Jon Moulton – private equity legend and chairman of Better Capital

Jon Moulton is a veteran of the private equity industry and the chairman of Better Capital. To his peers in the world of finance he needs no introduction. Through this interview, our subscribers can benefit from his unique insight into economy and industry related topics.

BB. How is Better Capital different from other private equity firms? How is it better than other companies that you’ve previously been associated with, both in what it does and how it does it?

JM It’s clearly better because of its name!

What it does is turnarounds – it only does turnarounds, so in that respect, it’s quite different from most private equity firms. We don’t buy companies typically at auctions and win by paying the most – we win deals by being very flexible, by moving very quickly and by taking aggressive action. The firm is set up in the form of a Quoted Limited Partnership which is a unique structure. It is the highest rated private equity company on earth at the moment in terms of its premium-to-net assets.

BB Your stated views about the economic future of this country have not changed since the elections last May and the outlook is still bleak, you say.

JM Probably. I fear things are looking a little grimmer today than they were last year. I think there is a great deal of uncertainty – we’ve got an economy awash with debt and we’re still running up a big deficit despite all the cuts that are being talked about but not yet implemented. That’s the same for the rest of the developed Western world. Interest rates are at ludicrously low levels. If they were to rise we would see an amazing amount of recession-related problems again. It all seems very unstable to me. I think interest rates will break up at some point and when they do, it will hurt.

BB Even if the cuts are implemented, you don’t see any way out?

JM The cuts are not enough. Even if the government gets through all the cuts that it is talking about in the UK, we don’t start to see any quality of government income and spending until 2015, so that’s a long period of adding to an already massive deficit. And that’s on the assumption of steady growth, low interest rates and no international financial crises on the way through. That seems very unlikely to me, so I think the debt will continue to rise. Which is actually something I feel quite strongly about: it’s wrong to be leaving debt for either our kids to pay or default on our creditors or inflate our debt away so that we don’t pay the same value that we took. I would welcome what would probably mean a much tighter and more difficult early period by actually taking through much bigger cuts now. The government might take out £80 billion over the next five years in pieces, in terms of annual savings – to get the budget balance right at once you need to take about £150 billion out.

BB A Wall Street legend quipped in an off the record conversation with us that the so called emerging markets could be equally defined as SUBmerging markets. How do you define emerging markets? Would Eastern Europe be perceived as an emerging market, or a peaked or a distressed one?

JM I think Eastern Europe’s quite interesting because it’s got a mixture of distress – oil industry’s in decay – and a bit of growth, and because the new middle class is driving the market forward through consumption. But really compared to an India or China East-European countries are not emerging markets – they are relatively mature, slower growing markets. The definition can be interpreted however you like, I suppose – emerging markets are pretty much anywhere apart from the UK, as far as the Brits are concerned.


David Rosier – CEO and co-founder of Thurleigh Investment Managers

Enter the Dragon: David S. Wong interviews Thurleigh’s David Rosier

The S&P 500 index ended 2011 relatively unchanged despite a year of high volatility driven by the European Sovereign Debt Crisis and the pertinent risk of double dip recession. During the year, the markets witnessed the major impacts of the Arab Spring, Japanese earthquake, downgrade of the US credit rating and the risk of a Eurozone country defaulting on its debt obligations – none of which were ‘predicted’ by Wall Street analysts in the beginning of the year.

The future is a lot harder to predict than Wall Street would have us believe in. As Nassim Taleb remarked, “To prophesize, don’t add anything to the future; just figure out and eliminate what will not survive.” This Popperian view that all investment hypotheses are provisionally accepted until proven wrong may not seem comforting to investors. Nonetheless, it has not stopped the influx of money flowing into hedge funds.

Hedge funds on average lost 4.83% in 2011 despite amassing a record $2.04 trillion in total capital under management in the first quarter of 2011. The industry – which caters to wealthy and institutional investors chasing higher returns for bigger fees – appears to be licking its wounds as fund managers finished the year in the red. The hedge fund industry which prides itself on outperforming the market has failed to live up to expectations and delivered one of their worst annual performances last year. As 2012 – the year of the black Dragon according to Chinese Zodiac – rolls on, can the industry reverse its fortunes?

B Beyond caught up with David Rosier CEO and co-founder of Thurleigh Investment Managers.

David Rosier and Charles MacKinnon, founders of Thurleigh Investment Managers, are a rare breed of investment managers who have skin in the game. David and Charles stress the importance of ‘eating your own cooking’ and have their own personal wealth invested alongside their clients’.

BB In your view, what is driving the current market conditions?

DR At the moment, there is greed and there is fear. There is greed because you are leaving your money on deposit and earning next to nothing and there is fear because the markets have become so volatile. It is a ‘risk on risk off’ mentality. The flight to safety or what investors perceive as safe investments has been driving this ’bubble’ in the gilt-edge securities. I mean, it’s mad to buy 10-year gilts yielding less than 3% when inflation is 5%.

BB Has this affected your strategy?

DR The way we implement our strategy hasn’t changed. We have always focused on asset allocation and academic research has shown that 90% of portfolio returns can be attributed to asset allocation rather than stock selection. We have always invested in a mixture of index funds, ETF and absolute return funds. We believe that by active asset allocation it is possible to capture short-term cyclical opportunities to enhance the returns without increasing risk. I’d say the main change is we no longer invest in hedge funds with the exception of a few CTAs (Commodities Trading Advisors). People got very frightened in 2008.

BB Why do you no longer invest in hedge funds?

DR We no longer invest in hedge funds for two reasons: liquidity and control. Firstly, our clients wanted liquidity. After the credit crunch, our clients would ring us up and ask ‘how soon could we liquidate our portfolio’, not necessarily doing it, but just the comfort to know they could turn it into cash. Secondly, when you invest in hedge funds, you lose the element of control. In early 2007, we put orders on to sell the hedge funds, but when we wanted the cash to invest – when markets had fallen – we couldn’t get the cash. It’s not that we don’t think there are some good hedge fund managers out there. The structure or the lack of liquidity is something that neither our clients nor we can take. Also, the UCITS III funds can essentially do what hedge funds do with slightly more onerous restrictions. With a UCITS III fund, you can get similar investment policies with the added benefit of daily dealings.

BB Can you tell us about your investment strategy and has that changed recently?

DR We have four core strategies based on volatility. The very low risk strategy has a maximum volatility of 4%, the low risk is 6%, medium is 8% and the high risk is 12%. Our strategies have not changed as we actively manage them to the desired risk levels. We are constantly checking our proprietary risk models to ensure our strategies run to a certain volatility level.

BB Any thoughts on the European Debt Crisis?

DR As central banks continue to debauch their currencies, government bond yields do not offer a smart risk-reward profile. We think there is a distinct possibility the Eurozone area would fragment with either departures or some form of dual currency emerging (convertible euros and non-convertible euros) to enable the most indebted nations to reflate their economies. It is unlikely for the Eurozone to survive in its current form. Regardless of the outcome, there will be a wealth of investment opportunities that will arise out of the ashes of the Euro project.

BB Any insights on investing in 2012?

DR We think that the large growth economies of China, Brazil, South Korea and Taiwan will continue to grow, and their currencies and bond markets will continue to deepen and strengthen. Within the equity and the bond portfolios, we will continue to move them towards a higher yield profile. We currently have 20 per cent of our bond portfolios exposed to high yield, and we anticipate growing this significantly at the expense of the strategic bond positions. Within equity portfolios, we anticipate altering the weighting of the indices and funds we use to increase the dividend yield significantly with a continued focus on global multinationals.

For more information on
David Rosier or Thurleigh please check out:


Cheviot’s Michael Kerr-Dineen

David S. Wong interviews Michael Kerr-Dineen, CEO and co-founder of Cheviot Asset Management.

Michael Kerr-Dineen is one of those financiers whose focus on class and quality can only be overshadowed by his determination to deliver on his promise. He has demonstrated this by walking away from giants such as UBS to prove that business can be done with complete honesty and integrity. As the former Chief Executive Office of UBS Liang & Cruickshank, Michael led 80 bankers out the door when he left UBS to form Cheviot in 2006. In less than five years, Cheviot became one of the UK’s largest independently owned investment firms with over £ 3.8 billion in assets under management.

Below is an extract of an interview with Michael Kerr-Dineen, published in full in B Beyond magazine’s Autumn 2012 edition.

BB I would like to ask you about your views on the current Euro debt crisis.

MKD I am very bearish about the whole thing with its political side. Europe was in denial about it for a very long time and I think they are probably just coming out of the denial stage. You just cannot engage in quantitative easing without longer term implications. The fact is, whatever they do in relation to piling money into the economies, the debt simply will not go away.

It is down to Germany who has obviously benefited from the whole situation. They are famous for taking decisions in their own economic interest, almost prepared to subjugate their political freedoms for their economic interest. However, for the first time you see splits within the German elite as to whether this is a good idea or not. It was always unwise to have a single currency without a genuinely integrated fiscal and monetary policy as well. So inherently there was a flaw from day one. Greece, Ireland and Portugal were relatively minor problems. Italy is obviously a big problem, Spain is a big problem, and the French banks too, both in their domestic markets and their sovereign lending. Even without the benefit of hindsight, it was always ridiculous to have a single currency system without integrating fiscal and monetary policies. Interest rates will continue to remain low for the foreseeable future.

BB What advice would you give people looking to set up their own firm like yourself?

MKD It is tough. It is perfectly clear that the trend is to move away from big organisations into smaller boutique firms. Part of the reason why it is difficult to start a fund is that you need a brand and a track record. It’s difficult to differentiate yourself from the rest and I think in some ways we have managed to do that at Cheviot. You will also need strong relationships and credible base team to establish a critical mass.

BB What do you think is the greatest pitfall of the finance sector as a whole? Or the greatest opportunity going forwards?

MKD The IFA (Independent Financial Advisors) and RDR (Retail Distribution Review) debate will certainly create big opportunities for the discretionary fund managers like us. The IFAs are just bailing out which will create opportunities for us. I think the structure of investment management firms is also important and I like to think that we have got it. There is still a lot of money out there that is not managed by anyone and accessing it through IFAs is a distinct possibility. Most of the inflows we get are generally new money. People are also moving to a more personal approach due to the bad performance of mutual and pension funds. Structural changes in the industry will force private banks and some wealth managers to move up the value chain, quit the market or seek a managed exit.


NB. Six months after the initial interview was conducted, Michael’s bearish outlook of the European Debt Crisis from the political perspective continues to unfold. Spain and Italy’s borrowing costs continue to soar as the European Central Bank cut interest rates to a record low of 0.75%. The US Federal Reserve is expected to keep short-term interest rates close to zero “at least through to late 2014”. Cheviot Asset Management won the Best Performing Fund Award for its Libero Cautious Fund in March 2012. Cheviot’s Liverpool office, its first office outside of London, attracted £170m of funds under management in its first year.

David Wong

If Hedge Funds are the good child of Capitalism, are Banking Institutions their Evil Twin?

Give me control of a nation’s money supply, and I care not who makes its laws.

– Mayer Amschel Rothschild

Post credit crisis, the spotlight was already trained on large ‘unregulated’ investment vehicles. Then we had the Bernie Madoff ponzi scandal. This was followed closely by one of the largest insider trading case worthy of a Hollywood script – the Raj Rajaratnam Galleon case which snared senior management from some of the most prestigious Wall Street and consultancy firms.

Main Street was hit with a triple whammy – reeling from the fact that taxpayers’ money is being used to bailout banks that took on too much risk, against a backdrop of the steepest recession since the Great Depression of the 1930s, which was further exacerbated by the unpopular war on two fronts. Obama said he did not run for president to bail out a bunch of fat cat bankers. A witch-hunt was inevitable.

The opaque nature of the Hedge Fund industry proved an easy target. In theory, hedge funds are just capitalist. They will tear a firm down if it makes money and build it back up if it makes even more. Capitalism at its very best – hedge funds help allocate capital more efficiently by punishing inefficient firms (through short-selling) and rewarding the well-managed ones (by purchasing their stocks). As part of a group of international private investors with a sizeable war chest measuring hundreds of billions, hedge funds can significantly affect global markets and the economies of nations. As such, hedge fund failures are often well-documented as their strategies are laid bare for the ensuing media scrutiny.

Long Term Capital Management’s spectacular implosion destroyed $4.6 billion. Most of it belonged to the firm’s partners. Despite its trillion dollar off-balance sheet derivative positions (due to leverage), no taxpayers’ money was used to bail them out. Subsequent academic studies noted that the Fed’s intervention, despite its good intentions, was misguided and unnecessary as it set precedence for regulating hedge fund-activity. The Fed may have helped shareholders and managers of LTCM to get a better deal than they would have otherwise obtained in a rescue effort that involved a consortium of Wall Street and international banks.

When Amaranth blew up in a $6 billon bet on natural gas that went bad, another hedge fund, Citadel, stepped in and took over Amaranth’s books. This time, the markets barely flinched. As Sebastian Mallaby, author of More Money than God, puts it: “hedge funds can be a fire-starter as well as a fire-fighter”.

The global financial system and banking institutions are so intertwined that recent events have shown some banks are clearly too big to fail. Hedge funds, on the other hand, are generally small enough to fail. When hedge funds blow up, taxpayers do not foot the bill. The same cannot be said for banking institutions.

During the recent credit crisis triggered by the bursting of the US housing bubble, two of the most hallowed investment banks on Wall Street converted to bank holding companies to take advantage of a lifeline from the Fed. The rest either went bankrupt, got taken over or got bailed out. Beyond the euphemisms, firms like Citigroup, JP Morgan, Wells Fargo, Bank of America, Goldman Sachs, Merill Lynch, and Morgan Stanley were bailed out by the American taxpayers through the Troubled Assets Relief Program (TARP). In the UK, the Royal Bank of Scotland and Northern Rock ran into the arms of the British government. Northern Rock became the first bank in 150 years to suffer a bank run. Images of the public queuing up to withdraw their money from the bank were plastered on national newspapers and will forever be seared in the minds of Northern Rock’s customers.

Whilst Hedge Funds and Banking Institutions can both be guilty of gambling with OPM (other people’s money), the hedge fund captain is more likely to go down with the ship. Hedge funds go to great lengths to justify their management and performance fees in order to align their interest with that of their investors. Fund partners often (though not always) have a significant proportion of their personal wealth invested in their own fund. In banking, on the other hand, there is a clear dislocation between management incentives and accountability. With the benefit of hindsight, incredulously, the system is essentially rigged to encourage excessive risk taking. Couple that with deregulation and the repeal of the Glass-Steagall Act and we have ourselves a recipe for disaster. History has shown that given enough rope, some of us have a tendency to hang ourselves. The problem then arises when ‘some of us’ (that may hang ourselves i.e. banks) happen to possess enormous financial power by virtue of their control of other people’s money.

The recent credit crisis may have provided ammunition to opponents of the laissez-faire approach to managing economies. One of the basic tenets of the free-market capitalist approach is that firms should be allowed to fail. Like Social Darwinism, only the strong survive and the weak die out. On the other hand, ideas of socialism while appealing, begin a slippery slope down into communism. The problem with capitalism is the inherent disparity of wealth that creates fault lines between the ‘haves and the have nots’. The problem with socialism is that it undoubtedly leads to ‘free riding and slacking’, or as Margaret Thatcher once said: “The problem with socialism is that eventually you run out of other people’s money [to spend]”. Recent financial events have drawn parallels with a common joke that begins:


A beautiful and shallow woman said to an intelligent and ugly man: “We should get married, so our children will be as beautiful as me and as smart as you”. The man replied: “What if our children turn out to be dumb like you and ugly like me?”

This worst of both worlds approach seems to caricaturize the recent tumultuous events of our financial markets post 2007. When we have ‘too big to fail’ in a supposedly capitalistic economy, we end up with the problems of capitalism (huge disparity of wealth) AND the problems of socialism (spending other people’s money) BUT with NONE of their benefits.

Thomas Jefferson, principal author of the Declaration of Independence and Founding Father of the United States of America – the last bastion of free-market capitalism once said that “banking institutions are more dangerous to our liberties than standing armies”.


What about hedge funds that take on excessive risk through high leverage and speculation? Hedge fund luminary, George Soros, is infamous for being “the Man Who Broke the Bank of England” when his currency trade forced the United Kingdom out of the Exchange Rate Mechanism (a precursor to the Euro). He netted $1bn by betting on the devaluation of the pound sterling in 1992. The total cost to British taxpayers by the botched attempt to prop up the pound was put at $6.1bn (£3.3bn). Subsequent information obtained through the Freedom of Information Act noted that “if the British government had maintained $24bn foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling’s devaluation”.

During the 1997 Asian financial crisis, former Malaysian Prime Minister Dr Mahatir Mohamad publicly criticized Soros as an ‘immoral financial speculator’ while Soros described Mahatir as a ‘menace to his country’ (Mahatir later accepted that Soros was not responsible for the 1997 Asian Financial Crisis). The crisis started in Thailand when the Thai baht collapsed. Thailand had already acquired a burden of foreign debt which effectively made the country bankrupt before the collapse of its currency. Soros defended his actions by saying “speculation could benefit poor societies if it serves as a signal, not a sledgehammer”. It is worth noting that Soros held back from an all-out attack on the Thai baht. In 1992, Soros sold $10bn worth of sterling at around 2.5x the firm’s capital. The $2bn Thai trade was only one-fifth of the firm’s capital. An all-out attack would have precipitated a crisis rather than encourage the Thai government to avoid one.

In the wake of the Thai baht devaluation, Soros funds gained about $750m whilst Thailand’s economic output plunged 17% and millions fell into poverty. Hedge funds were inevitably vilified. But in a larger context, the roots of the crisis stretched back several years where ‘hot money’ pushed the Thai economy into bubble territory. The Soros team had indeed led the short selling but the actions of hedge funds were in-part vindicated when the crisis spilled over to other Asian countries that engaged in ‘crony capitalism’ like Indonesia and Malaysia. What is not usually cited is the fact that Soros lost $800m buying the rupiah as he wrongly believed the turmoil in Thailand had spilled over to neighboring Indonesia without justification. This essentially wiped out all the gains he made in Thailand. President Suharto and his cronies who controlled Indonesia’s banks drove the country to a crisis which resulted in his own downfall. Hedge funds may have triggered the avalanche, but it was the government officials who allowed snow to build up to such dangerous levels in the first place.

Hedge funds reap the rewards when they are right and pay the price when they are wrong. Banks reap the rewards when they are right but taxpayers pay the price when they (banks) are wrong. This case of ‘heads I win, tails you lose’ has played key role in precipitating the recent capricious events resulting from the credit crunch.


David Wong

What role did Hedge Funds play in the credit crisis?

I have been asked numerous times along the lines of “What was the role of Hedge Funds in precipitating the credit crisis?”

The short and simple answer is: They are NOT responsible for the credit crunch. (If anything, Hedge Funds as unregulated investment vehicles probably help keep the markets in check). Below is the long answer I posted on a discussion forum which attracted recommendations and interests, as such I am reposting here.

If you have to draw the line somewhere like with all market cycles, post dot-com crash or 9-11 in 2001 would be a good arbitrary starting point. The key points to remember are:

1) Greenspan kept interest rates for far too low after 9-11 and the dot-com crash – fuelling a credit bubble.

2) This cheap credit meant a housing bubble, as low rates = low mortgage = let’s all buy a house! Happy days!

3) As house prices went up, banks ran out of people to loan money to, they went to subprime or Alt-A (alternative to A-paper).

4) From subprime/Alt-A, greed led us to NINJA loans. No income, no jobs and no asset. These people can’t even prove their income but they can get a mortgage. Happy days!

5) House prices were going up, banks kept lending at record low rates, paying themselves huge bonuses. Everyone was doing it. Can’t beat ‘em join ‘em mentality. Risk was perceived to be low as everyone believed this housing boom was going to continue. Therefore, banks can easily repossess and sell the houses on, fuelling predatory lending.

6) The loans were packaged up, sliced up and sold on worldwide (e.g. European/Japanese pension funds/institutions).

7) ‘Experts’ argue that never in the US history has there been a NATIONWIDE simultaneous fall in the housing market. (Blackswan event, God I hate that word) This led to the belief that securitized mortgages are relatively ‘safe’.

8 ) Pension funds can only buy triple A or AAA rated investments. Investment banks got around that problem by mixing up subprime loans with top rated ones. Paid good money to Moodys and S&P to rate them triple A. The rational was that not everyone is going to default at the same time (see no. 7). The CDOs (Collateralized Debt Obligations) spread the risk around…

9) Hedge funds act like vultures. They are like the market vigilante. Some of the top guys like Michael Burry, John Paulson, Andrew Lahde (my favorite because he knew when to call it quits) begin to explore ways to short housing.

10) This proved to be almost impossible. They could short firms like NATIONWIDE or homebuilders but naked short selling = their losses can be unlimited and the market can remain irrational than we can remain solvent. (Some managers who correctly foresaw the crash lost money because they bet too early and the market still kept going up.)

11) So smart guys like Paulson found a way to bet against housing by buying Credit Default Swaps (CDS). It is sort of like an insurance policy in case the loan goes bad. His line of reasoning is that, when mortgage-backed securities go bad, everyone will be scrambling to buy insurance because their loans will be worthless.

12) As Nouriel Roubini puts it: “It is weird that these CDSs (insurance policy) can be traded around freely. For example if you own a house, only YOU can buy fire insurance for it. But in the case of this credit crunch, I or anyone can buy insurance for your house insuring it multiple times, and then sell it on later essentially betting on your house burning down.”

13) On a side show, Goldman Sachs got hauled up to congress to explain the fact that they helped Paulson & co picked the worst tranches to bet against. GS later turned around and bet against housing themselves.

14) Those that did not bet against housing were geared and long – and as it turns out they were also ‘long and wrong’. Banks were highly leveraged: 30:1 for Lehman 42:1 in Bear Stearns’ case. It was a case of the sausage makers keeping all the sausages on their books despite knowing what went into them.

15) It was only a matter of time when homeowners started defaulting. It became a snowball effect. When half your neighbourhood is being foreclosed, the value of your home plummets. You bought your house for 500k, now it is worth 300k. You hand in the keys and walk away. So more defaults again!

16) Now all the banks are scrambling to buy CDS. House is on fire! CDS shoot through the roof. Guess who is holding it? The hedge funds who correctly bet on them like Paulson.

17) AIG (yup US taxpayers money bailed them out) wrote most of the CDS and sold it dirt cheap. In traders’ lingo – you have AIG making money paying huge bonuses selling insurance policy for houses built from flammable material next to a pyrotechnic factory located on an earthquake fault line. It was a case of ‘picking up nickels and dimes in front of a steamroller/freight train’.

18) No problem – when AIG was about to go down, we have TOO BIG TO FAIL. Lehman was Goldman Sachs number one competitor but they were allowed to fail. If AIG went down, Goldman Sachs was on the hook. But no problem, the then Secretary Hank Paulson was former CEO of Goldman Sachs (conflict of interest?). Hank played a key role in bailing out AIG. AIG straight away paid back Goldman. Make of this what you will. “It is Government Sachs mate. GS is a branch of the US government.” (That was what a friend said to me.)

19) When the market tanked, a lot of institutions started pulling funds from hedge funds. Some of which were geared/leveraged. They then had to unload their positions in thin market causing a death spiral. Liquidity problem killed them.

20) So do hedge funds have a role in causing the crash? Answer = NO! They were as much a casualty as well as a profiteer.

So what caused the credit crunch? Well, no simple answer. I tried to keep it to 20 sentences. I guess it is a case of pluralistic ignorance, greed, hubris and regulation (or the lack of it)?

“If I had known I was going to fall down, I would have sat down” old Polish proverb


David Wong

The four most dangerous words in investing

“The four most dangerous words in investing are ‘This time it’s different.'”

– Sir John Templeton (29 November 1912 – 8 July 2008)

In 2005, the late Sir John Templeton penned a memo, which wasn’t discovered until after his passing in 2008. It was eerily pithy, almost ‘prophetic’ as the first two words were bolded in its original text and begins as follows:

Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.”

Sir John had already correctly predicted the Dot-com crash and his predictions of a housing bubble (that will eventually burst) and subsequent stock market fall all came to pass. However, those with views similar to Sir John back in 2005 would generally have found their concerns of the housing market pooh-poohed by the proponents of securitization as the US housing market has ‘never experienced’ a simultaneous nationwide fall.

Time and again, investors have always used the words “this time it’s different” or many of its variants to justify our actions when we rush headlong into a bubble. Caught up in the euphoria of a bull run, we post-rationalize our thoughts and seek out ‘evidence’ to support our hypotheses. Much like when we suddenly decide to purchase a car of certain make and color, we tend to notice it a lot more often on the road. As our paper wealth increases, we use that as justification or worse, as ‘proof’ that our earlier convictions were indeed ‘correct’. Perhaps it is cognitive dissonance not too dissimilar to a smoker who is perfectly cognizant of the health risks yet continues to feed his habit by inhaling from the cancer stick. Psychologists have shown that we have a tendency to underestimate the risk of an activity when we ourselves are engaged in it. We also have a penchant to indulge in intellectual materialism where we treat our ideas like possessions. We find it difficult to admit we were ‘wrong’ in light of new contradictory information and as a result, we hang on to our ideas for far too long. Perhaps this could be a reason why economic bubbles continue to persist despite ever more efficient markets.

Hindsight is a beautiful thing or, as I always say, “hindsight vision is always 20/20”. From the tulips mania in 1600s and the South Sea bubble in 1720, to the Housing bubble in the 2000s – it was never a bubble in foresight, only in hindsight. To quote the ‘greatest stock operator’ that ever lived:

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”– Jesse Livermore

The whole premise of efficient markets lies in the fact that overvalued stocks should theoretically attract short sellers to bring it back in-line. Arbitrageurs should keep the markets in check. However, as Yogi Berra once said “in theory there is no difference between practice and theory, in practice there is” and as we now accept, the markets are not always rational. In fact, I would go as far as to argue rationality itself is an arbitrary concept.

Keynes once remarked “The markets can remain irrational longer than you can remain solvent.” Even the best investors have painfully discovered that being early and right is the same as being wrong.

Michael Burry of Scion Capital faced an investor revolt when he bet too early on the recent subprime mortgage crisis. The housing bubble continued to inflate before his predictions came true and the investors that stuck with him made a tidy profit. Scion ultimately returned almost 500% (net of fees and expenses) from November 2000 until June 2008 whilst the S&P returned just over 2% over the same period.

Even the likes of George Soros, his once right-hand man, Stanley Druckenmiller of the Quantum Fund and Julian Roberston were not spared from the ‘irrationality’ of the markets. Each man, a titan of the industry and a legend in their own right, has paid dearly for being ‘right too early’ at one point or another in their careers. If being right too early equals being wrong, does being ‘wrong’ too early equals being ‘right’? Is it homogeneous and symmetrical? (More on this later.)

Julian Roberston’s Tiger Fund paid the ‘ultimate price’. Robertson correctly called the tech bubble in the late 90s but had to unwind the legendary fund in March 2000 ̶ just before the NASDAQ tanked. Since there was no hope of bucking the trend as momentum traders continued to ride the wave, hedge funds mostly jumped on for the ride. Only the bravest or perhaps the foolhardiest would even dare consider trading against this mania.

Perhaps the bravest of all was Julian Robertson who suffered heavy losses when everyone else surfing the wave was making extraordinary profits. Faced with a flood of redemption requests from investors as the bubble drove the price of tech stocks to dizzying heights, Robertson who famously refused to partake in the Internet craze just couldn’t hang on long enough. He had repeatedly warned the ‘day of reckoning would come’ when internet companies which had never turned a profit continue to skyrocket against a backdrop of collapsing stocks elsewhere.

In March 2000, Robertson decided he had enough of waiting and closed down the battered Tiger fund. At around the same time, the NASDAQ crested to mark the beginning of the end for the tech bubble. But for Robertson and his Tiger fund, the end just could not have come soon enough. The ‘day of reckoning’ did come on 13 March 2000 when the sell off began, but for Robertson it was too late. The market had remained irrational longer than he could stay ‘solvent’. Over the next 20 months, the NASDAQ fell from 5038 to a bottom of 1114. At its peak, Tiger had well over $20 billion in assets under management and Robertson was second to none when it came to stock picking.

Back in 1867 John Stuart Mills noted “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive work”. The same lesson could still be applied to the Stock Market Crash of 2000-2002 which wiped off $ 5 trillion in the market value of companies.

Perhaps it is no wonder that Sir Isaac Newton famously said ‘I can calculate the motions of heavenly bodies, but not the madness of people’ when the genius himself got caught up in the South Sea bubble and reportedly lost £20,000 (equivalent to £ 3 million today).

Earlier, I argued that rationality itself is an arbitrary concept and posed the question “If being right too early equals being wrong, does being ‘wrong’ too early equals being ‘right’?” Think about it, if everyone in the world suddenly became ‘irrational’, would that not make you the irrational one (at least from a medical standpoint)? If rationality is defined by consensus, by implication, rationality is a moving target. Hence, when the market is acting ‘irrationally exuberant’, do you try to remain ‘rational’ and short the market (like what Robertson did)? Or do you act ‘rationally’ by jumping on for the ride to profit from it (like what Druckenmiller eventually did)?

George Soros famously said “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”. I would venture as far as saying when it comes to the markets, there is no such thing as ‘wrong’ or ‘right’. There are strategies that are profitable, and strategies that blow you up. That’s it.

Fortunately, in finance, economists have another term called ‘profit-maximizing’ which is often used interchangeably with ‘rational expectations’. However, as investors we may not always have the luxury or liberty to consider etymological and philosophical questions when our portfolio is haemorrhaging money. If it walks like a duck, quacks like a duck and looks like a duck, for all intents and purposes – it is a duck!

Toby Birch

The Inevitable Trek to Tyranny

Blog by Toby Birch

‘It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time’.

This quote from Sir Winston Churchill is something of a surprise given that he was a lone voice opposing the appeasement of Nazi Germany prior to WWII. He did have a point about forecasting though. Few leaders seem capable of considering the consequences of their actions – especially the unintended variety. Reaction rather than action appears prevalent. While we are not all blessed with investment insight or prophetic visions, we can at least take time to look at the past. Comparisons with the 1930s are highly valid but there is little reason to expect an exact repetition. A domino-effect is too neat and orderly a description for events over the last 5 years that resemble a slow-motion motorway pile-up.

Others have kindly described my book as one of the most prescient predictions of the credit crisis when I published it in 2007 (The Final Crash: Addictive Debt and the Deformation of the World Economy). It compared the build up of debt to drug dependency, dividing the phases into three parts, namely Party Time, Hangover then Detox and Rehab. With a little knowledge of history it was straightforward to run through a dress rehearsal of how the crash would evolve and escalate into other crises. At the time it was understandable to be belittled by doubters or worse still, ignored. At least one can hope that the author has credibility to make some comment on the future. The chapter entitled 2020 Vision ran through a scenario where a crash led to higher taxes, inflation and greater protectionism. It made the case that in times of economic distress politics will tend to swing to the far left and right and of course a common enemy must be pin-pointed and persecuted. Leaders down the ages have used such tricks to crush dissent and unite the populace through scaremongering. Little has changed.

While President Roosevelt may justifiably be criticised for banning the public ownership of gold before devaluing the dollar during the Great Depression, he was at least correct in implementing banking reform, following the Wall Street Crash of 1929. Modern investigative committees appear to be a pale imitation of interrogators of the day like Ferdinand Pecora who exposed the double-speak of financiers with utter determination. The subsequent implementation of the 1933 Glass-Steagall Act clearly delineated retail banking from its much riskier investment banking cousin. After many attempts this was repealed in 1999 with the naive tech-bubble view that modern folk were far more sophisticated than their ancestors. We can now appreciate the shallowness of this philosophy as banks once more mutated into speculative monsters. The lending mechanism is now broken; why should banks bother to lend money to real businesses when they can borrow cheaply from the central bank (a right not extended to governments) and use funds to buy bonds for a risk-free ride, funded by the tax payer.

History shows us that the very act of allowing reckless financial institutions to collapse is far healthier than allowing zombie banks to drag down the rest of the economy. Whether by lobby group pressure, Party funding or a simple lack of knowledge, politicians of all hues have fallen for the mantra that saving the banks will save the economy. This is best illustrated through humour than vitriol. In one episode of BBC’s ‘Blackadder’, an Elizabethan quack doctor recommends continued bleeding by leeches for a pallid patient. The doctor cites counsel from the highest medical authority; who just happens own the largest leech farm in Europe. A similar quality of financial advice has been provided for the last 5 years by a clique of central banks, regulators and ‘industry experts’ from the same stable. Interestingly, one of the best success stories of bypassing the banking system occurred in Guernsey, transforming the island from debt-trap penury into a model of prosperity. The States committee consisted neither of lawyers nor bankers but entrepreneurial merchants who used interest-free finance for the benefit of the Bailiwick.

Other echoes of the Great Depression centre on the emergence of trade tariffs and nationalistic behaviour. With the break-up of the Gold Standard, free-floating currencies caused chaos as every country adopted beggar-thy-neighbour policies of devaluation to gain a competitive pricing edge. Now, as then, the race to the bottom for currency weakness will eventually generate significant inflation; temporarily masked by a lack of credit creation in the banking system. World trade thrives on currency and financial stability which is what the Gold Standard delivered for much of the Victorian Age, albeit with some crises along the way. So why is this relevant today? If you mix the same ingredients together you will usually get a similar-tasting cake. In other words, by combining protectionist policies with political polarisation, tension and commodity-driven conflict are the likely end-result.

Many would argue that the lessons have been learned and that the prospect of totalitarian era is incomprehensible. After all, our children seem to study little else apart from Hitler in history lessons. While it is all well and good to analyse at the end result of tyranny, unless one understands its cause then dictatorship it is destined to be repeated. If anything we are in a worse position than the 1930’s as we have the perfect infrastructure to control, monitor and isolate individuals both financially and physically. The one-way extradition flow of Britons to America is a good example of such injustice where anti-terror legislation is routinely abused and applied to alleged financial, corporate or cyber crime. Our freedoms have been utterly subsumed with reams of legislation justified by the War on Terror. Just as regulatory institutions are riddled with conflicted financiers, politics is dominated by the legal fraternity determined to legislate ad infinitum to the detriment of the law-abiding and entrepreneurial class. Where it gets really scary is when one imagines a scenario under severe economic duress. This is when nationalist parties come to the fore of popularity and the apparatus of the state is hijacked and used to target whatever or whoever the common enemy happens to be.

The economic and social implications are likely to herald a period of greater self-sufficiency and isolation along national and lingual lines. The emphasis will be on job creation through major infrastructure projects and a return to domestically-driven industries. The inflationary implications of a de-globalised world are substantial from the physical aspect of scarcity and delivery plus the financial side from money-printing to fund such projects. This is where the Chinese and Russians have been so smart in dealing with resource-rich countries over the last decade in return for funding infrastructure development. The western model has for many years centred on military dominance or a debt-dumping exercise, forcing countries to export their raw materials to pay usurious interest bills. It doesn’t take a genius to work out whom developing countries would prefer to supply in future.

It will be fascinating to see what imagery will be paraded by future dictators. The word for fascism stems from a symbol of Roman power; a bundle of rods wrapped around a magistrate’s axe designed for punishment. The illiterate Ghengis Khan was likewise famous for demonstrating that one arrow could be snapped whereas a combination of several was unbreakable. The message in both cases is clear; unity is strength. In an era of government spin and media euphemism, we should be truly terrified at the prospect of despotic rule. While there is little any one of us can do in an age where demonstration has been sanitised by aggressive policing, we can at least take out some personal insurance. Not in the form of a policy from your friendly broker but by way of precious metals, offering a hedge against inflation, currency crises and catastrophe that is portable and globally acceptable.

Toby Birch

Guernsey Gold Limited

07781 136 534

Toby Birch

Investing in Megatrends: Green, Gold and Agriculture

Blog by Toby Birch

Titanic Centenary

It is sheer coincidence that the tragic sinking of the Titanic a century ago marked the point at which Britain’s economy was officially overtaken by America’s. A similar power shift is underway in modernity, albeit from West to East. It is likewise poignant to take stock and look back over the last 5 years. In 2007 I published my book forecasting of the credit crisis, called The Final Crash: Addictive Debt and the Deformation of the World Economy. As well as calling the year of the crash, it also examined its cause, effect and consequences well into the future. We are witnessing an unprecedented confluence of 5 key megatrends namely: population growth, resource scarcity, environmental degradation, currency devaluation and a rebalance of power referred to earlier. Appreciating commodity prices are escalating the speed and scale of resource extraction and subsequent destruction of the environment. This is the critical clash of theory versus reality; where infinite money creation meets finite supplies of natural resources.

Leading by Example

To lead by example, Oppenheim & Co has launched the Luxembourg-based Gaia Opportunities Fund investing in liquid assets that benefit from these megatrends. Given the clear manipulation of equity, bond and precious metal markets one may wonder if securities are the right vehicle to effect reformation in the real world. Although markets are being artificially moulded it does not mean they have mutated for good. They will undergo a transformation of ‘swords to ploughshares’ but for now are swelled by printed money and the assumption that asset prices are officially guaranteed from falling by central banks. In the meantime we can utilise market mechanisms to concentrate capital toward the right areas which for once will benefit the real world rather than the banking sector.

The Gaia Opportunities fund is designed not just to be ethical but to offset risks that are endemic in this post-bubble economy. It invests in areas that are beneficial to mankind today and more importantly for generations to follow. This need not be sentimental or socialist; it is using a key component of capitalism whereby price changes spawn solutions that can never be achieved politically. In my book I stated that rising oil prices would be like a flash flood in a desert; areas that once seemed barren and hopeless are given life. The same is true of alternative energy, agriculture and forestry. Rising oil prices will change our behaviour and also make alternative energy cost-effective, attracting capital in the process. While ‘Peak Oil’ is hotly debated it appears unlikely that we will run out any time soon; it will just be far more expensive to extract, process and distribute fossil fuels.

1930’s Parallels: Protectionism and Polarity

Sadly, the parallels with the 1930’s are becoming more disturbing by the day and leave one convinced that our leaders have little notion of historical precedent. Like the Book of Revelations, key events are unfolding that appear pre-determined and obvious to those with understanding. Nationalism has most clearly been shown with the 2010 wheat shortages in Russia as exports were banned as the fires blazed. This is a clear dress-rehearsal of things to come when national interests are put before a failed ideology of globalisation. A period of polarisation and currency wars is pending, fomenting energy and resource nationalism, with heightened protectionism and political tension. Just as markets correlate closely during a crash, seemingly unrelated factors are being drawn into this vicious vortex including population growth, pollution and detrimental weather patterns. Analysts and economists struggle to encompass such big-picture events outside of the latest earnings figures or neutered inflation numbers. This is why so many fail to comprehend the kaleidoscopic changes underway.

Taking advantage of Megatrends

The Gaia Opportunities Fund will seek to provide long-term, sustainable growth of capital deriving from these themes whilst limiting downside volatility. The Fund will focus on green investments, precious metals and commodities, especially those related to food production and fertilisers, hence the title ‘Green, Gold and Agriculture’.

Toby Birch
Managing Director Oppenheim & Co Limited (Guernsey)

Toby Birch ( is the Managing Director of Oppenheim & Co. Limited in Guernsey, the boutique wealth manager for institutions and family offices. He is a Chartered Fellow of the Chartered Institute for Securities and Investment and also holds the Islamic Finance Qualification. He has 20 years’ investment management experience and is the lead manager of the new Gaia Opportunities fund, a multi-asset, long-only fund with no leverage. A quarter of the performance fee will be donated to sustainable projects and Foundations aligned to the Firm’s philosophy. The minimum investment is €125,000 or currency equivalent and is only suitable for Well-Informed or Professional Investors.