It has been a rough spring for our open societies, not to mention the people in Ukraine where we have friends and acquaintances that have caused many a white night for us.
A stress-free portfolio
Despite all that, we have not been particularly anxious about our portfolio. Sure, it has fallen somewhat, but not with more than we can brush it off. We also remember all the simulations and back-tests for the "bouncing back factor" of our portfolio, which is one of the reasons we've chosen it.
Over a three-year period the portfolio has been back where it began in all cases, during the last 52 years.
So it's more bombs falling than the portfolio falling that keep us up at night.
In short: we felt prepared when the financial world started to seemingly fall apart during this spring.
In Ciceros original telling of the story, there were boys (twinks?) at Democeles' party. Just saying. But a debauched same-sex orgy (with additional food and wine to satiate all appetites) was a little too much in 1812 when Richard Westhall imagined the impeding fall of the sword and gory end of the party, so the twinks became ladies instead.
The markets price everything in
In the last few weeks, we've read doomsday forecasts for all asset classes we own.
Allegedly, Putin would be sitting like an old dragon on a ton of gold, and what happens with that pile, one way or the other, might completely perturbate the price of the shiny metal. We'll soon see kitchenware in pure gold instead of steal at Ikea, according to the most negative predictions.
Inflation eats bond yields, and it's going rampant and then central banks and governments will not able to control inflation, or so it goes, so treasury bonds and toilet paper are soon to be equivalent investments. Actually, toilet paper might be an investment with a better outcome if the wars in Europe get severe enough.
And the world economy will never be the same, with supply chain disruptions, a scared populace that refuses to consume and shrinks demand, and shortages of all kinds.
Perhaps. Perhaps not.
Don't forecast. And with enough time, everything happens.
What these fortune tellers seem to forget is, in our opinion, a very fundamental thing.
All assets above correspond to financial contracts, traded on open markets in anonymous transactions, by intelligent agents - mostly institutions - with access to much information, and much more than the alluring stories presented above.
Which means that all ideas about what will happen in the future is already priced into the current asset prices. There's no "natural laws" or "safe bets" that haven't already been baked into a (very refined) average assessment of the situation - an assessment that we normally call the current price.
For instance, bond prices already anticipate what the future payment stream (coupons) will be worth today, in today's money, inflation and all, with expected real returns, in the net present value in relation to existing bonds, buy backs, expectations of future quantitative measures, money printing and issues of new treasuries. It's all there, in the price, already.
So what one is saying when trying to see anything as "doomed", is that one is more intelligent than the market, or perhaps that one has figured out a bias that no-one else is exploiting. But beware. Markets are learning machines, and they are smart.
As good stoics, we prefer to lean back instead of trying to outsmart people that, truth be told, probably are much more intelligent than us.
We rely on the method, and we have pre-meditated that the sword may fall.
Come year's end, we will follow our strategy, and as usual pour our hard-earned money into the worst performing asset of the year (whichever that might be). That is probably then the lowest priced bet possible between long term treasuries, gold and stocks, and hence, also the bet with most upside if the market expectations are surprised.
So yes, we bet, but according to a pre-meditated and simple plan.
And the markets are always surprised, but not in ways that the stories above indicate - but genuinely surprised and one, at least not we, will not be able to predict why, when or how.
For instance, in our own risk assessments for our future FIRE-life, we hadn't even really written out war explicitly (it was implicitly there, but more like "Sweden becomes impossible to live in").
Once more: with enough time, everything that can happen will happen, and now war is raging in Europe, despite (at least) us not foreseeing it.
The best is to be aware that the knives might be falling at any time, and take precautions in advance and not hope that one will be able to do a last millisecond rescue when the unforseen actually happens.
Be prepared in advance, prepare for all eventualities, consider a strategy that works for the human you are and not the hero you wish to be, so you are able to stick to the plan when the party ends.
Farewell,
//antinous&lucilius.
More reading:
Ergodicity - everything that can happen, will eventually happen.
Amor fati - love what destiny has in store for you.
Our portfolio - the pathfinder, bringing us to our goal.
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