“We don’t get paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely.”
- Warren Buffett.
In treacherous markets, it helps to have some core beliefs. The statement of investment intent most meaningful to us we first came across about 12 years ago. We make no apology for repeating it here. It’s contained within the late Peter Bernstein’s magisterial biography of risk, ‘Against the Gods’ (Wiley, 1998), which more or less tops our ‘required reading’ list for the engaged investor. It was the first time we came across the name Daniel Bernoulli, perhaps the first behavioural economist, who essentially said the following:
For a wealthy investor, the practical utility of any gain in portfolio value inversely relates to the size of the portfolio.
Or in plain English, if you already have a meaningful pot of capital, simply watch that pot. Bernoulli suggests, and recent award-winning behavioural financiers have proven, that most people are risk averse. We prefer gains to losses, for sure, but if we incur losses, the hurt tends to be felt twice as severely as the equivalent monetary gain. Since our clients are wealthy, our natural bias is to pursue capital preservation in real terms on their behalf. Capital preservation in nominal terms is easy, of course. We can just park our clients’ cash in a sound bank – if we can find one. But at an extraordinary juncture in market history, there are heightened risks even to sound banks, and there is, we believe, more than “usual” risk of a particularly unpleasant occurrence of inflation – indeed, a serious inflationary outbreak may be the only way of “resolving” the global debt crisis.
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