Finance


Macro Contemplation

I view finance as the activity associated with the management and direction of the abstract representations of the economy; these would include currency through the spectrum to asset-backed securities. In the world of finance, speculators look after the risk taking and others secure a production related net income target. We all, as investors speculate to varying degrees, we choose a risk profile and invest in accord with it. The first contemplation one needs to undertake when entering the arena of finance is to clearly define your mission there - is it to secure a profit position, is it to invest, is it to be a trader, is it to speculate - clarity here allows one to enter the space and govern one's self in accord with the mission as opposed to being a news windsock with one finger over the enter button and one over the exit button.  

As an investment philosophy, the broader your scope the better, full spectrum of sectors, companies, instruments - all pursued with the tireless assessment to identify best of breed. Investment for me begins with the contemplation of the macro elements of the economy; geopolitical, economic cycles, demographics, monetary policy, general product cycles ... etc.. From the macro data, one discerns where the macro trends lie, Warren Buffett, when he sees a commodity super cycle, he thinks railroads - so an economic dependent origination assessment is required, to see how a given trend will filter through the economy. Having determined your best prediction of the economy and societal trends, one needs to find how the trends will find satisfaction for the demand they will generate in the arena of products and services; from here a list of companies or financial instruments while emerge. At this point one would choose best of breed in the company space or, for example, if gold was indicated as a holding - one would choose the appropriate ETF or instrument to take a position is gold.  At this point "trading" plays a role insomuch, as technical data will inform the best entry point to a given stock or instrument within a specified period, perhaps 0 to 12  months; during the period technical data will inform the purchase of investments intended as holdings. This is effectively a deep value investment strategy - the investments you make are intended to hold and generate growth - the only activity in your portfolio is to maintain balance for proper sector diversification and winnowing of laggards and selection of replacements. This is conservative investing, it can be profitable, during the Japanese malaise the best 10 Japanese "blue chips" generated nearly 300% return, 10 to 15% annually, when the general economy was in deflation. 

There is reward in risk, the above strategy is for the money one needs to secure them self in their non-productive years, then there is the fun money, fun money you can afford to loose, that money it is ok to risk. Here you can take an aggressive option position or play in the more aggressive instruments. 

In the world of risk management, the mission is clear, secure an agreeable operational outcome - hedge inputs and sales, secure a profit level and review the position at intervals and adjust if a better outcome is indicated. 

When working in the financial space one is working with the abstract representations of the economy on the one hand and the expansion and contraction of human sentiment on the other. The challenge with this reality is gaining resolution on which is affecting which and what is going to trigger an event. This contemplation is important in trading, of course, it comes to play also in shorter term financial system participation, like managing risk - hedging production inputs or commodity sale prices for example.  

We accept cycles in nature – spring, summer, fall, winter – the predator-prey cycle, etc. People not only accept these cycles, they want to preserve and protect them. Cycles are an inevitable element in the interface with the environment, the economy is an extension of the environment - ergo, the economy will have cycles – this is a good thing; we burn more heating oil in winter there is an effect on heating oil prices every year. There is a cattle cycle, absent extenuating influences, it runs ten years - it runs ten years because the gestation period of a cow is nine months - for the overall herd to build from a low, to affect increase in supply enough to reduce prices to effect the sale of the cow herd, to increase demand etc .. takes ten years - the Real Estate Cycle 5 to 7 years, the business cycle 7 years. Government interventions work at times to lengthen or shorten cycles, the US government's monetary policy in conjunction with its inadvertent underwriting of home lending extended the housing real estate cycle with a calamitous outcome. The point here is that real world cycles are anchored in real events, there is a degree of predictability here - one needs only inform them self of their presence and act in accord with them.      

Public sentiment is a challenging element in the assessment of market behaviour, it shows up in technical assessment, news and the like, vigilance is key here, history helps, as was said once - events, dear boy, events. Public sentiment does way on entry points for trades or positions in the risk management sphere and or general investing - it is a critical point of contemplation. Public sentiment, I believe is best managed by, technical assessment, historical observations and vigilance. 

Micro Contemplation 

In the micro financial space, contemplation centres around decision making; predicting, to the degree possible decision outcomes and the assessing of financial outcomes of decisions to inform future undertakings. To lease or not to lease, to borrow here or there on what terms, to engage in expansion or not, to do capital improvements or not. The joy in currency and the other abstract representations of the economy is the ability to see clearly in a concentrated way what is occurring as a result of your actions. There is always the bottom line, the cumulative outcome of choice, financial assessment when done correctly, gives resolution to or puts a fine filter on, the financial outcomes of operational decision making. 

I believe in taking the time to quantify and qualify business choice, to apply as much objective assessment as possible - science and data. When the science ends, however, judgement takes over, as the saying goes - it is the eye of the master that fattens his cattle - to put another colloquialism to work, two heads are better than one - an outsourced perspective is helpful in this space.  

General Comment on the Financial Space

In 1980, the abstract representations of the economy where at about par with world GDP, by 2006 they exceeded world GDP by approximately %300 - a phenomenon referred to by some as financial deepening. There are very real repercussions the emanate from this reality, John Kenneth Galbraith in his book on the causes of the Great Depression, used another name but cited financial deepening as one of five causal elements of the great depression. The financial fluff that was created in those years, in large measure still exists, the challenges that arose from opaque trading systems and layered abstract representations of the real economy have found no real redress, window dressing and lip service mostly. With that in mind, in the context of business management, the financial system should be viewed as a short-term tool to manage the financial matters. 

The financial sector requires representation in an investment portfolio, but vigilance is certainly required. At some point, there will be a rationalisation of the abstract and the real economies, and tactile assets will be your friend. We have recovered in large measure from the ills of exuberance, the recession took care of that, the un-anchored collective human psyche will come to play again - that is the reality of currency volume that is in no way dependent on the volume of goods and services in the economy - instability will be our constant companion - the key is to have it work in our favour.  
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