‘I believe that there really is a bubble brewing,’said billionaire investor Carl Icahn on the Fox Business Network 18 June 2015.
Icahn went on to say (emphasis mine):
‘They’ve [interest rates] never been held down this long and I don’t think anyone will deny that this is unchartered territory — and it could be very destructive to our markets and to our economy.’
And one final quote from Icahn’s interview:
‘…the Fed is really pandering to a lot of these guys on Wall Street that they really shouldn’t be pandering to.’
Icahn has made billions from the Fed’s post-GFC heavy handed manipulation of asset markets.
So why air these public concerns now?
Maybe he is talking his own book by suggesting the Fed start raising interest rates.
Or perhaps he is genuinely concerned about the increasing instability in the system created by an extraordinary period of zero-bound interest rates. Whatever Icahn’s motives are for stating the obvious on Fox Business, there’s no doubting the truth in what he said.
We are in unchartered waters. We have record debt levels. Record low (even negative) interest rates. Record high share markets but weak underlying economic fundamentals.
This cannot end well. The imbalances need to be corrected.
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Destruction of capital on an unprecedented scale is a very real possibility.
The world of investing that Icahn successfully inhabits is far removed from the one the average investor operates in. Icahn wheels, deals and cajoles. He understands how to mitigate risks. That’s the suite of talents you need if you want to make billions of dollars in your lifetime.
On the other hand, the average investor is told by the investment industry to hold shares for the long term and everything will work out just fine.
The average investor is simply grist for the investment industry’s poorly performing mill.
In March 2002, Associate Professor Wolfgang Drobetz and Friederike Köhler published a study titled, The Contribution of Asset Allocation Policy to Portfolio Performance. Here is an excerpt from the report:
‘Finally, we report that, on average, active management (i.e., stock picking and/or timing) has not even been neutral to fund performance, but rather destroyed a significant portion of investors’ value.’
Unlike Icahn, the average investor faces dual risks to their capital. The first is the potential destruction of value by the active investment manager they entrusted their money to AND the possible destructive forces of an artificially inflated market.
It’s for these reasons, I only invest (when the time is right) my family wealth in index funds and source my research and economic analysis from trusted independent experts.
Nearly 30 years in the investment business taught me a number of valuable lessons. You’ll not find these rules in any investment textbook. They are a product of experiencing firsthand what works and what doesn’t work…over the longer term.
- Keep it simple. Clearly understand what you are investing in and why. If you do not understand the investment and/or why you should be investing — DO NOT DO IT.
- Ensure costs are kept to a minimum.
- Over the long term, low cost index investing trumps the performance of actively managed funds nine times out of 10. Go with the low cost odds.
- Invest for ‘growth’ when markets are undervalued. If you invest when markets are overvalued you are almost guaranteed to ‘shrink’ your capital.
- Higher interest paying investments usually come with a cost to capital. The offer of an extra few percent could wipe out most (if not all) of your capital. DON’T BE TEMPTED.
- Treat research and economic reports from the investment industry with a healthy degree of scepticism. They’re in the business of drumming up business and then trying to hold onto it.
- Above all, be patient. Markets always proceed at their own pace. Your wants and desires are irrelevant. Trying to ‘force’ markets to deliver a level of return is a recipe for disaster.
- Use proven valuation metrics (Shiller PE 10, Tobin Q ratio, Corporate Equity to GDP etc.) to determine whether markets represent value or not
This investment approach and strategy would bore someone of Carl Icahn’s prowess to tears.
However, for the average investor it is designed to avoid them having an investment experience
that ends in tears. In my opinion the investing world we are confronting is one were there will be very distinct winners and losers.
Reading between the lines Icahn was alluding to what I think we are approaching…THE MOST IMPORTANT inflection point in investment markets since 1929.
There will be no quarter given when these markets finally decide to switch from constructive to destructive.
Anyone with money in the market will watch in varying measures of awe and helplessness as their value is destroyed.
Average investors who believed the marketing message of the investment industry — shares for the long term — will be the losers. They are going to face a period of painful reassessment…possibly postponing retirement indefinitely or rejoining the workforce (if possible) to make ends meet.
The winners will be those who heeded the warnings from the Icahn’s of the world and took the appropriate defensive action to protect their capital.
The coming collapse of the financial system will be like no other. The central bankers have used all their ‘tricks’ to reflate the previous market collapses of 2000/01 and 2008/09. The Fed’s credibility will be shot to pieces and markets are going to have to rebuild under their own steam.
This recovery will not happen in most investors’ lifetime.
It was Arthur Miller who wrote, ‘An era can be said to end when its basic illusions are exhausted.’
The era of economic growth by credit expansion and central banker manipulation is fast coming to an end.
Any lasting illusions that prosperity can be created from printed dollars rather than personal production will be totally and utterly exhausted.
After nearly three decades in the investment business I hold no illusions about the task that confronts investors over the coming years.
My simple rules for a disciplined, value oriented approach to investing are designed to navigate our capital through the dangerous and destructive unchartered territory the central bankers have taken us to.
Editor, Gowdie Family Wealth