Finance blog



April 27, 2021

In turning on my Bloomberg every day, I look forward to a little-noticed feature: the daily quote. The one from a few days ago that really caught my eye was from Epictetus—someone I had never heard of before—who said, "First learn the meaning of what you say, and then speak."

This really struck me. I think about all of the broker-speak and the stuff that goes on in the capital markets and I feel a direct connection to this maxim which Epictetus uttered 1,900 years ago. I did a little research on this ancient Greek philosopher and my takeaway is that to Epictetus, all external events are beyond our control. We should accept whatever happens calmly and dispassionately. There is one significant caveat, namely that individuals are responsible for their own actions, which they can examine and control through rigorous self-discipline. This fits in almost perfectly with what I have been espousing via this blog for nearly the past year.

Think about my admonition to always measure your investments over time, across a variety of scenarios, and counting the money (aka TMI).

The process of running numbers dispassionately REALLY strikes me. When we think of investing, there should be no emotional attachment. It should be a totally agnostic process whereby we give our best effort at simply running the numbers, to the best of our ability, and then in a very calm and dispassionate, way make the best decisions we can using reason and common sense. If we recognize that we cannot know the future, we should then be able to accept the result without becoming emotional or irrational. The other thing that I love about his philosophy is that he does say that individuals must be responsible for their own actions. I couldn't agree more. One of the most important things we can do regarding our investment decisions is to look back at them with rigorous self-discipline. What he does not say is that we will never make mistakes. As I have written before, one certainty that we should all expect is that analysis will never be perfect in complex systems like the capital markets. However, if we do not examine our past decisions in a careful and measured way, how can we ever improve our decision making? We must use our mistakes to learn.

I think this is one thing my kids hate about me, by the way. I am always saying we need to make our decisions based solely on reason and discipline, and in a non-financial world, that may be a little harsh. So, let's restrict my maxim to the financial decisions most of my readers make every day. I do not recommend breaking out Epictetus with your teenager to examine his or her choice of friends.

The reason I am writing this is because of a recent headline on the front page of the Wall Street Journal. The headline read: "Insiders Gain in SPAC Deal While Investors Take Losses."

The SPAC craze started catching my eye several months ago, mostly due to the fact that any time you write someone a blank check—and agree to pay them hefty fees to spend it—you are asking for trouble. I included the graph below in my post on February 22nd entitled "SPAC Attack AKA Groundhog Day". The quote I included at the time was from a young real estate broker named Marco Prieto, who said: "I would just have a bad case of FOMO [fear of missing out] if I wasn't in SPACs".

When I wrote that February post, my feeling was that while there may be good SPAC operators out there, and that there are undoubtedly some good private equity deals to be found, the SPAC craze would end badly. I just didn't really expect it would materialize this quickly. The deal that WSJ details was apparently part of one of the largest SPAC merger deals ever. The really interesting thing is that while this investment is tanking (its shares are down roughly 30%), the insiders still stand to make a massive profit. There is a very good chance that the common investor, John Q. Public, will get wiped out. The WSJ article quotes Carson Block, CEO of Muddy Waters: "It's so asinine that you can get this kind of payday for something so value destructive." Well said.

Prediction: This will not be the last SPAC that massively implodes.

When you give someone unlimited funds, plus the ability to leverage, and you pay them incentives to spend it, the money will get spent. The question as to whether those spends make financial sense will be secondary, if that.

This is not the first time Wall Street has behaved in this way. Remember private label mortgages and all the derivative related chaos from just 10-12 years ago? Remember Bernie Madoff?

It takes me back to my newfound philosopher and another one of his famous quotes:

"If a person gave away your body to some passerby, you'd be furious. Yet, you hand over your mind to anyone who comes along, so they may abuse you, leaving it disturbed and troubled—have you no shame in that?"

If this wasn't so long, it might make a good tattoo.

A long time ago, one of my mentors in the industry said that most structured products are sold, not bought.

In other words, people do no suddenly say to themselves, "I think I want to write some mystery managers at a big Wall Street bank a blank check, so they can go borrow more money and then spend it on something unknown." No, decisions like that are pushed—that is, sold—by brokers getting paid for selling them.

The same is true for many of the products that are sold in the fixed income marketplace today.

As financial managers, we need to remember that some things are out of our control, for example, the direction and timing of interest rates, so we must make calm and dispassionate decisions using rigorous self-discipline. Once time has passed, we must then look back at those decisions, and learn from them.

As financial managers, we need to remember that some things are out of our control, for example, the direction and timing of interest rates, so we must make calm and dispassionate decisions using rigorous self-discipline. Once time has passed, we must then look back at those decisions, and learn from them.

Final, final thought: We northerners have apparently not figured out how to make sweet tea. Please help. Summer is coming—does anyone have a recipe to share?

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