Safe Ice? – Part 1

Fishing is typically seen as a safe, (mostly)relaxing, warm-weather activity. While the weather is nice and temperatures are high, it can be an activity that is done at all hours- early, late, or overnight; it can be performed socially or in isolation; or casually and at the spur-of-the-moment. Even warm water ventures require operating safely and paying attention to the environment. Ice fishing can provide trophy opportunities as well, but environmental awareness becomes a much greater factor in successful operations.

For example, last December two fisherman on Lake Minnetonka, Minnesota had to pull themselves from the water after their ATV plunged through the ice as they were traveling to an ice fishing house on the lake. Both men survived, but local authorities gave cautionary advice to residents who were considering venturing out on the lake, as recent warm weather had degraded the ice in many places. It was cautioned that one could walk on the ice, if the depth of the ice was checked as one moved, but moving out on it in a vehicle was strongly discouraged as inconsistent ice depth could result in further accidents.

The point of this post is to help provide an understanding of the current depth of the ice as it relates to investing in the public stock and bond markets and to begin to develop a framework for dealing with the current conditions as a generalist investor. History is as strong a guide to current conditions as one is likely to get, with numerous articles and books having been written that express authors’ experience and wisdom across time that can be applicable to the current era. These works can be useful in constructing an individual approach to money allocation.  One part of the equation for developing a framework is gaining an understanding of what one’s own approach should be, with a second piece the outlook on likely future returns and safe return of principal.

I believe an interesting guide to the former has been expressed well in The Battle for Investment Survival(G. Loeb). The author first points out that anyone with excess savings becomes an investor: “Any earner who earns more than he can spend is automatically an investor. It doesn’t matter in the slightest whether he wants to be or not, or even whether he realizes that he is investing,” and goes on to clarify the objective of investing: “The real objective is fundamentally to store excess current purchasing power for future use.” Any decision involving extra capital is an investment decision, be it adding to cash savings, making an additional mortgage payment, or buying into a mutual fund. With this outlook established, Loeb continues by defining the objective for an investor as: “To achieve success, one must set the investment goal very high. Not only that but the goal must also be a speculative one, for only there lies safety – paradoxical as that may seem.” Further elucidation is provided a bit later: “It is absolutely futile to try to get results except by buying into anticipated large gains. It is far better to let cash lie idle than to buy just to ‘keep invested’ or for ‘income.” Investing for supposedly “safe,” small annual returns, a 6% target, for instance, is put forward as not likely to work as well as more speculative investing, as “Trying to invest for 6% is like trying to retire. You are the “absentee” creditor or part owner as the case might be. You sit back and stop thinking, letting the money work by itself.” His practical recommendation based on this outlook was to take ~10% of one’s available cash resource and use it to speculate in investments with the express purpose of catching a double with the allocation.

A small, concentrated position focused only on opportunities for large percentage gains is seen as the best approach to navigate the investment landscape. Such an outlook forces one to concentrate only on the best ideas that one may have or come across, and encourages active, rather than passive, management of the investment. Concentration encourages an instinct to look for large gains, as the impact to one’s bottom line would otherwise be negligible and not worth the effort, as well as the instinct to sell if a position goes against you and needs to be closed.  It tends to be easier psychologically to manage a small position, as one is not counting on the principle amount too greatly, and the emotional attachment to a position and fear of loss is not so great that it should be overly difficult to close it. “A backlog of cash is a great help in meeting emergencies and in freeing one’s judgment so that commitments are opened and closed for financial cause and not affected by need, fear, greed, or other human failings which are fatal to profitable security investment.” Combining this outlook with an approach that provides a selling discipline and broad overview of market conditions can actually be protective of an individual’s money, as one does not run the risk of total catastrophe and frees one’s research time for only the potentially outstanding opportunities. For developing the second leg of the approach, It’s When You Sell That Counts(D. Cassidy) is instructive in gaining understanding, and will hopefully provide the basis for a second post.

I am not a financial services professional.  All information on this site should be regarded as informational or for entertainment only, and not as actual investment advice.