Would you invest on a stag weekend?
Posted by Morgan on 18th May 2009
It seems that when unprecedented economic events occur commentators reach for metaphors to try and rationalise what can not be readily explained using logical economic arguments. Thus, we regularly read about "Black Swans," "Five stages of grief" and numerous other biological metaphors.
Given that I am a simple person and so are most of the people I know, even the ones with high flying finance jobs. I felt I would try and capture the irrational economic behaviour we are currently seeing in the stock market with my own valley boy metaphor.
The irrational but much welcomed bounce in equity markets are driven by the same short term energy that underpins Saturday night on a stag weekend.
OK, I know this sounds odd but my thinking goes like this...
The global economy is unquestionably in decline, corporate earnings are starting to reflect this and almost every major company, regardless of sector, is having to try and re-build its balance sheet. Yet, against this incredibly negative backdrop the FTSE is up 14.7% over the last three months. I have studied a bit of economics, worked at two major banks and I read the FT every day but I am still at a loss as to why share prices are flying.
At least I was until I went on a stag do a few weekends ago. Twenty six lads, an easy jet flight to Majorca and as much San Miguel as you can drink - you picture the scene... (Actually it was worse than that but you can see where I am leading you.)
Friday night everyone is over excited, we are all dressed in Toga's and everyone gets happily plastered. I awake the next morning, feeling terrible and vowing never to do this to myself again. I stroll down to the beach, drink as much water as possible and try to avoid 25 idiots and the inevitable beer that will follow when I bump in to them.
At this point I have total clarity. Beer is bad for me, I can't handle my booze and when pissed I am likely to do something stupid that I will regret in the morning. This is almost inevitable especially as I will be surrounded by 25 drunk daredevils who will encourage each other on to new levels of recklessness.
So for all of Saturday afternoon I stand in a sun drenched bar avoiding as much alcohol as possible and carefully hedging my position by following each pint of beer with a sneaky bottle of water.
Back to my economic metaphor, Friday night = 2005 / 2006. The party was in full flow, everyone was on great form and it was easy to make money, whether this was in shares, property or in hedge fund land. We were all high on life and felt like we were masters of our universe and it seemed the party would last forever. Even in a pink sequined toga you could take on the world...
Saturday morning = 2007 / 2008. The dawing realisation that the party is over, you have lost your wallet and your head hurts so much that you can not conceive what to do next. The only thing that you know for sure is that you are not ever going to invest again, well not for a long time at least and next time you will be sensible! True to form nothing reallyhappened in late 2007 and 2008 as everyone liked thier wounds digested the fall out of the high jinx that had enjoyed and now regretted.
And suddenly, it's Saturday evening... The sensible afternoon has helped, the pain of the night before has faded. You have had one or two quiet drinks and suddenly as the sun fades and the music begins to play you are feeling somewhat better about life. You were thinking you would never drink again, at least not before 2010, but suddenly its mid 2009, it Saturday night and all of your mates are in town - hey why not, lets get involved, after all yesterday we were the masters of the universe.
Deep down you know that this is a bad idea, that tomorrow will be even more painful than this morning andthat this is a stupid idea but by now its too late - the band is playing, you andeveryone aroundyou is two sheets to the wind and in full voice you blast out the lyirics to Sweet Caroline - "Good times never seemed so good, I've been inclined, To believe they never would..."
Suddenly for no apparent reason other than everyone is on a high and you are feeling good about life the FTSE is through 4000 and heading for 4500 - the good times are rolling once more.
Oh, if only I'd listened to my inner voice, that Neil Diamond had added the line he forgit to sing "Good times never seemed so good, I've been inclined to believe they never would... I don't believe it, your making it up!"
I left Magaluf on Sunday morning - feeling a shadow of my fomer self, my wallet empty and my limbs aching. It was always inevitable!
So if you buy into my metaphore it seems there will be a sudden downwards market correction as the night clubs closes and the bar man kicks out the final revelers. It is never easy to leave a party early, especially one you are enjoying but as we sang on that balmy Saturday night in Majorca - "You got to know when to walk away, know when to run..."
With corporate earnings set to collapse and banks only just starting to account for loan loss provisions. It may be time to cash in those equitites and go home. If you need a rest there is a bar in Magaluf I can recommend... the sign says "the beer is cheaper than the water." (There is probably a blog on relative value in there somewhere...)
You may feel me metaphore is baseless but I have one other piece of anecdotal evidence. The stag is a finacialadviser who specialises in shares, he has been off work since his stag weekend - maybe he has come to the same realisation? Surely nobody would believe he has an infection that would take this long to heal, we were only in Spain.