Eric Peters: “One Day Your Investment Style Will Blow Up: Will You Fold Or Double Down?”
Sunday morning brings us the traditional Weekend Notes from One River CIO, Eric Peters, whose panoply of topics under discussion today include systematic investing, economic forecasts, Fed reaction functions, Twitter algorithms, bond yields for the new abnormal, fear and greed, and of course “Rocket Man.”
Below are several excerpts from his latest weekly note:
“Whatever investment style you adopt will blow up someday,” said the CIO. “When that day comes, will you fold or double down?” he continued.
We were discussing systematic investing. I see its future dominance and am building my firm accordingly.
“If you’ve surrendered control to a machine, how will you make that decision?” he asked. Before I could answer, he supplied his own. “I’d rather practice making decisions along the way so that I’ll either avoid the blow up or at least understand my strategy in the crisis.”
That’s a credible position to take on the matter; for years I took it myself. But time changes most things, ourselves in particular. Day by day, month by month, we’re different people. Humble, hubristic, stubborn, objective, greedy, fearful, certain, confused, euphoric, depressed, and every imaginable combination thereof.
The two greatest advantages of developing decision-making algorithms are that they allow us to consistently be our finest selves, and they can apply our process across more markets than a single human ever could. But the difficulty of distilling profound complexity into a set of robust rules leads many practitioners to cut corners – which takes the form of choosing rules that worked in the recent past for seemingly arbitrary reasons, and building algorithms without sensible risk-mitigation to avoid its corresponding costs.
Such strategies put their investors at risk of catastrophic loss in exchange for a pile of pennies, and/or tend to make money in every time period except for the future.
But such pitfalls are not machine error, they reflect human weakness, and are thus common to both poorly designed discretionary and systematic strategies.
Because ultimately, every conceivable form of successful money management requires the experience to identify rules that tend to make money over time, and the introspection necessary to come to know our finest selves.
Bonus #1: Peters on bond issuance in the “illiquidstan” market:
Tajikistan issued 10yr bonds this month. Less than 1bp of mankind can locate Tajikistan on a map. Nearly all are Tajiks.
But the bonds paid 7.125% which is roughly what pensions need to prevent insolvency. Bahrain issued $3bln of 12yr paper at 6.75% ($15bln of bids). Iraq issued $1bln at 5yrs at 6.75%. Belarus issued 10yr paper at 7.63%. And Ukraine issued $3bln of 15yrs. $1.6bln rolled existing paper that nearly defaulted 2yrs ago when investors wrote off $3.6bln in debt and delayed payments for 4yrs.
This new issue yielded 7.37%.
Bonus #2: Rocket Man
“Did he really call me Rocket Man?” cried the chubby Korean kid. “Yes he did Rocket Man,” said some nervous sycophant in a cheap suit, saluting his Dear Leader.
“Did he call me a scared, barking dog?” barked earth’s most powerful man, typing a tweet. “Woof!” answered the President’s pack. “He called me a suicidal madman on Twitter!” stammered shorty, combing his black bouffant. “He said he’d tame Trump with fire?” asked The Donald, incredulous, swirling his sweep.
“He tweeted North Korea would be tested like never before!” screeched Kim, pounding the table, knuckles mere dimples, baby fat.
“He said he’ll detonate a hydrogen bomb over the Pacific?” asked our entertainer in chief, excited, knowing a sensational season opener when he sees one.
“Shall I go thermonuclear?” asked the itsy bitsy dictator. And his generals glanced left, right, unsure. “Shall I do it?” he screamed. The garden gnomes stood motionless. “Tell me, shall I mention Trump’s little hands?” asked Kim Jong Un, dead serious. They shook their heads in perfect unison; such a devastating insult would surely end 3.5mm years of human evolution. “Dear Leader, such an insult must be saved, savored,” pleaded his generals. “Very well, I’ll call him a dotard!” cried the child.
“Kim called me a dotard! A dotard! What the hell does that even mean?” whispered the steward of earth’s largest nuclear arsenal. An Ivy League intern explained, “Mr. President, it’s actually pronounced DOE-turd, and it’s a middle English word used by Shakespeare that means an ageing imbecile…” The Donald cut him off, “You’re fired!”
The room fell silent, the enormity of this unexpected crisis sinking in. You see, dotard is the kind of nickname that just might stick.
But at least the risk of nuclear Armageddon had receded. Because of course, it’s simply not possible to end civilization amidst such buffoonery.