Olympic Super G and Short Term Financial Markets.

Marc Girardellii. His father was famous on the World Cup tour for being very litigious and ill tempered. During Marc’s youth he fought with the Austrian federation so much that Marc ended up racing for Luxembourg for most of his career. In Albertville, a week after Marc’s win in the Super G, his father punched the race director for the combined event, he thought the track was in poor condition for the Olympic event. To this day Marc remains one of the most talented all event racers of all time

In 1992, Corinne and I were very excited to go see the Olympics Super G in Val d’Isere. The race was scheduled to start at 10 AM, however at 9 AM, Val d’Isere was wrapped in a thick blanket of fog, and it appeared that the race would have to be cancelled. The race director announced that the start would only be postponed to 11 that morning. I thought this was most likely a desperate decision in the hope the weather would clear, but to my surprise, by 10:30AM the fog cleared, and the race started as planned at 11 AM in perfect conditions.

As I watched Marc Girardelli’s amazing winning run, I recalled that the planning committee had requested that weather sensors cover the race mountains with a very fine mesh, thus allowing temperature, pressure, wind speed and humidity to be measured in real time at points 1 km apart (as opposed to the usual 10 km). Complex equations describing thermodynamic equilibria, mass transfer and fluid mechanics could thus be crunched live by the supercomputer at the national weather center allowing the fog burn-out effect to be predicted with uncanny accuracy.

A deterministic and very complex system such as the weather is, by definition, a chaotic system. Massive data collection, extensive modeling, and enormous computing power can give some level of predictive power. But for anyone without these tools, a chaotic system is just like a game of chance.

Now consider the Powerball drawing system which consists of a large sphere containing numbered balls, each of equal weight. The balls are stirred and then drawn. This is also a deterministic system, the laws of mechanics of solid movement are perfectly obeyed at all times. However, the stirring and the multitude of balls makes the movement of this system very complicated. Furthermore the powerball administration makes sure that no one can have access to any live data that could possibly feed a numerical crunching of the movement. This system is deterministic, very complex and allows no data collection. This is a chaotic system that becomes a game of chance for everyone.

The short term movements of financial markets are also a chaotic system. Some groups do attempt large live data collection, and try modeling and crunching equations numerically (they are called quants) but, for the immense majority of investors, short term fluctuations are no more predictable than Powerball. In fact, the quants themselves know that they have very limited predictive power. For us, short term market chaos is a game of chance, worse than that, it is well documented that our emotions systematically push us in the wrong direction. Faced with a game of chance skewed against the interest of investors, we think it better not to move, avoid having to pay capital gains taxes, and avoid decisions that could hurt the investor’s long term interest.

Perhaps you think “I know this virus is going to have a devastating impact ”, I think that too, but the real question is: “Will it be better or worse than the market expects?”. Remember, the market is composed, in part, by quants with huge tools, and as a group they make prices. How can we possibly out predict all these master predictors armed only with our gut feelings? Only by chance. Or if you prefer, statistically, we can’t out predict the market. So we sit on our hands.

The urge you have to do something when markets are stressed is a very human instinct. John Maynard Keynes called it the animal spirit. That instinct alone has been broadly documented as hurtful to the investor. Nevertheless, if Anselme Capital is your advisor, we recommend that you do the following:

1. Refinance your mortgage. The mechanics of market chaos has just dropped the rate of loans, take advantage of it. This is money in your pocket. If you don’t refinance, that is an opportunity cost.
2. Rebalance your account. In the large fluctuations we just went through your long term portfolio composition might have veered off the composition that is your chosen optimum. Come back to it. If you are a client of Anselme Capital you are in luck because we are rebalancing right now.
3. Bring into your investment account all cash or near cash you have around. We will invest it. In fact we will start investing it in bonds so that your overall portfolio will be stabilized in the short term, we will then progressively shift its composition to your long term posture.
4. Stay cool. Call us if you are anxious, we are here for that. We just went through a 20+% drop in the S&P, that is a bear market, these situations occur every three or four years on average in the last century, they are definitely part of the long term investor’s landscape, your calm during these trying times absolutely determines your long term success.

Be cool, be safe.

Marc Anselme