The JMP Weekly Report with Chris Hagan

Psychological Investing Traps

Posted Anslie Bullion 22/09/2023

Having extra money and a clear strategy can be rendered obsolete if one falls into a common psychological investing trap. These traps can appear in a variety of asset classes, and we are covering some of these traps now as global stock markets have begun to experience pullback in the last week. These are not limited to individual investors. Large companies and institutional investors have been wiped out by these mistakes. Today, we will cover what some may view as the top 3. 

Sunk Cost

Some words that can describe the Sunk Cost psychological trap are denial and avoidance. If allocating money to the stock market over the span of a decade has made steady gains, but is beginning to look risky, it can be very easy to avoid addressing the issue and leave the investment as it is. Many will even attempt to get revenge on their falling investment by aggressively adding to it as it falls from its high.

What is temporarily a successful investment can easily form a strong habit and feeling of comfort that are difficult to stop. The habit can eventually become challenged when a market cycle flips and the easiest way to continue and keep feeling comfort is to deny that the investment has started to go the wrong way. As it gets worse, the loss becomes too difficult to bear and the investor feels forced to hold on for another full cycle until the price rises again (if the company still exists).

In the 1980s, hedge funds in London shocked the world with their tremendous gains happening during a recession. So, what were they doing? The answer is very easy: Hedging. They were shorting overheated markets and investing in safe havens, such as gold. The Sunk Cost mentality was such a pervasive trap that it plagued most of the finance sector and resulted in hapless investors bleeding themselves into failing markets. They didn’t know what else to do and had such strong habits formed during the bull market that they could not quit cold-turkey.

Irrational Exuberance

Markets have cycles: They rise and fall, boom and bust, and individual companies can be taken out of the game in a very short time due to unforeseen competition and challenges. When investors’ greed and excitement reach a high level, a specific stock or sector can be so aggressively pumped that a pullback or crash becomes certain. This is especially painful for investors joining in the herd mentality near the end of a bull cycle or fake-out and are buying into overvalued stocks at their highest prices.

This exuberance is used as a weapon against consumers by the most professional marketing firms. Consumers shown a large crowd of people lining up for the first release of a new mobile phone are easily pulled into the line so that they too can purchase the device that will be over a thousand dollars cheaper in several days.

In terms of investing in the stock market, consumers are not typically overly excited at the prospect of a new product, but rather the prospect of more money. The main emotions backing up the decision to enter the overheated market are greed and overconfidence, which are created by the rise in price and the crowd of others doing the same thing. 

Anchoring

Anchoring is a state of mental inflexibility, in which the investor stands by their original thesis for the investment and refuses to gain a holistic view or update their strategy based on new information. One recent example of this is the stock prices of short-term loan companies. From its low in March 2020, Zip Co rose over 1200% in just under a year. A brutal crash of 50% happened in a matter of weeks after it reached its highest point and investors who piled in to the seemingly endless run were wiped out. 

What were investors thinking? One thing they were linearly aligned to was that the economic slowdown combined with easy money made buy now, pay later companies the perfect investments. A major flaw here is that this easy money would not last forever, and the high-interest charges from these companies cannot be received if consumers stop spending money or cannot pay down their debts.

Anchoring is a great term for describing people who decide to “marry” their stocks and never abandon their original theses. This typically discards market cycles altogether and assumes that changes in things, such as interest rates and competitors, will never occur.

A too often forgotten mathematical reality is that if your investment drops by 50% you have to make 100% on what’s left just get back to even.  Financial markets overnight were hit heavily again.  The NASDAQ is now down 3% since the Fed Wednesday, the Dow Jones down 2% and S&P500 now down to a 3 month low.  ALL are below their 100 day moving average and looking precarious. With the demise of US Treasuries, the classic ‘set and forget’ 60/40 portfolio has been awful.  Gold & Silver remain one of the few truly uncorrelated assets to own. 

Thank you AINSLIE BULLION

Better Than Cash – Gold & Silver in a Cashless Society

Posted 18/09/2023

The tug-of-war between cash and cashless continues. Macquarie Bank’s decision last week to phase out cash altogether in 2024 is hot off the heals of CBA, NAB and ANZ ceasing cash handling at a number of branches and setting a trend for more to come. However, whilst ATM withdrawals and cash transactions fall, the pandemic saw an increase in cash held and even transaction tick up as the penny dropped about the perils of centralised digital ‘money’ for many.

In a news.com.au article entitled Australia to be ‘functionally cashless’ by 2025 last week, UNSW Business School professor of economics, Richard Holden, predicted the headline above but went on to say “But unless the government gets involved to accelerate the process I think we’ll be actually cashless by 2030”.

The article goes on to quote sources around the banks “cash rationing” through less branches and limits on ATMs. Already Ainslie customers regularly experience banks limiting how much cash they can withdraw to buy bullion. So to be clear, not being allowed to take THEIR money out.

The ease and convenience of the various digital payment methods nowadays with the likes of ApplePay, PayID and tap and go card payments etc, mean cash is becoming ‘inconvenient’ for both users and receivers alike. That ease fuels the problem for those wanting to use cash as the majority happily accept the short term convenience. Then along came the pandemic which highlighted to many the ease of implementation and extent of government overreach and had many then questioning where else that could happen.

We wrote extensively of the proposed ‘cash ban’ before the Senate in 2019 and 2020.  We last wrote to this here and worth a read to get up to speed if you weren’t aware, particularly its links to previous articles. That Bill was ultimately defeated but blind Freddy can see it will come back again. The pandemic changed many things for many people. From today’s reference article:

“However the use of cash has ticked up slightly after Covid, with an RBA survey finding cash was used in 27 per cent of in-person transactions in 2021, compared with 23 per cent in 2020.

ATM cash withdrawals and banknote deposits have similarly increased from their pandemic lockdown lows.

The pandemic also saw more businesses refusing cash altogether, although cash acceptance remains high overall at 94 per cent in June 2022, from 99 per cent in February 2020, according to the RBA.”

“The RBA also notes that while Australians are using cash less frequently for transactions, overall demand for cash remains strong.

“The value of banknotes in circulation grew particularly strongly during the pandemic, with circulation growing by 23 per cent from December 2019 to December 2021,” it said.

“Much of the increase in demand was for high-denomination banknotes ($50s and $100s), suggesting that many people in the community continue to view holding banknotes as desirable for precautionary (i.e. emergency) or store-of-wealth purposes, especially in times of economic uncertainty.”

A lecturer at Macquarie University, Chris Vasantkumar, is an expert in “anthropology of cash and cashlessness”. He makes some very salient points:

““While most Australians use far less cash than they did 20 years ago, the idea of having cash to fall back on remains very important,” he said in an email.

“There are a number of reasons for this. First, it’s pretty easy to replace cash as a medium of exchange (using it to buy and sell things) but harder to replace it as a store of value (stuffing it in the proverbial mattress).”

Dr Vasantkumar said there were serious issues to consider at both a personal and societal level.

“On a personal level, some folks (indeed some societies) have serious concerns about lack of privacy — this is the flip side of a popular argument for moving to cashless transactions — decreased crime as a result of increased transparency,” he said.

“But one person’s transparency is another person’s surveillance. How much information about our economic behaviour are we comfortable giving up? Different countries answer this question in different ways. Germans, for example, still strongly prefer cash (especially in the east) due to negative past experiences with state surveillance.”

More broadly, Dr Vasantkumar suggested an issue less often considered with going cashless was “in some ways a kind of privatisation of what used to be a public asset — money itself”.

“The kind of money we’re generally used to, standard currency issued by states (or by banks tapped by states to issue it on their behalf) is a public good like a healthcare system — accessible equally by all and ideally not a source of profit,” he said.

“Going cashless moves transactions out of this sphere into a world where you are always relying on privately held banking infrastructures to buy and sell things and someone is making money off your transactions (e.g., debit and credit card transaction fees). We wouldn’t usually think about this as similar to selling off the power grid but in some ways it really is.”

Thirdly, he noted there were real concerns about the durability and dependability of the payments infrastructure itself.

Periodic outages affecting banks’ IT systems have in the past seen Aussies stuck at the checkout unable to pay for fuel, groceries and bills.

“Cash never goes down,” Dr Vasantkumar said.”

This of course doesn’t even touch on the prospect of CBDC’s (Central Bank Digital Currencies) and that complete and utter government control of ‘your money’.  We wrote back in late 2020 about CBDC’s, Australia’s RBA moving to establish ‘our’ own, and what that might mean for you. You can read that here. In May this year we wrote to the revolt against these already happening in the US.

The writing is therefore firmly on the wall of the challenges cash has before it.  Ultimately, cash is just a Fiat currency backed by nothing but the promise the government. It is a government owned and controlled medium of exchange but is it really money? No, it fundamentally fails the monetary test of ‘intrinsic value’, that is, value in and of itself through scarcity.  It is and only, currency.  We have written extensively to the global economic Ponzi scheme that underwrites all currency and the eye watering amount of new currency created out of thin air. ALL Ponzi schemes by definition must end.  History is routinely riddled with failed Fiat currencies.

Converting your cash to gold and silver ensures you have real money stashed away not pieces of plastic that can be outlawed or unilaterally converted to digital, government controlled currency.

All the warning signs are there.  Its just a matter of acting on them and preserving your wealth and liberty.

Corporate disclosure on environmental and social topics for governance professionals

by SPONSORED ARTICLE BY NASDAQ

05/09/2023

Increased public scrutiny of corporate action and disclosure on environmental and social topics has generated concern that both leaders and laggards are at risk of unwanted attention.

Amidst the shifting landscape of environmental and social regulations and stakeholder expectations, Nasdaq ESG Solutions gathered input from governance professionals across the Nasdaq network, including company secretaries, general counsels, executives, and board members, to identify leading practices informing their approach to ESG and sustainability. They raised corporate sustainability and social responsibility disclosures, as well as the role of ratings in reputation and risk management, as key topics.

Several of the governance professionals predicted that the days of broad aspirational statements in sustainability and corporate social responsibility reports are waning as risk mitigation further influences the information shared in voluntary disclosures. The resulting approach for many organisations is to disclose the most impactful environmental and social metrics and policies sought by investors and rating organisations, and those most critically aligned with the business strategy and goals.

In addition to corporate sustainability and social responsibility disclosures and the role of ratings in reputation and risk management highlighted above, governance professionals Nasdaq spoke with raised valuable focus areas to build upon in 2023, including best practices to:

• Establish organisational and operational design for strong governance
• Define ‘materiality’ in the context of ESG
• Deepen board knowledge and education on ESG matters

Take a closer look at these focus areas and best practices in Nasdaq’s guide: ESG & Sustainability Trends and Leading Practices for Governance Professionals

Nasdaq supports companies at all maturity levels, including publicly listed, private and nonprofits to achieve ESG excellence, drive good governance and action their strategies.

Thank you to Governance Institute of Australia and Nasdaq