The Rothschilds, A-ha, and Blood: What You Need to Get Superior Investment Returns
Charlie Munger, Warren Buffett’s cousin and business partner, predicts an economic crisis with most people losing everything in its aftermath (see his interview). That’s bad.
However, Nathan Rothschild, one of the members of this famous banking family, was credited with saying that “the time to buy is when there’s blood in the streets.”
Historians are still arguing whether he intentionally exploited the false rumors about Napoleon’s victory in the Battle of Waterloo in order to make a fortune by accumulating British government bonds that were selling at a steep discount during the financial panic.
Some critics say he had known the battle’s actual outcome from his informers on the continent before the false rumors started to spread. His admirers say he first delivered the accurate news of Napoleon’s defeat to the government and started to accumulate a huge bond position later. The eventual return was 40% in just two years.
Actually, the full original quote was “the time to buy is when there’s blood in the streets, even if the blood is yours.”
In 1988, A-ha, a Norwegian band, released a single The Blood That Moves The Body that had the following lines:
“The blood that moves my body
Now covers the ground
The blood that moves my body
Now colors the ground…”
The lyrics are somewhat enigmatic. Some say the song is about teen suicides in Japan, while others suggest it is about Gabriel García Márquez’s short story.
My suggestion is that the guys were just astute investors waiting for the right moment to start buying cheap assets.
What is the morale of this story?
You can get superior investment returns when
- you have access to superior information. It requires developing a network of mutually beneficial personal connections. Insider trading is safe and profitable from an investment point of view. However, even in this situation you have to become an insider first. It is not so easy. Besides, you might go to jail from time to time;
2. you have superior analytical abilities. First, you should be good at mathematics. Mathematical equations can describe qualitative economic relationships pretty well. That’s the beauty of mathematics: if you change one variable in a mathematical equation, some other variable in this equation must also change to maintain equilibrium. It is sometimes difficult for people who are not good at math to grasp this essence of economics. This is one of the reasons why there are so many persistent illusions that a portion of freshly printed money or a life in debt will ensure a steady rise in your level of economic and financial well-being.
However, being a genius rocket scientist is not enough. Mathematics allows us to determine WHAT kinds of changes in the economy should occur, while psychology determines the MAGNITUDE and TIMING of these changes. That is why people with a strictly technical mindset often find economics and, particularly, financial markets to be such a “tough nut” to crack. Having lost a significant part of his fortune as a result of the bursting of a financial markets bubble, Isaac Newton, one of the greatest physicists in the history of mankind, could really utter the phrase so frequently attributed to him: “I can predict the movement of heavenly bodies, but not the madness of crowd.”
3. you have superior psychological abilities. Actually, there is some psychological meaning behind Nathan Rothschild’s full quote: you should be buying assets even when you personally are scared to do anything. If you check stock quotes every 10–15 minutes, cannot focus on performing your job tasks, cannot sleep properly, feeling the need to check the quotes of financial instruments at 3 a.m. and begin to notice that the only thing that helps you is alcohol and weed, then psychological stability is unlikely to be your strongest trait.
If you do not have access to superior information, while your analytical and psychological abilities are just average (it is not a tragedy whatsoever), then stick to diversification. If there is a reasonable diversification of the investment portfolio, it is possible to reduce the level of risk, while maintaining the same level of return on investment.
Just do what you love. It will make you go further and deeper compared to others. That is a very good basis for you to be more competitive and more professional in the field of your interest. And it feels good.
