Via Paul Singer's letter to investors,
THE TREND IS YOUR FRIEND... MAYBE
When markets are trending, they can appear unstoppable. Every sale in a rising market feels like a bad one, and every purchase in a rapidly falling market is punished by losses within minutes or hours. It is so much less painful to go along with the trend than to buck the trend – at least in the short or possibly medium term. Furthermore, in the modern world of super-leverage and group-think, valuations can go far beyond the estimates of every expert and practitioner. That is, of course, until they stop.
One of the main challenges of a long career in money management is that the distance (in terms of time and cost) between an intelligent conclusion that prices are massively wrong in either direction, and the actual reversal of valuations toward the range of “reasonableness,” can sometimes be too long to bear. One could have easily become stridently bearish on stocks in 1995 (as we did), when in America equity prices passed all-time highs by nearly every measure, selling at 22 times earnings, a level that was previously reached in only September 1929 and March 1972 (both serious peaks). But they did not top out until early 2000 at 40 times earnings. And, in October 2008, those who thought that markets had fallen as far as they possibly could, and backed that belief with massive buying, found themselves weeks or months away from what was an extraordinarily painful and confusing bottom, with horrifying losses mounting by the day.
Today, one could be bullish on the long-term value of gold and be not only sitting on losses but also experiencing incoming ridicule and schadenfreude. In the same vein, based on the extraordinary monetary policy being practiced by the world’s central bankers, one could be completely convinced that medium- and long-term bonds are staggeringly overpriced, with nowhere to go but down in price (up in yield). But watching bonds persist in their long-term uptrend regardless of money printing, and watching gold prices languish with no understanding by investors that throughout history gold has always been considered the only real money in a world of monetary fakery, is concerning to say the least. Maybe history has stopped.
We do not have a solution to the problem of assessing the outer boundaries of the price ranges of a host of financial assets, nor do we have a key to refining the timing of turning points in trends. The only appropriate answers are: “Who knows?” and, “Whenever they feel like turning.”
But we do have thoughts about survival as money managers, based on our own experience as well as observation and data. Every money manager with aspirations of a long career must govern his or her purchases to take into account the uncertainties we have described above. There must be a “Plan B” when purchasing or selling assets, so that capital is kept intact even if trends or turning points do not follow expectations. Being “wrong” may (or may not) be a temporary thing, but money managers who want to stick with long or short positions must determine how they are going to trade, hedge, or increase or decrease their positions if the prices continue to go against them. It is surprising how few money managers ask themselves: “What if I am wrong, or early? What do I do then?”
These are particularly important issues at present, with bonds across the globe still absurdly treated as “safe havens.” They are not safe havens with the 30-year euro swap rate trading at 1.85%, or the Japanese 20-year swap rate at 1.35%.