Gyroscopic Investing

Flash crashes + today's news of more "glitches" ... I'm wondering if it's even safe to invest in non-tangibles anymore?

Thoughts?

Well, it doesn't seem safe to not invest.

dualstow wrote: Well, it doesn't seem safe to not invest.

I'm not saying "Don't invest."  I'm saying: There are many things to invest in that aren't as easily manipulated by factors we can never hope to control, influence or understand (flash crashes and computer "glitches").

I think that this is one more great argument for diversification of institution.  It also shines a bit more light on the wisdom of holding 25% in physical gold.

With the Permanent Portfolio, your paper instruments are things like Treasury securities and broad-based US stock indices.  If there was a computer glitch so catastrophic as to foul up these investments, I think that you'll be extremely happy to have 25% in physical gold!

My view is that if anything happens that is horrific enough to significantly compromise your stocks, bonds, or cash, your gold allocation would pick up the slack to protect you.  It's just one more hedge that Harry Browne built into this investing system.

Don't trading glitches just impact those who are trading?

If you have what is basically a buy and hold strategy like the PP, do trading glitches really matter that much?

If I was a PP investor and I took a Rip Van Winkle nap and when I woke up someone said there had been some trading glitches over the 20 years or so I was asleep, I wouldn't be too concerned.  I would just want to know where I was at with my rebalancing bands.

That's why I like paper records.  I'm wondering when the day will come that a computer glitch or malware wipes out a brokers electronic records.  How would you even prove you had an account without some backup?

In the Knight Capital case, the company is the market maker for more than 50 ETF funds, including some from well-known companies like Vanguard, State Street, Wisdom Tree, etc.  I don't think the ones we like to use in the PP are on Knight's list, but no doubt some of Knight's ETFs may be in use for some of our VPs.  Also, lots of familiar brokerages routed their trades through other firms besides Knight Capital since yesterday, including TD Ameritrade, Vanguard, E-trade, etc.  The re-routing seems to have worked this time, but I do wonder about the next "glitch," as well as what might have happened if this glitch had happened to one of the TBTF banks, or if it had lasted at Knight longer than 45 minutes.

I wish I could have been a fly on the wall at Knight Capital during those 45 minutes. I'm willing to bet quite a few people needed a change of underwear. Almost 500 million dollars in 45 minutes? Man. It's hard to even get your mind around it.

Pointedstick wrote: I wish I could have been a fly on the wall at Knight Capital during those 45 minutes. I'm willing to bet quite a few people needed a change of underwear. Almost 500 million dollars in 45 minutes? Man. It's hard to even get your mind around it.

I guess that's why the CNBC and Bloomberg news have already nicknamed the situation the "Knight-mare."

Some of the HFT programs work by rapidly making orders, the majority of which are cancelled within microseconds of being placed.  That allows their algorithms to test prices, determine price direction, front-run, and see other things long before anyone goes forward with an actual trade. 

From what I gathered watching Bloomberg and CNBC, the cancellation phase of the errant program was not working well, leading to Knight to push gazillions of test trades into the market as real buy-sell orders they had to make good on.  It's like they were at an art auction where the auctioneer, who was obliged to accept new offers higher than the last, couldn't convince them to put down their paddle rather than rhythmically holding it up every second.  They thought they were paper trading and testing their arm muscles, when they were actually in a real auction.  In the end they wound up bleeding away their capital by trading up their own previous bids.  By the time they figured out what the problem was and did what they could to fix it, it was too late.  $440 million down the drain in less than an hour.

I'm certain that the person(s) responsible for giving the go-ahead to run the "untested" software not only had to have a few underwear changes, but at some point was probably forced into a newspaper- and plastic-lined cubicle. 

MediumTex wrote: Don't trading glitches just impact those who are trading?

If you have what is basically a buy and hold strategy like the PP, do trading glitches really matter that much?

If I was a PP investor and I took a Rip Van Winkle nap and when I woke up someone said there had been some trading glitches over the 20 years or so I was asleep, I wouldn't be too concerned.  I would just want to know where I was at with my rebalancing bands.

this strategy doesn't protect against the likes of MF Global / bernie madoff...(granted, PPers probably aren't invested with either)

MediumTex wrote: Don't trading glitches just impact those who are trading?

If you have what is basically a buy and hold strategy like the PP, do trading glitches really matter that much?

Exactly.

"invest" vs "trade" vs "speculate"

I invest.  Speculation is when you are depending solely on someone willing to pay more than you paid, rather than the intrinsic value increase of a good company, etc.

I very seldom make a trade so the chances of a glitch or manipulation hurting me are slim.  And even if they did, it wouldn't affect more than a minor portion of my assets, so the hurt would be very limited.

Coffee wrote: Flash crashes + today's news of more "glitches" ... I'm wondering if it's even safe to invest in non-tangibles anymore?

Thoughts?

I was four days in the backcountry with no form of communication and when I came back there was nothing wrong with the portfolio. What did I miss?

I think that probably the best thing to do is just ignore this stuff because by the time you could react to the news it is too late to react to the news.

I always liked one of Taylor Larimore's stories on the Diehards. I do not do it justice, but here is the core of it: Taylor was on a cruise when the big crash in 1987 happened. This was something like -25% in one day. News of it spread around the ship and a huge line formed to use the limited (and probably expensive) ship to shore phones as people tried to call their brokers to react. He was not able to reach his broker and just did nothing.

The end result? By the end of the year the market recovered and all the losses were gone.

The lesson is that often doing nothing at all is the correct course of action.

But you will all be happy to know that I did manage to summit Glacier Peak with a climbing buddy. This was two days of backcountry travel on snow and glaciers to reach the approach camp. We then summited, came back down, and then hiked out half-way. Then we camped the third night, then hiked out on the Pacific Crest Trail back to the junction to our car.

Yes I'm thread hijacking a little, just wanted to show the only news that mattered to me this week. It was a great trip and the reason I feel like I can go to these remote places and not worry about investing is because I have a very widely diversified portfolio!

Our Mission: Glacier Peak - Most remote volcano peak in the Washington State:



My climbing partner traversing a glacier towards me:



View from camp:



I summit the peak:



I think all portfolios should be able to pass the "No Communication for a Week" test. If you don't think you can leave your money unattended for at least a week then the portfolio you are running is probably too risky for you.

That's a great test.

And great photos of you and your friend on the glacier peak. I can see that you had a good time.

I think the moral of the story here is that
I am due for a vacation.

dualstow wrote: I think the moral of the story here is that
I am due for a vacation.

Craig has promised to take me climbing while we're on the book tour.

The two of you should never be climbing at the same time! That's too risky.

Reub wrote: The two of you should never be climbing at the same time! That's too risky.

Oh we diversify the gear. You see he carries the food and I carry the water. He carries the tent poles and I carry the tent.

That way if one of us vanishes over a cliff the other person will either have no food or water and no way to setup a tent. It's a great arrangement.

Besides, we would look great in leather chaps on the summit.

Be sure the chaps are trimmed in gold. It will protect you from all sorts of catastrophes. 

As HB used to say in the early 1980's:

"When the going gets tough, the intelligent investor takes a vacation."

Or something like that.