Inflationary And Deflationary Market Conditions Create Fear
Business expert Solomon Berkoff, one of the few traders to spot the Housing Bubble burst of 2008 in time to reposition, says Periods of inflation and of deflation are tough times for most Americans. Even in the realm of finance, few professionals are able to understand and navigate successfully through turbulent markets, depressed conditions or unforeseen events.
With a background in banking, trading and structuring, Mr. Berkoff is able to understand finance from all sides. He is now a Principal at Charleston Capital Management, where he seeks absolute returns through tactical investments less correlated to the markets.
Get The Full Warren Buffett Series in PDF
Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues
Q1 hedge fund letters, conference, scoops etc
His unique takeaways from surviving the Housing Crisis, as well as both bull and bear markets, can help finance professionals gain new insight into investing during inflationary and deflationary market conditions.
It is Mr. Berkoff’s belief that the ability to make sound investment decisions that unlock hidden value come down to the investor’s ability to understand and make predictions based on these two factors: data and social mindset.
Good Data Is The Essential Source For Smart Decision-Making
In a recent interview with Mr. Berkoff, he discussed the invaluable process of running smart data analysis even when the popular opinion on a decision-point feels sound.
“I was at RBS during the financial crisis. I had a front seat to huge declines in asset prices and then the subsequent recovery. I remember a lot of speeches about how Americans would never default on their homes en masse. I also remember a lot of speeches about how the housing market would never recover. I think in both cases, the data available ahead of time suggested both outcomes.” said Mr. Berkoff.
The collapse eventually brought transparency to the CDO investment class as an abundantly awful choice once investors after the fact, but it is important to remember that over half of all Americans were affected by it. Up until the point it failed, it was considered a wise investment decision even by prominent institutional investors. A prudent investor should take this point in history with him or her into every strategic decision. Popular decisions aren’t necessarily good choices. Do the hard labor of data analysis from every angle prior to determining where you put yours or your investors’ money.
“In those days, in order to figure out which originators were in a deal, one had to actually read the data tables in individual bond prospectuses.” Mr. Berkoff adds. Today’s technology makes good data decisioning far easier and readily available. Investors should take advantage.
Reconsider Liquidity from a Cultural Standpoint
The second important point Mr. Berkoff notes is that what many investors term liquidity may be inaccurate, especially with regard to times of uncertainty.
Mr. Berkoff notes that while liquidity is the ability to turn an investment into cash, the source of that capital has an affect on how truly liquid an investment is. “The ability to sell something easily today can be very misleading.” He notes. “Many investors judge their risk by how easily an investment can be sold. Meaning — if I own something I can sell easily, then it is less risky than an investment that cannot be sold easily. The problem is, when fear takes over, there are often no buyers. In a crisis, even high-quality investments will sometimes see zero buying interest. At that point, prices begin to drop, which causes more fear. You really have to experience this cycle first-hand to know how dangerous it is. Once it starts, you do not get to go back and reposition yourself.”
This is an important point for many investors who have not experienced times of uncertainty, and circumstances like these are more possible now than ever, thanks to social media. Social media has hyper-connected information so that now, information is spreading so quickly it can have instantaneous and severe effects on any business, industry, or even market. Just last week, Metro Bank experienced the first social media era bank run, spiraling from false rumors spread through Twitter. The bank ultimately closed on the market down 11%, an all-time low.
Mr. Berkoff urges investors to make predictive behavioral decisions by taking the value of collective fear into account. “That is why we at Charleston Capital like making loans backed by short duration collateral. Paydowns mean cash. Cash gives one flexibility and optionality in a crisis. Owning long duration bonds that were liquid before a crisis is no help once fear takes over.”
For more information about Charleston Capital Management, and to read Mr. Berkoff’s weekly insights, visit www.charlestoncm.com.
This is because these two market conditions create fear, an often underestimated risk factor in the public markets.