The Best of Kass
Among his posts this past week, Kass discussed how to trade what has become a random and inconsistent market.
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Learning to Live With Volatility and Disorder
Originally published on Friday, April 19 at 8:18 a.m. EDT.
One day, the sardines disappear from their traditional habitat off the Monterey, Calif., shores, the commodity traders bid the price of sardines up, and prices soar. Then, along comes a buyer who decides that he wants to treat himself to an expensive meal and actually opens up a can and starts eating. He immediately gets ill and tells the seller that the sardines were no good. The seller quickly responds, "You don't understand. These are not eating sardines; they are trading sardines!"
-- Seth Klarman, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
The market that has no memory from day to day has demonstrated an inconsistent and almost random pattern over the past few weeks, and I suspect this will continue to be the investment backdrop over the next several months.
Yesterday I mentioned the role of time frames in my trading -- as an example, one can cover short hedges (as I did recently) while maintaining a negative market view (as I do). In essence, this is not inconsistent with my view, and it is not necessarily a contradiction, as I am gaming the volatility. ( Time frames will be the subject of my opener on Monday. I hope it will clarify my tactical approach to trading.)
Last spring I was speaking to the legendary Ira Harris (one of the most influential Wall Streeters over the last 40 years; back in the day, he ran Salomon Brothers' Chicago office), who mentioned that he could not remember a time during his investment career when there was so much uncertainty as there is now.
Ira's fears of uncertainty represent the reality of the times today. Human beings fear that which they do not know -- be it economic, social, political, geopolitical or even environmental (especially of a climate kind).
The market's wild swings over the past two weeks are the most recent reminder of the world's fragility and the general lack of certainty -- it is a world far different than when my Grandma Koufax was investing years ago.
As I tweeted and wrote in my diary yesterday, the only thing I am certain of is the lack of certainty these days!
An important contributing factor to the market's volatility and disorder is the more frequent emergence of black swans.