Exactly 10 years ago, I was struggling to not lose too much of other people’s money that was invested in the hedge fund I was managing. It was a battle that I didn’t win.
(The world of asset managers – the people who look after your money in hedge funds and mutual funds – call it that when foreigners aren’t around: OPM. It softens the terrible feeling when you lose it. A tiny bit.)
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The wind in your face – not at your back
Most of the fund’s assets were in Russia. That was bad, because Russia’s stock market fell more in the crisis (down 80 percent vs the 55 decline in the S&P 500) than any other big market, and its economy shrank more (by nearly 8 percent in 2009 vs the 2.8 percent contraction in the U.S. economy) than another other large economy. You can be a fantastic stock picker, but if the market you’re invested in falls that much, you’re going to lose a lot of money.
Unless, of course, you’re short the market – which means that you’re making money as the market falls. To be short stocks in the face of a catastrophic market decline is glaringly obvious in hindsight, when you look at the steep downhill path of the index. How could you not see that it was going down, down, down?
But at the time – in the thick of it – each little tick of that line is a day punctuated by fresh news, false hopes, distracting rumours, and blinding white noise that blocks out the forest for the trees. You don’t want to be caught on the wrong side when the wind suddenly shifts. At the beginning of a big market correction, you don’t know what’s coming. After all, every 5 percent dip starts the same way as a 50 percent dip.
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What I said then
As it happened, on September 4, 2008, I was looking at Turkey (which was tangentially part of the fund’s investment mandate). I wrote the following to my colleagues about the market…
Turkey: Sharp currency movement yesterday, and today, and Turkey (despite an improving outlook on the back of a lower oil price) is vulnerable if EMEA [emerging Europe, Middle East and Africa] currencies come under focus/attack. Few catalysts for the market in the short/medium term. I don’t want us to stick around in non-Russia markets that are going to show losses (we have enough of those in Russia), so I’d prefer to sell.
So: Turkcell: Sell. Cheap, but estimates are coming down, which means it may get less cheap in the wrong kind of way. We’re down slightly (has outperformed a lot else in the portfolio, as it happens). The company may well be on the verge of entering into a price war, a broker told me. I prefer to get out with a small loss than wait around for things to get better.
Was I right? Well, the lira back then was trading at 1.49 to the U.S. dollar… by the end of 2008, it was at 1.89 to the U.S. dollar, for a 27 percent decline. (And now it’s at 6.60 to the U.S dollar.) Turkcell – which I proposed selling – fell 39 percent over the next six weeks (and today is down 75 percent from those levels). So I won that battle at least.
(As it happens, I’m in Turkey right now… Turkey is experiencing another market Waterloo, and I wanted to check it out. The currency has collapsed… the politics are a mess… and the stock market is down a lot. I’ll tell you more in coming days about what I see here in Istanbul.)
I learned a lot about investing during the months of that meltdown a decade ago, including these three thoughts…
1. As I’ve said before, there’s always a crisis going on somewhere. That’s terrible for the people in that economy, and for investors in that market. But the modest silver lining is that there’s also going to be a significant opportunity at some point. Crises don’t last forever.
2. It helps to look at economic crises as if they’re an economy experiencing bad weather. It’s not pleasant – and it’s also not avoidable. What do you do if you anticipate rain? You bring an umbrella. If there’s a hurricane coming? You board up the house and, depending on how bad it is, you might evacuate the area. (Here you can read what I wrote before about how to prepare for a crisis.)
3. Writing out why you buy a stock is extremely helpful. Some people keep trading journals religiously… tracking their thinking at the time, the investment rationale, and what they expect to happen. It’s important to recognise when any of those things change. And you can keep yourself honest by writing it down.
Publisher, Stansberry Churchouse Research