Hyman Minsky, an economist in the early 1900s, like many others of his era, has largely been ignored and forgotten by the modern school of economic and monetary theory. Minsky largely dedicated his career to his “financial instability thesis” in which he predicted a form of corporatism where vast profits are privatised and vast losses socialised. If you are big enough you will not be allowed to fail.
In the cutting edge of business, it is the impulsive entrepreneurial gambling spirit that will often achieve success.
Ironically, impulsive risk-taking spells disaster for the investor. The uncertainty and market volatility that we are currently experiencing are proving that the market can stay irrational longer than we can stay solvent. Hyman Minsky understood this.
It is the knowledge from study of market cycles that gives the investor encouragement. Fear and greed are what Adam Smith, one of the best brains to emerge from the 1800 period of enlightenment, called the “invisible hand” of the market.
As the correcting arm of a sailboat keel prevents capsize, his invisible hand is what ensures that price action eventually reverts to a historic mean.
Hyman Minsky wrote of a time when capitalism would change for the worst and institutional financial speculation would dwarf business endeavour.
We have reached that time. We have moved from an ownership society where individual shareholders owned 92% of all stocks and financial institutions only 8%, to an agency society in which institutions own some 70% of all stocks.
Given this market reality, anything short of a well-reasoned investment strategy, implemented with the discipline of conviction to stay the course when the media and all around are screaming “tear up the script and start again”, will not achieve a desired investment outcome over the long term.
It is not timing the market in the belief that you know more than anyone when to buy or sell an asset, but it is the time in the market that provides long term success. What Albert Einstein called the miracle of compound interest.
The value of stocks can simply be thought of as a combination of investment return and speculative return. The initial annual dividend, plus the subsequent annual rate of earnings, growth and a speculative return, the price investors are willing to pay for a dollar of earnings at some point in the future.
As we continue to experience uncertainty and price volatility, investors would do well to heed this simple definition before being tempted to nervously tinker at the edges with their strategy, or worse, leave the market and “tear it up and start again”.
Jeremy Blatch TEP