Investing as Foresight Practice

Do you invest? I hope you do, as investing, and teaching your children and friends to invest, is one of the classic ways people can and do put their futuring skills to the test. The great investors are all futurists to some degree, and a good study of their habits will help you improve your business and personal foresight skills as well. There are two types of investing, Conservative/Long-term and Speculative/Short-term (six months or less). Once you have enough saved and enough personal insurance to cover catastrophes, I hope you will choose to be involved in both. An asset mix that is commonly recommended is 80% conservative and 20% speculative.

For conservative investing, I have two main books to suggest for your edification. The first is Andrew Tobias’s brilliant The Only Investment Guide You Will Ever Need, 2011, which explores how saving, and cultivating a great understanding of the value of money, is by far the most important skill for any investor. For passive strategies, I highly recommend the The Permanent Portfolio, a modified version of which I’ve been following for several years now. A smartly asset-class-diversified approach like the permanent portfolio seems to me to be the best way to easily capture the growing financial value of our planet’s accelerating technical productivity, without being an active investor or trader. The Permanent Portfolio’s four asset classes are Index Stocks, Long-Term Treasury Bonds, Gold, and Cash. For some data on its performance, see Crawling Road’s 40-year retrospective study on its returns, which average 6 to 9% a year, depending on assumptions in calculations. This is nearly unbeatable for a passive investment strategy.

One way you might improve this, if you are looking to experiment, would be to substitute potentially better (yet potentially also riskier) versions for some of these asset classes. For example, you might swap Technology Stocks for Index Stocks, your Favorite Country or Company’s Bonds for Treasury Bonds, Commodities for Gold, and the currency of fiscally more conservative countries like Switzerland, Norway, or Singapore for US Cash. These changes would make your investments less diverse, so a diversifying modification could be to add a few asset classes not included in Harry Browne’s four class approach (for example, use six asset classes, investing 16% of assets in each). If you do add more asset classes, I would recommend Real Estate, through REITS or via direct investment. I’d also recommend converting some of your politically-backed cash into math-based currencies like Bitcoin or Litecoin. Fiat currency has been greatly overprinted by most governments since the 2008 financial crisis, and such overprinting is a regressive secret tax on all the small savers in every country where it occurs, transferring more wealth to those who don’t keep their assets in cash: the already wealthy.

Coinbase is an easy and safe way to create an online bitcoin wallet that can be converted back to country cash as needed. Because of unnecessarily restrictive banking laws, rigged to give unfair advantages to folks with more than $25,000 deposited in full-service investment accounts (Merrill-Lynch, Schwab, etc.), citizens with ordinary bank accounts don’t have easy access to the currencies of financially better managed countries, or to alternative stores of value. Bitcoin has provided an important new freedom in that regard. Investing in Bitcoin online is much easier and more economical for the small investor than, for example, going physically to a local currency exchange center (bank or airport) and paying their “spread” to get access to currencies other than the US dollar. The Bitcoin strategy has the additional advantage of the general public not yet having wide public recognition of math-based currency’s legitimacy. One day soon however, they will.

If you are uncertain of Bitcoin, you could relegate it to your speculative investing, and stick only with better-managed country currencies like Swiss Francs, Norwegian Krones, or Singapore Dollars for your cash. That gives 20% of your long-term assets in five asset classes, or 16% in six asset classes, if you wish to keep both Cash and Bitcoin (there is a good argument that Bitcoins and paper currencies are separate asset classes at present). As it is passive, you need only rebalance this portfolio annually, based on the performance of each class. That’s not a lot of work for a lot of reward.

You could stop with a passive strategy like this, but I think you will learn the most about both yourself and the world by also engaging in active speculative investing with a small fraction of your funds. Whether or not your short-term (six month or less) bets pay off, doing at least a little speculative investing on a continual basis will motivate you to understand, learn, and potentially profit from the specific changes going on in the world. Great speculative investors (traders) rely on superior marketintelligence and learning (knowing what’s going on), strategic agility (ability to move faster than the competition), good risk management (hedging strategies), and better-than-average forecasting abilities. A special few investors have consistently beat the market average in returns, and those who do deserve to be studied carefully, for general life and psychology lessons they offer in profiting from uncertainty and volatility. As Kwai Chang Caine says in Kung Fu, 1972-75, (one of best TV series I’ve seen) our greatest, and least realized journey is better understanding and control of the self, emotionally, ethically, and intellectually.

Elliott Wave Analysis

For those who want a treat, I recommend the documentary Trader (1987) which follows Paul Tudor Jones (then 32 years old), a young asset manager whose firm predicted and tripled its assets during the 1987 stock market crash, which happens during the film, by using a simple forecasting tool called Elliott Wave analysis, a rule-of-thumb for predicting crowd psychology cycles over time (see picture right). The film is a fun trip back to the 1980’s, and worthwhile viewing to motivate and improve your speculative investing.

Those who’ve read this far now get a speculative tip: Bitcoin’s recent runup to $1200 has just lost (“retraced”) 50% of its recent speculative value, by retreating to $600. This week Bitcoin is sitting at the bottom of Wave c in the diagram at right, a perfect time to buy to be ready for the next drive up in price over the next six months. Set up an account at Coinbase, buy 10 bitcoin for $6,000 this or next week, and then watch its value go up at least 20% at some point over the next few weeks to six months. Then cash out or stay in longer, as you desire. If I’m wrong, feel free to ask for a refund. Not! That’s speculative investing in a nutshell. A wild ride, but one worth taking once in a while. If we don’t regularly exercise our precious freedom to experiment, we may lose the desire to risk, and to keep learning from both small successes and small failures, and that is too great a price to pay.

[Followup Note: This bet paid off quickly for those that followed my advice. Bitcoin rose from under $600 on Dec 18 2013 (the date of my post) to $937 on January 6, when it most recently peaked. Those who sought to take profits on a very likely 20% return (from Elliott Wave perspective) received that in eight days. Those who tracked momentum daily to the reversal and then sold, saw a 50% return in three weeks. This is a classic speculative investment. See  Coinbase charts for details].

What may stop most investors from speculative investing is the knowledge that the top investors, like Tudor Jones, who is now a multibillionaire and philanthropist, managing the best in algorithmic trading systems, will always have superior speed of execution. But their need to manage massive wealth is also a trap, as their trades influence the market far more than they would like. Furthermore, wealthy traders don’t always have superior market intelligence, or hunger to learn, and their much-touted algorithms often don’t provide superior forecasting ability. To succeed in speculative investing, as with most things in life, you don’t need to be better than the best, only better than the average, a condition usually worth striving for. If you make lots of small bets, and treat every speculation as a learning experience, you will gain much from it, particularly the ability to
quickly sum up a situation and make a decision (“take a position” in trader speak). With practice you will improve your ability to quickly see and profit from patterns, as long as you stay in the game.
In forecasting, most successful investors follow J. Scott Armstrong’s maxim that a good forecast should be conservative. Most are also contrarian, meaning they know how to find out when the majority is acting foolishly, and when it is a good time to bet against them. Finally, the best are active learners, about themselves and the world, and they learn how to find methods that work for their psychology. Jack Schwager’s book Market Wizards, 2012, an update of the famous 1988 original, is a great study of such traders.
Financial foresight is a marketable commodity, and even systems as chaotic as the weather and markets have patterns. Lo and MacKinlay’s A Non-Random Walk Down Wall Street, 2001, makes an excellent case for the market’s partial predictability. Market movement is random to a first approximation (on average), but as human nature is very slow to change, and is built on top of myriad predictable physical processes, we can always find and profit from predictable patterns, trends, and cycles in markets, as well as all other economic, social, political, and technological systems driven largely by human psychology. Good luck and happy trading!