Albert Einstein's Timeless Advice For Investors

Tyler Durden's picture

Submitted by Tim Price via Sovereign Man blog,

“If I had an hour to solve a problem and my life depended on it, I would use the first 55 minutes determining the proper question to ask, for once I knew the proper question, I could solve the problem in less than five minutes.”

 

- Albert Einstein

Well into the summer of 1914, when the then 35-year old Einstein was a professor in Berlin, Europe’s stock markets were buoyant.

They initially shrugged off the assassination of the heir to the Austro-Hungarian Empire, Archduke Franz Ferdinand, in Sarajevo.

But as investors began to grasp the implications of a European war with Russia siding with Serbia, both bonds and stocks started to sag as proactive investors began to raise liquidity.

Historian Niall Ferguson points out that market makers on the London Stock Exchange, heavily reliant on borrowed money to finance their equity holdings, started going bankrupt.

Counterparty risk blossomed, and bill brokers were caught with customers on the continent unable to remit funds. There were fears of bank runs.

The Viennese stock market closed, on July 27, 1914. Within a week all the continental exchanges had followed, along with London and New York.

The world’s major stock markets remained closed for up to five months. This was reality finally setting in.

Today we have western stock markets either at, or close to, record nominal highs. Interest rates remain at 300-year lows.

This despite fears of a slowdown, and deflating credit bubble, in China, the looming end of QE in the United States, and military escalation in Ukraine. And an unreconstructed banking system in the euro zone.

Greece’s recent 5-year bond was floated at a yield of less than 5%. And demand was so strong it was -seven times- oversubscribed!

And the Dow Jones Industrial Average rose to an all-time high within HOURS of the US government announcing that Q1 GDP growth had ground to a halt. It’s a total disconnect from reality.

It seems crystal clear to us that developed world central banks are busily inflating bubbles that will inevitably burst. We just do not know when.

And the sad dilemma of our times is that the monetary authorities have made the successful pursuit of low-risk investing virtually impossible.

By driving deposit rates down to below the rate of genuine real world inflation, investors are effectively forced to take on much more price risk than they might otherwise choose.

We have long held that asset class diversification remains the last free lunch in finance. But asset class diversification alone is insufficient if there is genuinely a bubble in -everything-.

This presents a major problem for investors. So as Einstein suggested (quote above) and you had an hour to solve the problem, what question would you pose for the first 55 minutes ?

It isn’t just: what do we want to own ? Should it be a combination of appropriately valued stocks, bonds, property, cash, and gold ? How can we best avoid the more obvious risks to our capital ?

We think this dismal financial environment requires a return to first principles. So for us, it’s a question of: what do we want to achieve with our capital in the first place ?

We think for our clients, trying to “beat the market” is entirely the wrong objective today. Preservation is paramount.

And prudent investors should look for attractive valuations along the roads less travelled, less crowded by hordes of index-trackers determined ultimately to fall exactly in line with the central bankers who control them.

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ugmug's picture

Forming a question presupposes intelligence. Enough said....

DoChenRollingBearing's picture

 

 

Q: Would taking $500 more out of the ATM on the way home be prudent?

DoChenRollingBearing's picture

And that, sir, is why negative rates is the perfect name for you!

JLee2027's picture

 

“If I had an hour to solve a problem and my life depended on it, I would use the first 55 minutes determining the proper question to ask, for once I knew the proper question, I could solve the problem in less than five minutes.”

 

- Albert Einstein

 

This is perfect advice for many situations...design, for example. Once you solve that nagging problem of "how", the solution is usually very easy.

 

chumbawamba's picture

Yes, great.  But this guy isn't even in the right ballpark with his question.

The question should be: what do institutional investors know that the little guy doesn't?

There's a reason this market isn't making sense: it's making sense to those who know what's really going on.  Unfortunately, 99% of investors don't know what's going on.

I am Chumbawamba.

MoneyPowerWomen's picture

seems very true on the surface, but I am not sure.

Institutional Investors are led by humans who have personal incentives and/or habbits of behavious and belief that are making them behave in directions not neccesarily aligned with the best interests of the institutions themselves.

so maybe they dont know any more than the little guy?

 

old naughty's picture

So did David Einhorn ask the right questions?

Oh, Ben is not Albert. And he had answers before the last 5 min?

 

seek's picture

Wrong question.

Q: Will the US dollar have any value in ___ years?

(or Q V2.0: Will the US dollar's value be the same or higher in ___ years?)

If the answer is anything but yes, you're taking the wrong thing from the ATM.

DoChenRollingBearing's picture

One hour.  I cannot buy gold in just one hour, nor BTC (for cash).  But, the ATM is just sitting there, sitting 100' from the street I drive along...

Gold better than (BTC and/or CA$H) better than electrons there in the bank.

***

Until a gold ATM arrives in my town...  

chumbawamba's picture

In a world of functional idiots, how valuable is gold anyway?

Value is in the eye of the beholder and the pocketbook of the buyer.

I am Chumbawamba.

acetinker's picture

Well Chumblez, in a world of people who work to support each other, irrespective of the means of exchange, how valuable is gold, anyway?

Mabussur's picture

Remark concerning Q V2.0 : You cannot formulate a yes/no question out of a postulate with 3 possible outcomes.

freewolf7's picture

"How can I prepare for the upcoming collapse?"

G.O.O.D's picture

"How can I prepare for the upcoming collapse?"

guns ammo canned goods condoms bic lighters kotex bandaids garden and a big fvking knife

Xibalba's picture

you forgot the flashlight

G.O.O.D's picture

no good unless you get the kind you wind.. oh and a fleshlight..

eclectic syncretist's picture

my toilet still flushes, so all good here.

Anusocracy's picture

The dog from the movie A Boy and His Dog.

Xibalba's picture

check out luminAID.  Got a couple for the b.o.b

G.O.O.D's picture

bic lighters.. if you need to see light everything on fire

Serenity Now's picture

This made me LOL.  Funniest comment of the day.

bam's picture

don't need no condoms!

Rantabulous's picture

I agree that 'collapse' is a risk that needs to mitigated, and I have been working for some time to do so, but I have also been asking the question, 'and then?'.

By this I mean, let's say it is 'bad' - financial chaos, governments largely losing control and violently exercising 'authority' where they can, food shortages, disease, dramatic population reduction etc.

Eventually, there will be a new equilibrium. I am trying to guess at what that might be where I live, and what might my place be within it.

Even if everything goes 'Mad Max' - it may be that way for 10 or 20 years but it won't stay that way, and then...

Most famines, major wars, or pandamics only last a few years - they can do dramatic damage to population numbers in that time, but after a 'few years' a new equilibrium emerges. If I imagine where I live with 50% of the people gone - what are the products and services that will be needed - what do we have a lot of here - what will be naturally lacking.

I have moved to an agricultural area, where rainfall and temperature are expected to stay good according to IPCC projections until the end of the century - but there is no real industry here. 

I try to imagine this future and what I may be able to do to trade.

Nage42's picture

How about being the guy who can run a bacteria culture for gram positive, and then dip into his stockpile of antibiotics?
The shelf life is pretty good if you store them right.

Rantabulous's picture

Nage42 - that is absolutely brilliant - who wouldn't trade for antibiotics? I have a stockpile that I have purchased, but never thought of the value of making the stuff. It can't be rocket science, and what's more, my wife is a molecular biologist - so I have some in-house expertise that I could use. Seriously - thank you for the idea!

ACP5gTG's picture

What? . . . . no likkor?

 

Groundhog Day's picture

No Debt = No slavery

no fiat = no counterparty risk

Own Gold, silver, quality real estate with QUALITY tenants that will also survive the collapse (otherwise the RE is useless), be smart and short stocks at the appropriate time with risk management in mind. 

Thats all i got

Pure Evil's picture

You forgot the mansion to house all your whores.

You think having sex will stop just cause everything else does?

#winningWhores

NoDebt's picture

"You think having sex will stop just cause everything else does?"

I sure hope not.

Rakshas's picture

..... sex never sleeps ...... dot Gov makes certain of that......

 

#IHaven'tHeardMyFartsInYears

Ying-Yang's picture

"Along the roads less travelled, less crowded by hordes"

You mean invest in Nevada State Highway 50 titled "The Loneliest Road."

http://www.youtube.com/watch?v=gO3g8P7gnqs

 

Matt's picture

Doesn't seem that lonely, if you broke down you'd see a car every ten minutes or so it seems. 

Nobody For President's picture

Had to give you a greenie for that Y-Y. 44 years ago (next month) my brand new bride and I took that route in a new VW Kombi I had built a custom interior for as part of an epic 9 month journey looking for home. Found home a lot closer to Eureka CA than Eureka NV, but that video brought back a lot of memories. I lost her to cancer this February, after building a fine family and a fine homestead together. Kind of empty now - like a lot of Highway 50.

acetinker's picture

Please accept my condolences, for as selfish as it is, I pray to a God I've never seen that my wife outlives me.

Ying-Yang's picture

God bless you NFP... my wife of 43 years and I are both cancer survivors who look in each others eyes and thank the big guy for sharing each day.

My memories like yours are sweet rewards for a good life lived with someone who loves me for what I am.

 

palmereldritch's picture

Ironic (or perhaps 20/20 hindsight) that such a view is attributed to Einstein given he incorrectly formulated his most famous question producing the most frustrating and "special" theories

Another key mystery where Tesla differs from Einstein involves the paradoxical findings of Michelson and Morley who in 1887, tried to detect the ether by using two sets of mirrors pointed at each other and placed miles apart. One set was aimed in the direction the Earth was moving and the other set was aimed at right angles to the movement of the Earth. It was hypothesised that if the ether existed, once an impulse was sent, there would be a difference in the return times of each set, yet no difference was found.

Einstein essentially agreed with the findings by stating that by its nature, the ether could not be detected. However, Einstein also upped the ante considerably by also saying that if the ether could be detected then his theory of relativity was in error.5 Einstein further stated that if light could travel like a particle it would not need a medium (i.e., the ether) to travel through. Even though most of the great scientists of the day such as Maxwell, Faraday, Kelvin, Fitzgerald and Lorentz all accepted the obvious conclusion that there had to a medium of transfer in space, i.e., the ether, all of this was glossed over. This led to a generally accepted conclusion that the ether did not exist and that is the situation today, a full century later! It would take Einstein 15 years before he addressed this glaring misconception but the damage had already been done.

In 1920, lecturing at the University of Leiden, on the topic “Ether and the Theory of Relativity,” Einstein stated outright that the ether did exist, that is was necessary as a medium of transfer because light also had wave-like properties. He even wrote Lorentz to clarify this point.6 But by now, the damage had been done. This lecture received little notice, it was ignored in Roland Clark’s watershed biography on Einstein published in 1971, and so the 20th and early 21st centuries evolved in such a way to dismiss entirely ether theory.

http://www.newdawnmagazine.com/articles/tesla-vs-einstein-the-ether-the-...

Illustrating that what's in the question is only as good as knowing what has been omitted.

fonzannoon's picture

yes yes attractive valuations...yes tell me more....

prains's picture

By driving deposit rates down to below the rate of genuine real world inflation, investors are effectively forced to take on much more price risk than they might otherwise choose

 

why choose at all? loss to inflation over time is better than loss of everything when the reset hits! Gold meh, maybe if it's portable enough......gold hoarding although a wise choice is also a defacto shelter in place choice if the weight is a burden

TruthTalker's picture

Gold/silver should be hidden in several small caches - this way you can move if needed and not have it be an issue -

eclectic syncretist's picture

Bond, stocks, and housing are all in one ginormous Fed QE induced credit bubble that seriously looks to have reached the limits of possible expansion.  So if you have to run from them, where do you go?  I'm in PMs.  Whether the credit sloshes over into them or not they are the ultimate safe haven from counterfeit, corruption, and fraud, and that is what I want now more than anything.

G.O.O.D's picture

i think we should just eat more pussy and everything would work out.

Vampyroteuthis infernalis's picture

Thanks for telling me nothing!

Pure Evil's picture

Invest in oxygen and sunshine.

Something very few can live without.

#winning

That and toe jam. Everyone needs toe jam.

No Quarter's picture

Yes, but if you follow Goods recommendation in tandem, oxygen may be an issue- Long snorkels.

Postal's picture

Moar!

Keep the party going just a little longer. I need more supplies...

yellencrash's picture

Simple question: where do I want to be when the dollar becomes the final bubble?

eclectic syncretist's picture

Going short the dollar from a remote island in the south pacific?

denverdolomte's picture

"It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong."

~ Richard Feynman