exception to warning against “Buy and Hold” is Deepcaster’s injunction to buy physical Gold and Silver (coins and/or bullion) on Takedowns, and take physical possession of it yourself. For details on this Strategy see Deepcaster’s “Defeating The Cartel…With Profit” (referenced above). It is increasingly important to own “physical” because of the increasing threat of Systemic Collapse.

The exponentially increasing numbers of “Paper” Derivatives required to implement each successive Takedown is a clear reflection of the increasing Threat of Systemic Collapse. A Financial Regime built on Darkly Liquid Paper and Fiat Currencies and $683 trillion (and increasing) of OTC Derivatives (see www.bis.org, follow the path: statistics>derivatives>Table 19) is not indefinitely sustainable. See Deepcaster’s 2/15/08 Article “Profiting and Protecting From Collapsing Paper” at www.deepcaster.com.


Beware of Cartel Intervention in Other Markets. Cartel Takedowns and other Interventions are not limited to Precious Monetary Metals and Strategic Commodities. Though these are the Ultimate Stores and Measures of Value, given repeated Cartel Interventions, the timing of their acquisition is key. Similarly, Cartel Overt and Covert Intervention (see Deepcaster’s article referenced above) dramatically affects the Equities Markets, so these Caveats apply to them as well. The Cartel is now in the process of effecting a general Commodities Price Deflation as earlier forecast by Deepcaster. This process should continue for several months until the Commodities Bull Trend is allowed to resume.


Conclusion

“Buy and Hold” increasingly means to “Hold and Lose, subject to The Golden Exception.” There is a maxim that “smart money is always long-term money.” Indeed, that saying has until recent years often been true, provided that the smart money was also proficient in finding and investing in “value” investments.

Alas, that maxim is increasingly NOT true. One primary reason is traditional measures of the value of a particular investment have mainly been contextual, rather than inherent.

But the economic, financial, and market system within which these contextual measures have been determined is increasingly vulnerable, as described above. The Chinese Yuan re-peg to a market basket of currencies several months ago, and the general trend away from the U.S. Dollar are only two signs that the U.S. Dollar-as-World-Reserve Currency System is beginning to crumble before our very eyes - - and the evidence is increasingly before us.

When coupled with monetary and price inflation (U.S Dollar-denominated, especially) and the unprecedented Market Takedowns of recent months, simply buying and holding many assets will increasingly not be profitable, and in many cases will be a losing proposition.

Employing all of the above Guidelines greatly improves the probability of achieving Real Profits and avoiding Real Losses.

In sum, the aforementioned Guidelines can help provide Deliverance from the Curse of “Buy and Hold.”