Weekend Reads: How to Profit from a Crisis

Everyone is about to lose a lot of money, but do what I say and you won’t!

Somewhere in that sentence is the ultimate pitch. It’s nothing if not a call to adventure, and even better: It offers you the chance to be smarter than the folks next door. For some, it’s just the allure of being right while others are wrong that makes crisis-inflected analysis so compelling.

For others, it’s making money. I probably do not need to remind you of John Paulson’s 2007 payday. No doubt: Make the right call, stick to it, and the rest of your life changes. You’ll be sought out as an oracle amid the crisis, and for sure the people who didn’t listen will write in to say they wish they did.

If you ever find yourself thinking this way, it’s time for a vacation.

I’m not just ripping on the bears here. A creative professional in today’s market will find no shortage of reasons to be legitimately worried about the outlook for risk assets. If you’re following along at home: They also go down.

The word “crisis” is nightmare fuel enough to produce a career’s worth of bad decisions though. With discussion blossoming about whether Deutsche Bank will produce another “Lehman moment,” I figured I could usefully round up some crisis thinking for your examination.

I’ve summarized three books below that each offer its own flavor of apocalyptic investing. One of them I recommend. The hope is that reading over the list will keep you mindful of the sometimes narrow line between thesis and theology.

But first, I’ve got two words for you:

Heirloom Seeds

If you believe a doomsday crisis is around the corner and you are interested in generating robust returns from it, even well-collateralized exchange-traded products might not be the way to go. Heirloom seeds, which are cheap and can be used to create more of themselves, are your best bet for a store of value

Options cost money, and if it’s Deutsche Bank that has you worried, you can only get puts going two years out. You’re better than that.

Create an option to manufacture food amid the wreckage instead. You’ll coast without paying theta for years, and if you happen to buy the seeds on a credit card with a promotional 0% rate, it gets even better: If the world ends before the offer expires, your rate of return is infinite.

If you’re skeptical, consider what the going rate for a fresh heirloom tomato is likely to be after Armageddon. Even if at the end of five years you throw all your seeds out the window in disgust, you might still get a radish out of it a few weeks later.

Try that with a financial instrument. Probably these alpha spouters are outside your mandate, and that’s exactly the point. It’s almost like considerations of crisis don’t have a place in the realm of professional activity.

Only they do.

Not for nothing, when you ask late-career investment professionals what quality they’d like to pass on to the next generation, a very common response is “a sense of financial market history.”

There has been no shortage of financial scandals, scoundrels, and crises over the years, and knowing what’s happened in the past can help you avoid bad, simplifying assumptions in the future. I’ll never forget the response I got from a trader in 2007 when I asked him to assess the probability Lehman Brothers would stop making a market in some securities my firm owned for clients. “They’ll never do it” he said. “If they did, they’d never get another to underwrite.”

It’s weirdly possible to be both entirely right and completely wrong when handicapping a crisis.

With all that preamble established, let’s look at some books (in reverse chronological order).

How You Can Profit from the Coming Devaluation. 1970. Harry Browne.

“The lending of demand deposits causes inflation” is the key sentence in this work, which argues Keynesian economic policies lead, by definition, to the debasement of currency. This book came at an important time, as my colleague Ron Rimkus, CFA, puts it, right before President Richard Nixon sold the world fiat money in 1971.

Browne deserves some credit: Inflation did pick up significantly a few years after this was published, amid the so-called “Great Inflation.” Among economists, there’s still some debate as to why this period of high peacetime inflation happened. Allan H. Meltzer of the US Federal Reserve somewhat vindicated Browne in 2005, arguing that “widespread acceptance of the simple Keynesian model with its implication that monetary and fiscal policy should be coordinated. In practice, that meant that the Federal Reserve financed a large part of the fiscal deficit.”

Browne recommended a combination of cash in dollars (a month’s expenses), converting savings to Swiss francs and placing them overseas, owning $250 or more in silver coins as well as silver bullion through a Swiss bank, and creating your own retreat in an area full of “self-sufficient and individualistic” people for maximum safety.

I’ll leave it to you to research how those recommendations performed.

Beat the Millennium Crash: How Profit from the Coming Financial Crisis. 1999. Jake Bernstein.

With a trader’s sensibility, Bernstein compares the predicament of an investor at the start of the millennium to that of someone in a crowded movie theater just before the audience notices there is a fire. Noting speculative excesses in markets around the world, Bernstein maintains that markets are headed for a fall and the Y2K bug is just another reason why they are about to plunge over the cliff.

This is another reminder of how it’s possible to be right and wrong at the same time. Bernstein spends a lot of time analyzing the negative implications of a Y2K crisis, which did not actually happen. But his statement that the top may not happen exactly on 1 January 2000 was perhaps over-hedged. The peak in the S&P 500 came on 24 March 2000.

Bernstein recommended reducing holdings of stocks to about 10% of a portfolio, adding a 20% allocation to precious metals and equivalents, holding 40% in cash, 15% in real estate, and 15% in collectibles. As before, I’ll leave it to you to assess performance, though one imagines Bernstein had a pretty good start to the millennium.

How to Profit from the Coming Rapture. 2008. Steve and Evie Levy.

I’ll initiate the discussion with a “strong buy” rating: This is a classic.

Let me just excerpt the first few sentences of the foreword:

“The Rapture is coming.

“The Tribulation, a horrifying nightmare of bloodshed and destruction, will follow.

“And that means one thing: investment opportunities!”

The Levys proceed to lay out a framework for entrepreneurship in a world of unfolding tribulations, where the medium of exchange has shifted to canned tuna and beans. They even create helpful charts, which they invite us to use for our own calculations.

One More Thing

Before moving on to the other recommended reading material, I need to warn you about something: This article contains snark, which carries with it the risk of assuming that our own investment programs are better thought through and documented than those discussed, which were transmitted in full-length books.

Do not make that assumption. The problem with putting an investment thesis in a book is its permanence: Dow 36,000, for instance, has not aged well. But the benefit is that the authors have been forced to think about what they’re doing and why they’re doing it with enough precision to communicate that information. All of us have something to learn about the communication end of investing.

There are a lot of potential opinions you can have, but defining those you take action on is important. That way you can stick to them. Remember what happened to Harry Browne: His runaway inflation actually materialized, but that happened a few years after the publication of his book. The chart below shows how $100 invested in gold on 31 December 1969 would have performed over the following decade.

So if you’re thinking about doing something unusual in response to a crisis, make sure and ask yourself how long you’ll be able to stick with it.

Read These, Learn Something

• “A brief history of chairs.” (The Paris Review)
• A visual guide to neural nets. (The Asimov Institute)
• “How to Raise a Genius” (Nature)
• When will New York City sink? (New York)
• In memory of Dan Fredinburg. (Quartz)

Questions

• Is a self-driving car engineer really worth $10 million? (Recode)
• “Why Are Japanese Designers Choosing Copenhagen for Their European Debut?” (HYPEBEAST)
• What happens when your viral idea has no basis in fact? (New York)
• Will you perform better if you eat better? (@Z_Xavier_R)
• Is there anything better than a screwdriver to find a nuclear bomb? (The National Interest)

Talk to the Bot

Would you mind if your friends started building chat bots to serve as personal assistants? Sandi MacPherson got one, and it changed her life. (LinkedIn)

What will we do with you?

The most popular course at Stanford is “Designing Your Life.” It is now a book you can read. (The New York Times)

Just Saying

CFA Institute has a guide to coming up with investment ideas that might be of interest. (CFA Institute)

Long Product Cycles

The final revision of the English Standard Version (ESV) Bible dropped this summer. Have you ever wanted a biblical heirloom? For devotees of the third-most popular Bible translation in the United States, now might be the time. The publisher’s board voted unanimously that this version will keep things consistent “in much the same way that the King James Version (KJV) has remained unchanged ever since the final KJV text was established almost 250 years ago (in 1769).” (Baptist News Global)

Wiggle a Little

If you like music made with 0s and 1s, check out this collection of Armada Captivating’s top tracks. In my capacity as a staff member of CFA Institute, I recommend turning the volume all the way up and engaging in vigorous physical movement. (SoundCloud)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: iStockphoto.com/JLGutierrez