Riskmanagement
Relatively clueless weekend articles by the Wall Street Journal. This one, ‘Preparing for the next Black Swan’, is downright scary in the number of supposedly “heads I win, tail you lose” hedging/ ‘black swan-proof’ strategies currently pushed to customers – increasingly retail customers on top of the institutional ones. To be clear: we’re all for capital preservation, and our company’s success is built more on the back of risk aversion than of risk-taking. However, the article doesn’t do nearly enough to highlight that hedging instruments or strategies, especially untested ones, have not only flaws (have we already forgotten counter-party risk in 2008?) but most importantly costs, sometimes hidden, and in no way are these costs of a fixed nature. This has all the tell-tale signs of a fad…
The text inside did not appear in our Q2 2010 report in English, but we’ve brought it to Buysiders. It’s about “visibility” in the markets: do investors really alternate between periods of “excellent” and “very poor” visibility or is that just an illusion? We choose the latter. As Warren Buffett says, “Forecasts usually tell us more of the forecaster than of the futureâ€.
Read more about IP report excerpts, vol.7, part 1: on visibility
Many analogies with investing in this Slate post about a mountaineer’s worst mistakes. Quoting from the introduction: “(…) I was curious about the kind of attitude you develop toward error when a single mistake can easily cost you your life. I also wanted to test a hypothesis that I call “the paradox of error”: If your goal is to avoid making mistakes, then you must constantly assume that you are about to make one. That’s why fields like aviation and medicine have, at their best, a productive obsession with error.”
GP Investments’ Antonio Bonchristiano and Fersen Lambranho gave an interview for Valor Economico (in Portuguese) that should be pretty interesting for those interested in Private Equity in Brazil – not the least because it’s above-average in terms of frankness.
Two LEX articles highlight the accounting “dangers” still lurking around the world. Taken together, it’s a reminder that it’s easy to “learn lessons” from crises, but it’s extremely hard to actually implement changes. We would even point out that when changes are implemented, it’s not always an improvement…
Gustavo Loyola, a former Brazilian Central Bank chief, writes an op-ed today about the increasingly irresponsible legislative pieces enacted or proposed by our Congress. He goes back to the ages-proven concept that success breeds failure and vice-versa and applies it to Brazil’s current situation. We’ve been mentioning these risks in our latest reports and it’s part of our reasoning to keep a relatively high cash stake. While it has been somewhat tempered since our last report, some prices still imply a “blue-sky” scenario that we’re not comfortable with.
Read more about Brazilian Congress vs. fiscal responsibility
Recent stories about the increased credit lines at BNDES highlight the issue of government spending. There have been many other initiatives that translate into increased spending, and one is reminded that this is an election year. The temptation to focus on the primary fiscal surplus could, for the less skeptic, hide the dangers of this growing spending binge.
In this Q1 2010 report, we describe how the last few months were a period of much study and few operations. We have found ourselves in a phase with few new situations in which we could have great convictions. We also announced the “Prêmio Investidor Profissional de Arte – PIPA” to our clients.
This roundtable on “The Demographic Dilemma” by Booz & Co. reminded us of the informational challenge as Ms. Wang insisted on it: what are the actual measures of the “impact” of aging, what should we be looking at? Without information that leads to intelligence and then action, it’s just an empty debate. Our main point is that this informational dilemma occurs in plenty of other fields and that we must always be mindful of the fact that sometimes there’s simply not enough information to draw insightful, actionable conclusions.
It’s been 20 years since the “Confisco”, the seizure of assets from current and savings accounts designed (so to speak) to deter then-rampant hyperinflation. Brazil was then in default on its external debt and had precious little reserves… But the point here is not to judge decisions taken under extreme distress. Twenty years. The very fact that it seems like ancient history shows how far we’ve come, yet it still serves as a fresh warning.
