16
Jul
2016

Discomfort of thought

So a few people asked me what I think about BREXIT. To keep things focused, I’ll just write how I thought I could make money from the situation. Before the vote, my thoughts were:

“I don’t really know what is going to happen, but I think there are asymmetric risks and rewards.”

The idea that you have to predict things, or have strong opinions, to make money in the stockmarket is wrong. Instead I like to find situations where the probabilities don’t match the prices. Or conclusions that are obvious, but which other people are reluctant to reach those conclusions because it goes against how they would like to see the world. Taking positions when you admit to yourself you don’t know what’s going to happen, or you don’t like what is going to happen. Seeing the world as it is, not how you would like it to be.
That is, I thought the vote would be close, around 50 / 50. But this 50 / 50 probability was not being correctly anticipated by financial markets.
So ahead of the vote I bought some Pearson. This is the company which has been struggling. The core business is publishing text books, which is high margin but it is suffering from online / digital competition Massive Online Open Courses (MOOCs). Why go to a traditional university and buy all the coursework books, when you can watch lecturers online? But importantly Pearson earns most of its money in US dollars. I thought that most of the bad news was priced in, MOOCs seem to me unproven. If BREXIT happened everyone agreed that GBP would fall relative to USD, so the answer was to buy a company that earns most its money in dollars.
I bought at 801p and sold at 860p, a gain of 7% in three weeks but 10x leveraged because it was my CFD account. I sold because I changed my mind – and decided to sell ALL of my CFD positions ahead of the vote.  I was 100% in cash. I can tell you, it is uncomfortable being 10x leveraged into an uncertain situation. As it turned out, this was a mistake, I sold too early and actually PSON did well after the vote and is now at around 954p.
I didn’t stay up all night, and actually didn’t check the result until just before the market opened. I saw that the “outers” won. I was half surprised because I thought “remain” would win and half not surprised at because I thought the vote would be close.
But because I was 100% in cash, when the market sold off aggressively in the first hour or two I bought some Britvic (it makes soft drinks) De La Rue (it prints bank notes) and Bank of Ireland (Irish bank). These companies were all falling steeply, like most other shares.  I couldn’t see their prospects change that much if there is lots of political uncertainty. Though I made money, this wasn’t easy for two reasons.
i) If Bank of Ireland can fall 20% why not 30% or 40%? I lost money in BKIR because although the shares fell c. 30% then recovered; I didn’t time the bounce well enough.
ii) The bid ask spreads (price you pay when you buy v price you get when you sell) widened massively, particularly for De La Rue. In the end I made a tiny profit in De La Rue, because although the shares recovered, that was the mid point. I bought at 480p and sold at 482p, because the recovery wasn’t enough to compensate for the very wide spread.
I did make quite a lot of money in Britvic, buying a big chunk at 596p and selling at 634p.
I was then going on holiday to Gdansk. And I had to decide whether to either
i) leave my positions open (with stop losses) or
ii) just close the positions.

As I was going to a music festival, with limited mobile phone battery and internet access I just decided to close my positions. I knew that I wouldn’t enjoy the festival very much if at the back of my mind I was worried about all the money I might be losing. But this is completely irrational – it shouldn’t make a difference, but I just thought I’d prefer to enjoy my holiday.  

The idea that to be a trader you have to stare at a screen watching prices every second of the day seems to me not how most successful people operate. Closely following prices seems to me something that computers can do better than humans. But humans can still think about deeply uncertain situations better than computers can – that is where our edge should lie. But uncertainty is uncomfortable.  As it happens I would have made far more money if I had just gone on holiday and left my De La Rue position open – as of yesterday the price was 624p.

My opinions on BREXIT more generally are that this was never about rational economic self interest – people voted in way that they either identified with “Great Britain” or “Europe”. I could easily have voted either way. Many of my friends had very high convictions on this issue. I think they have these convictions because they don’t have good evidence. We don’t tend to have heated arguments about whether a triangle has three sides, or whether Scotland is North of England. That’s because we all accept that a triangle has three sides, and that there is a lot of evidence Scotland is in the North. So we only tend to argue about uncertain situations, we might have strong opinions, but there is no good evidence and the conclusions aren’t obvious.
My other thought beforehand was that this would be a “protest vote”. For instance: since the banking crisis in 2008, there has been huge, unfocused rage that not enough has changed. According to the High Pay Centre, 20 years ago UK Chief Executives used to earn 50x more than their average employees. Now the stockmarket has gone nowhere for the last 20 years, UK Chief Executives earn 180x their average employees. That’s just one example, but it does feel like since 2008 “nothing has changed” – and this vote was a protest against that.  

When left wing, wealthy young people with Trust Funds smash up MacDonalds in Oxford Street as a protest against globalisation, they are cool. When working class people in the North of England vote against the European Union, for similar anti globalisation reasons, they are called bigots and xenophobes. I don’t think 52% of the country that voted to leave are idiots, I think they have legitimate grievances.
Is globalisation, inequality and the power of large corporations the fault of the European Union? Perhaps not. But putting a man like Jean Claude Juncker, who made his name by growing Luxembourg to be one of the world’s foremost corporate tax havens, seems like it is sending the wrong message.  And why hasn’t Juncker resigned?  If you are not part of the solution, you are part of the problem.
There is a certain irony to me also, that I think young people have the most to gain from BREXIT.

  • Higher inflation (good for younger generation).
  • Less competition for jobs in London (good for younger generation)
  • Lower property prices (good for younger generation).
  • Austerity economics abandoned (good for younger generation).

Old people who own houses and pensions have the most to lose. But it was the old people and people in the North of England who voted “out”, and the young people in London that voted “in”.
All this goes to show that opinions are one thing. But if you want to spot opportunities from uncertain situations, it is worth thinking uncomfortable thoughts.  Or a US President once said

“We enjoy the comfort of opinion without the discomfort of thought.” John F Kennedy

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