Apr

29

 The chair asks: What fable of Aesop best explains the tendency to seek short term gain in speculation as the expense of the long term. Such situation often occur when it looks like the next 1/2 hour ( or day) will be very bad for your position but the next 8 hours (or week) will be very good. What to do? Be an ant or a grasshopper dancing and fiddling.

John Tierney, President of the Old Duck and Speculators Association replies:

In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

“Why bother about winter?” said the Grasshopper; “we have got plenty of food at present.” But the Ant went on its way and continued its toil. When the winter came the Grasshopper had no food, and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the Grasshopper knew:

“IT IS BEST TO PREPARE FOR THE DAYS OF NECESSITY.”

The REAL rest of the story:

I'm am ant. Always have been. Worked full time. Saved. Rented. Invested. Worked part-time, too. Saved more. Cars: '63 VW, '75 Civic, '87 Duster, '99 Saturn. All used, all stick, all good mileage. Vacationed in tents. Finally bought home. Paid off mortgage early. Never borrowed against it.

Others (grasshoppers) borrowed. Nice homes, big mortgages, big tax write-offs. Nice cars. Bank financing, tax write-offs on interest. Later, larger homes. Larger mortgages. Larger tax write-offs. Exotic vacations. On charge cards. Debt is good. Debt is smart. Some worked in financial fields. Neither sowed nor reaped. Middle men. Collected sowing fees. Collected reaping fees.

Early 80s: banks lent much to S. American countries. Countries go broke. Late 80s, early 90s: SLs borrow short expensively; lend long cheaply - go broke. Early 90s: bank bond holdings tank. Banks broke. Suspend accounting rules. Banks saved. 98: Nobel-winning geniuses bet on Russia. Russia goes broke. Geniuses go broke.

Consortium of investment banks saves day . 03-08: same banks make leveraged bet on real estate debt. Others (grasshoppers) can't pay. Banks go broke. Savers (ants) are losers. Low interest on savings. Less than rate of inflation. No return on loans for second homes and interest-only mortgages.

Much money lent and lost. All money comes from savers (ants). Banks and others (grasshoppers) lost other people's (ant's) money. Savers (ants) lost. Others (grasshoppers) gather to save system? Who needs saving? Grasshoppers. Who still has funds? Ants. Wonder what will happen?

On each occasion a pitiful remnant of ants were seduced by easy money and joined grasshopper parade. All have now joined 12 step program. First lesson is from Einstein: "Insanity is doing the same thing over and over again and expecting different results."

Ants looking for ways to withdraw from system. Grasshoppers trying same old thing and using government decrees to force ants into cooperation. If this effort fails only funds additional available will be from red ants. Good luck.

Russ Sears adds:

The problem with going for the short term gain is that they often are zero sum games, you against the world. Whereas long term gains often have more of a mutual benefit to them. Because of this if a long term outlook is opposed to its short term counterpart, the short term expected gain, generally has a much higher risks that is often ignored. (going long stock versus short term short position for example) Likewise if the short term gain appears too good to be true, it probably is. You are probably missing the true risks.

From nature, I recall from visiting Yellowstone, the obligatory warning of leaving food in the cars.

The bears will smell the food in an empty car. The bear will easily tear the car apart. He will leverage his size and get a quick easy delicious high calorie meal. Soon Yogi the bear will be hunting cars with food rather than foraging . And if left unchecked other bears will soon emulate his apparent windfall.

From Yogi's and his bear friend's point of view its a low risk, easy high gain meal. Of course Yogi is oblivious to real long term risks, people. He has totally underestimated, peoples ability and motivation to end his life. As more and more bears partake, the higher the risks becomes.

It's tempting to say, "Yogi's nothing but a dumb bear going on instinct. An investor would never get blind sided by unforseen risks"

But you must wonder WWYD (What Would Yogi Do?) in the mortgage bubble. If after all so many wolves as intermediaries left their marks on MBS's (mortgage backed securities). Would Yogi's instincts ever let him touch an MBS or worse a MBS CDO or CDO square, let alone leverage them up?

 


Comments

Name

Email

Website

Speak your mind

4 Comments so far

  1. Steve Leslie on April 28, 2009 11:54 am

    For those who wish to research Aesop I found this website particularly interesting. I hope it is helpful.

    sl.

  2. Anton Johnson on April 28, 2009 3:30 pm

    After the SARS fizzle, ants are loath to close out susceptible long stock market positions. The current risk/reward for a potential influenza pandemic dictates taking at least something off the table. Ants need to be prudent to survive and make it to winter.

  3. Mr Wolff on April 28, 2009 6:08 pm

    While I appreciate the classics as much as the next guy Aesop seems rather limiting. Allowing for modern fables which would you choose? Gordon Gekko or Tyler Durden? Ayn Rand or Karl Marx? (and if Rand then John Galt or Ragnar Danneskj√∂ld?) Keynes or Hayek? Friedman or Klein? Or are current events simply a crucible for Nietzsche’s Overman to appear and define his own morality? Or has that already happened?

  4. Steve Leslie on April 29, 2009 8:09 am

    I am lost by Mr. Wolff's streaming.

    Aesop has value as does the Old Testament. In Genesis we meet Joseph who was sold into slavery and eventually became in charge of collecting the grains in anticipation of the famine that was to follow. When such event transpired, the brothers who sold him into slavery came begging for grain to survive.

    Think of the American Indian who spends the spring and summer planting and the fall harvesting in anticipation of the harsh winters that will follow. The American farmer understands this well as we learn in the early 70's when the Soviet Union was in desperate need of grain and Nixon negotiated harshly with them and gained many concessions in return.

    It has been said that in war the battles are won during the preparation and the planning. The execution then becomes a formality.

    If one prefers children's stories I wrote in the past of Winnie the Pooh who was cautioned to guard his honey against the Heffalumps and Woozles who were sure to steal it when he were not watching.

    Other great investors have stated that one makes his money during bear markets, he just doesn't get it until later.

Archives

Resources & Links

Search