Thoughts and musings from my desk to you.

Smart Money? Maybe. Brilliant Money? Never.

Like all industries, there is a pecking order in the investment arena, a hierarchy, if you will. At the top of the financial pyramid are the hedge fund and private equity businesses. At the base of the pyramid is the bank teller. While often grouped together, the hedge fund and private equity businesses are very different since hedge funds normally trade in listed securities that are available to everyone. In contrast, private equity is comprised of companies that don’t trade anywhere. Those listed securities in the hedge fund space could be options, stocks, preferreds, bonds, futures, and may or may not include leverage, or borrowed money.

Structured Notes Deconstructed

We occasionally see portfolios come in for review containing structured notes. There are a wide variety of them, so I will speak generally. Not everything I will say applies to all, but likely most.

A structured note is a bond from a brokerage firm or sponsor which represents an underlying derivative. Most often, this derivative is a set of option contracts. The underlying derivative is what sets the parameters of upside vs. downside and can make them seem like a viable proposition.

Market Optimism

I’m a cynic when it comes to the nature of humans but an optimist when it comes to the nature of markets. To be a pessimist, I would have to believe that markets are somehow doomed or that people are irredeemable. Neither is true. And when I speak of being a human nature cynic, rest assured I’m putting myself in the same category. I’m not judging people from some lofty height; I’m in the muck with all the other sinners. However, I have a unique vantage point, and by observing my own mistakes and those of so many others, I have insight into what works and what doesn’t. One of my most strongly held and loudly professed beliefs is the wild advantage of sitting still.

Recession? Who Knows?

Economist Paul Samuelson famously quipped that “the stock market has predicted nine of the past five recessions.” This tongue-in-cheek expression reflected his view of jumpy stock investors’ impact on the market, who pile in and out, often letting fear win out over fact.

Current tea leaf readings might have one conclude that a recession is imminent, and that may be true. The bond market gives pretty reliable clues, an inverted yield curve among the most notable.

Expect to Bleed at the Cutting Edge

It is quite fun to try to predict the future and invest in companies in the sweet spot of your prognostications. Investing in long-term growth trends with short-term dislocations is a viable strategy, and we do this often. But finding the “next big thing” is entirely different and is fraught with pitfalls. Such positioning comes with great peril because the future is not that predictable. More importantly, it is also likely that other investors share your view already and beating you to the punch is what causes FOMO and will likely cause you to overpay.

Rising Rates

The poor economic policy of the past is coming home to roost in the form of rising rates and spiraling inflation. To make matters worse, policy leaders spent months gaslighting us all, denying inflation’s presence when the signs were in plain sight. This lag in taking action has surely exacerbated the situation because it’s best to nip inflation in the bud before it blooms. Too late for that.

Investor Trendspotting

One of the greatest misconceptions investors have embedded in their psyche is the assumption that predictions about the future are accurate or even valuable. I struggle with it too.