Your Investing Role Models Might Be Deceiving You

In the investment world, there aren’t too many well-known and respected figures who garner the public’s attention at large. This goes some way in explaining why the ones we do recognise walk around with something of a rock star aura about them.

Many investors, abetted by the media, tend to stick with one or two familiar faces they know. Invariably, that usually means either Warren Buffett or George Soros — the Mick Jagger and Jim Morrison of the investment world.

They hang on their every word and action, basing entire investment strategies on the philosophies these famed investors espouse.

Yet, without the kind of capital available to billionaires, that might not always be the wisest thing to do for mum and dad investors. These guys can afford to lose — and lose big. Most people can’t.

Nonetheless, basing investment decisions on what successful outliers are doing is tempting. After all, if you’re going to take guidance from anyone, it might as well be from those who are making money — and a lot of it — right?

In most cases, that would be true. But we have to be careful about assuming retail investors are on the same level playing field as Soros and Buffett.

Not only that, but you can never truly know what the ultimate motives are behind their investment decisions.

George Soros, you might remember, bet against the ‘Leave’ campaign prevailing in the Brexit referendum. He went long on the British pound. And he made sure everyone knew he was adamant Britain would stay in the EU. You know how the rest of the story goes.

But did Soros really lose out from this trade? Decide for yourself: He made a $100 million bet against Deutsche Bank, in addition to put option bets against the S&P 500 index, and a holding in Barrick Gold. Deutsche got pummelled in the aftermath of the referendum, with its stock plunging 20%. Meanwhile, Barrick Gold surged $4, to $23 a share, in the two weeks following the vote.

What Soros said, and what he ultimately did, were completely at odds with each other.

In truth, investors who have the kind of clout (and capital) to move markets in the way that Soros can don’t necessarily show their hand upfront. In fact, there’s good reason to believe that, the more vocal a public figure is about the outcome or direction of something, the likelier it is they’re making trades against that very thing.

That’s a generalised statement, but it does have some merit. After all, the biggest victories are those in which trades run (and win) against the majority of the market.

That is to say, Soros can easily supplement a ‘publicly made’ trade with an underhanded bet elsewhere. And that’s exactly what he did during the Brexit referendum. Guys like him didn’t get rich by announcing their true intentions to the world.

So you should factor in the way in which investors like Soros and Buffett benefit from manipulating and guiding public investment decisions. If not, at least come to terms with the fact that these are human beings, fallible and prone to error.

The ‘quieter’ ones

One big-wig investor you hear far less from is Lord Jacob Rothschild, of the Rothschild banking family.

It’s not often we get to hear about markets from the viewpoint of a Rothschild. So when we do, it’s time to sit up and take notice.

Lord Rothschild, founder of RIT Capital Partners, noted in the trust’s recent half-yearly financial report:

The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.

Lord Rothschild is being coy.

He knows fully well what potential consequences await the world if it continues on its current path…as it will. There’s no other option. It has to. The time for change is long over.

Yet he is right about the fact that these are uncharted waters for the global economy, which, in the case of potential market volatility ahead, is foreboding.

Rothschild continues:

To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility on the whole has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the world.

There was a time when assets could claim to reflect the broader economy. But, again, that boat has long since sailed.

What’s more, there isn’t some hidden force at play here that would lift the lid on the paradox of rising asset prices even as economic growth remains subdued. Assets like stocks are at all-time highs for the simple reason that the financial system is awash with credit. That’s all.

Weak demand and anaemic growth is no great mystery, as some would have you believe. It’s merely a reflection of the true state of the global economy — a point that’s overshadowed by credit-inflated asset bubbles.

But Lord Rothschild is right in one respect. ‘To date, the experiment has been ‘successful’. But the rising monetary tide can recede all the same from whence it came. Volatility won’t remain low when it does. Markets won’t be climbing to new all-time highs. At that point, we’ll know the true meaning of weak demand and anaemic growth. And we’ll quickly forget about this baseless notion that deflation is real.

In light of this, how, then, is Lord Rothschild trading the markets? He explains:

In times like these, preservation of capital in real terms continues to be as important an objective as any in the management of your Company’s assets. In respect of your Company’s asset allocation, on quoted equities we have reduced our exposure from 55% to 44%. Our Sterling exposure was significantly reduced over the period to 34%, and currently stands at approximately 25%. We increased gold and precious metals to 8% by the end of June.

On currencies, we reduced our exposure to Sterling in anticipation of Brexit and the generally unsettled UK political environment. Our significant US dollar position has now been somewhat reduced as, following the dollar’s rise, we saw interesting opportunities in other currencies as well as gold, the latter reflecting our concerns about monetary policy and ever declining real yields.

As you’ll note, Lord Rothschild is slowly reducing his exposure to major currencies and stocks, while increasing exposure to gold.

Yet the increased exposure to gold, while a defensive move, isn’t drastic. At the same time, reducing exposure to currencies doesn’t mean RIT has consigned cash to the scrap heap. Clearly, currencies still play an important part of its portfolio.

Cash will, of course, be an important asset if and when a potential stock market crash materialises. In the event of a downturn, it is those who hold cash who will be primed to swoop in and scoop up companies at pennies on the dollar.

Overall, though, the message Rothschild is sending out seems to be one of uncertainty and caution. At the very least, his words don’t bode well for stock markets, and only add to the growing chorus of voices forecasting a crash in the future.

But remember, it’s important to keep in mind the deception games that may be at play.

Wise heads will tell you to watch what these famous investors do, and not what they say. But as Soros demonstrated, things aren’t quite as black and white as that.

Sometimes, they make trades that look at odds with each other. But the market, at least initially, only hears about one side of it — the side of the trade Soros and the like are happy to let the public in on.

So, for all we know, Lord Rothschild could be bearish on stocks and major currencies. And it could be in preparation of widespread volatility hitting markets. But we won’t really know with any uncertainty until after the fact. At which point, we’ll probably learn about how these big-wig investors were actually making the right calls all along.

We won’t remember that they misled markets and retail investors; all we’ll remember is that they were right…again.

Mat Spasic,

Contributor, Markets and Money

Markets and Money’s Vern Gowdie believes we’re already at the beginning of the next major crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the coming crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that makes the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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