Smile When You Say That, Partner
Markets are ruled by greed and fear. Or so they say.
For example, Warren Buffett famously declared, “Two super-contagious diseases, fear and greed, will forever occur in the investment community… We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Which is just a wordier version of the old stock trader maxim: “Buy on fear, sell on greed.”
Does this really tell us anything? Fear and greed are “super-contagious diseases.” We’re all infected. Everybody’s greedy and fearful.
Buy on fear – when stock prices will go down. Sell on greed – when stock prices will go up. But you can turn the maxim upside-down and it’s just as true. Buy on greed – when stock prices will go up. Sell on fear – when stock prices will go down.
“Buy low, sell high.” Duh.
If we used fear and greed as our sole investment guidelines, we’d be buying everything all day long and, at the exact same time, selling everything we just bought. Strange investment advice… Weird investment portfolio.
Let’s rethink what we mean by “greed” and “fear.”
Note that both words are prejudicial. Saying that fear and greed control markets is the same as saying, “We investors are cowards with sticky fingers. Our decisions are the result of shameful panic and naked avarice. We’re chickens and pigs!”
Speak for yourself, Warren Buffett.
If we used fear and greed as our sole investment guidelines, we’d be buying everything all day long and, at the exact same time, selling everything we just bought.
Investors should steal a page from the “politically correct” creeps on campus and protest this use of “hurtful and insensitive language.” We should create a “safe space” – right here in this column – where a “historically oppressed group” (oppressed by the IRS and SEC) can “raise awareness” of “investment justice issues” without being exposed to “offensive speech.”
We won’t call it “greed” anymore.
We’ll go P.C. and call it “a desire to maximize human potential.” No one can object to that. Maximizing human potential is a good thing.
After all, maximizing human potential is what we humans do with the money we make in the markets. Money has potential. Potentially, our money purchases food, clothing, and shelter. Money pays for education, supports culture and the arts, funds charities and other worthy causes. (And too bad about those of us with the potential to be huge jerks with our money.)
Money is like water. Water can be used to slake thirst, irrigate crops, and wash the dog. We wouldn’t want to go without water just because it’s also used for waterboarding.
“Maximize human potential” – when we put it this way, Gordon Gekko’s “Greed is Good” speech in Wall Street becomes a glorious paean to market capitalism even though the movie was directed by notorious Hollywood lefty Oliver Stone who hates capitalism.
Here’s the script, slightly rewritten:
Gekko: The point is, that maximizing human potential is good.
Maximizing human potential is right.
Maximizing human potential works.
Maximizing human potential clarifies, cuts through, and captures the essence of the evolutionary spirit.
Maximizing human potential, in all its forms – potential for life, for money, for love, knowledge – has marked the upward surge of mankind.
No wonder Gordon Gekko has become a folk hero. He’s like Archie Bunker (also conceived by a lefty, Norman Lear). These are characters that were created for us to hate, but we took them to our hearts as men who called it as they saw it.
The lefties ended up kicking themselves in their own ass. We can help them do it again if we change the word “fear” the way we changed the word “greed.”
Instead of saying “fear” we’ll say “alertness to detrimental inequalities of outcome.” That has a politically correct ring to it. And what’s more detrimental than taking a beating in the market? What’s a worse inequality than having a bank balance that equals zero?
I’ve always wondered what FDR meant by “The only thing we have to fear is fear itself.” But, using our new terminology, FDR’s statement starts to make sense: “The only thing we have to be alert about is staying alert.”
Besides, I don’t think “fear” should ever be used in a prejudicial way.
A Day Without Fear
You get up in the morning and brush your teeth with Drano. It can dissolve a hairball in the sink drain so it must be good for removing plaque from your teeth.
You stick your head right under the Keurig and drink boiling coffee straight from the spout, tip the skillet to your lips to slurp your fried eggs, and tell your wife she’s gained weight.
You back the car right through the garage door – it’s supposed to open automatically, isn’t it?
You drive to work at 100 mph reading your e-mails and ignoring red lights, call your boss an idiot, and go out to lunch at a biker bar wearing a pink pussy hat and an “I’m With Her” button.
A Day Without Fear should be more properly titled, Dead by Noon.
Fear is never to be scorned or mocked. Fear is a reflection of risk. Given the current state of the markets, it’s a very reasonable reflection. But all markets at all times can – and ought to – contain fear. A bull market is no exception. A rising tide doesn’t lift all boats – not if the boat’s anchor chain is too short.
Under Armour stock lost 50.3% of its value during the bull market of 2017. Maybe the problem is that Under Armour was anchored in too many chain stores. Or maybe the problem is global warming and people have quit wearing underwear. Whatever the problem, investors weren’t fearful enough to foresee it. Roughly half of the Under Armour loss occurred last February in one trading day.
The need for fear is what got my attention in 2004 when the Chicago Board Options Exchange began trading its Volatility Index –the VIX, or the “fear” index.
The VIX is calculated using S&P 500 put and call options expiring over the next 30 days. It doesn’t pretend to predict markets. Instead, what the VIX does is, in effect, predict what investors are predicting. It foretells the mood of the market rather than foreseeing the market itself. It gauges “alertness to detrimental inequalities of outcome.”
I have an old friend at CBOE, Jay Caauwe, who is Managing Director, Business Development, CBOE Global Markets. When Jay told me about the VIX, I was excited.
“You mean,” I said, “that I can buy and sell fear!”
“Yep,” said Jay.
And I started to think how useful this would be, not only in investing, but in the whole of life.
I was a timid child, afraid of all sorts of things – clowns, the dark, and a large monster that lived in our attic. The attic door opened into my bedroom. Before I went to bed (with the light on), I had to check at least three times to make sure the attic door was locked. (Although what good a flimsy hook-and-eye would have been against a monster, I don’t know.)
If I could have sold fear, I would have been the richest third grader in the world. I could have bought the circus and fired the clowns, lit the whole neighborhood with arc lights, and hired Bill Murray, Dan Aykroyd, and Harold Ramis before they were famous, then fund the development of their portable cyclotron proton packs to neutralize the negatively charged ectoplasmic energy of the attic monster.
As with many timid children, I turned into a reckless adolescent. If I’d bought fear – instead of a motorcycle – I would have had fewer broken bones and more skin on the left side of my body.
But the trouble comes in knowing how much fear to sell or buy. The problem is measuring risk. And measuring risk is a problem for which there is, alas, no easy answer.
Jay Caauwe took me to a CBOE Risk Management Conference. We attended the sessions on the VIX. Most of the speakers were “quants,” mathematicians specializing in quantitative analysis.
The quants all had PowerPoint presentations that looked as if Jackson Pollock were still alive and working in graphs and Venn diagrams instead of splashes of house paint.
The quants talked about portfolio performance alphas, volatility betas, standard deviation sigmas, and all the risk sensitivities and hedge parameters expressed in Greek letters – delta, vega, theta, rho, lambda, epsilon… I felt like I was in some awful fraternity initiation shotgunning coffee instead of beer.
I said to Jay, “I can’t understand a single word they’re saying about measuring risk.”
Jay just smiled.
“P.J.,” he said, “if you could measure risk, it wouldn’t be risk.”