Irrational Markets

Rational plans fail in irrational markets, at least in the short term. If you hadn’t noticed, our civilization is acting irrationally. Priorities are disassociated from needs. Compensation schemes are taken to extremes. Prices are uncoupled from values. In the short term, that can mean confusion in any attempt to make sense of the world. As one of the Occupy signs says, “Don’t confuse the complexity of this movement with chaos.” It is easy to think the chaos is everything. In the long term though, this redefinition of our society will probably result in needs better met, a retreat from extremes, and a return to values. A rational plan that can be sustained through the interim may be incredibly valuable. In the meantime, my rational plan is being challenged as the prices of my stocks are not matching the value of those companies.

Dendreon reported earnings after market on Wednesday. They’ve tripled earnings since last year. The stock (DNDN) is down 80% from that same time. Make more money, witness a stock drop. Rationally, those holdings alone should be funding an expansive lifestyle, or at least giving me the extra cash to get some maintenance done in addition to paying the bills.

Real Goods Solar’s revenues are up 28%. The stock (RSOL) is down 46%.

GigOptix’s product revenues are up 43%. The stock (GGOX) is down 17%.

The companies I’ve invested in are doing well, maybe not as well as initially expected, but it is rational to expect that any company growing in these dismal economic times should be selling at a premium instead of a discount. Irrationality is piled on irrationality.

Others with similar portfolios are worried and having cautious talks with themselves and their partners about what to do. Who knows? No one does. Yet, in general, rational plans maintained through irrational times can prevail as long as the fundamental assumptions don’t change. I continue to recall Louis Rukeyser‘s comment during the bust after the Internet bubble that paraphrased is, “The people investing now will be the people that will be rich ten years from now.” I’m sure he wasn’t claiming anything special about ten years versus nine or eleven, though the bottom of the NASDAQ bust was about 2003, so maybe in a year or two . . . Anyway, the point was that while everyone else was in panic, others would see quiet counter-intuitive opportunity. If I was gainfully employed, I’d be buying stocks; but remember, I have an extraordinary risk tolerance.

Unfortunately, while the value of my companies has increased, the value of my portfolio has seriously diminished, and the responses to my job applications have been, “Thanks. but no.” Ever the optimist, though sometimes with a struggle, sufficient income may arrive at any moment via sales, consulting fees, speaking events, paychecks, or windfalls. Lotteries can be won. Maybe a rainbow will end in my yard and I’ll find a jar of gold. If it nothing changes though, I’ll be dipping into a radically reduced IRA within the next few weeks. Eek.

My neighborhood has a beach and a fire pit. I tend to only use it in the cold months after Labor Day and before Memorial Day. That may be counter-intuitive but the warm days include unsupervised neighborhood children and people who dispose of dud fireworks in the firepit. A beach fire on a quiet November night is relaxing. I sat there wondering what went wrong. Why was I having to consider diving into my IRA? And then those revenue numbers came to mind. I hadn’t made any glaring mistakes. I invested in good companies. I did my research. I diversified. I live my life frugally. I don’t try to cheat the system. Sometimes it just works out that way. I also knew that I wasn’t alone. Millions of retirees, millions of job seekers, millions of overworked, underpaid employees are wondering what went wrong despite years of doing things right. The Occupy Movement is proof that I am not alone.

The Movement is not a surprise, except to those who live isolated from bad luck and who are ignoring history. This isn’t the first time economic inequities have raised public outcries. Big buffers have their benefits, but sometimes they also filter out compassion, which is a sad consequence and also may be why there’s a disassociation between social priorities and needs. Continually increasing executive compensation can seem normal when compared against other executive compensation packages equally buffered from mainstream life. The extremes probably wouldn’t be reached if they were compared against entry salaries, student debts, health care costs, and poverty levels. I doubt that money has retreated from the market because of high-net-worth individuals fearing the Movement. I suspect it has withdrawn in fear of EU and possible USA economic collapse. In fear it is easy to be blind to other’s fears. But the only thing to fear is fear. “The only thing we have to fear is fear itself.” – Franklin Roosevelt. Reality lies beyond that view.

A friend commented on my house price and value. The point was made that the value has never really changed. That’s one of the nice things about real estate. Changes usually happen slowly and under the control of the owner. Values can increase through sweat equity or hired help. The price, however, fluctuates. If my financial situation doesn’t improve soon, I’ll be testing that market value.

Many values are stable. The productivity, or at least USA GDP, is impressive. Wealth has been and is being generated, though the trickling down may be plugged somewhere. We have all of the assets, abilities and people we need to jointly prosper, maybe with a rewind that re-regulates some unregulated industries and institutions. That worked. This doesn’t. Returning to what worked sounds like a rational option.

That night by the fire convinced me that I’d followed, am following, and should continue to follow my rational plan. The last time the market was this irrational my portfolio tripled within months and that only happened because I didn’t suddenly change plans. And besides, the optimist in me knows that every moment contains the possibility of surprising, significant, sufficient good news. In an infinite universe it is a finite probability, even though some feel it is impossible – but I think they’re irrational.

About Tom Trimbath

real estate broker / consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: and at my amazon author page:
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