I find it amusing that the debacle in Copenhagen which just finished was the birthplace of Hans Christian Andersen. One of the most famous stories of Andersen’s included the famous quote from the child, “but the emporer has no clothes”. And so it is left to the children to speak the truth.

The truth is, after being in this business since 1975, I came to the realization a few years ago about what a silly business this is (at best) and how malign it is (at its worst). After all, we spend all this time and money shuffling around pieces of paper which have virtually no utility in the real world. We bet (because this market today has little or nothing to do with investment) billions of dollars or euros or whatever chasing the opinions of those who get paid lots of money but are no more credible or reliable than the proverbial man in the moon.

What’s your opinion on gold, Mr. portfolio manager? “Buy” he shouts, there’s massive inflation ahead “Sell”, says the next one,”it is a barbaric relic which has no intrinsic value and has a negative carry.” Who is right? and more importantly, who is keeping score? Oil? the dollar? The S&P? Corn? Name it. You and I can give equally exhaustive and comprehensive arguments for buying and selling ANYTHING. Yet well-meaning and seemingly intelligent people make tons of money professing they have the answer. IF I HAD THE ANSWER I SURE AS HELL WOULDN’T TELL ANYONE for a few measly dollars.

At its most malign, the investment banking sector has destroyed as much wealth as anyone or anything. The vast majority of mergers and acquisitions are done for FEES, and/or just as shockingly, because the CEO of some company has an edifice complex and buys just for the grandioisity which the media will shower upon him. AOL/ Time Warner? Worldcom? Cisco? disasters. And why is this so? Because the culture of Wall Street makes it so. The bankers-to-be are hired from only the finest universities. They are continually told how brilliant they are, and the firms that are trying to hire them.

At the same time, they also know that investment banking, while paying out humongous sums of money, is a culture where “you eat what you kill”. Or, you’re only as good as your last trade. So these bankers know they have, on average, a very short life span in which to make all this money. So they pressure clients to do deals, to buy toxic pieces of junk that not even their own firms understand, engage in unethical (albeit narrowly legal trading practices) all in the knowledge that they have a very short time (on average) to make their reputation and their money. The client be damned. Number One comes first!

WHY DO YOU INVEST IN ANYTHING? – Obviously to make some return. But the broader question is, why any particular asset? And whether or not you realize it, it is because you think that either you or your advisor/broker or whomever has some EDGE; that somehow he is in possession of information or knowledge with which YOU AND ONLY YOU will benefit. Oh, my sweet young innocents!

For example, Galleon, the recently liquidated hedge fund run by Raj Ratanaram (under investigation for insider trading), paid $250 MILLION a year in brokerage commissions. For this horrendous some of money, he expected his institutional brokers to get him information FIRST. Now, if I am (and was) an institutional broker and had a client who was paying me over $1 million a YEAR, where do you think my first call each morning is? To you, who might be paying me $25 or even $100,000 a year? You can do the math.

So if you multiply the Galleons by some factor, those who pays enormous commissions, how old is the information when it finally gets down to you? You will NEVER have new information. The effect is that every other investor is reduced to being a momentum player. All other explanations one suffers thru in the media are just so-much hot air. And we all know (or should) what the consequences of being a momentum investor are, don’t we? The worst is getting off the bus in time, which most NEVER DO. You are the ones left holding the bag.

But it would be unfair to say there is nothing new under the sun. Meredith Whitney found Citi’s black hole; David Einhorn was on top of Lehman like a cheap suit and profited hugely when it collapsed; Jim Chanos knew Enron was a house of cards and acted accordingly; John Paulsen made $3 BILLION on the sub-prime debacle. There are honorable, honest brilliant hardworking practitioners of the trade. But unless you invest with them directly, you will never get the returns you secretly hope for.

I always found it amusing (often annoying) when, during this past earnings cycle, the pundits were saying “XYZ beat analyst’s expectations”: That is all this rally was. And why? Because the analysts either DIDN’T DO THEIR WORK or DIDN’T KNOW!! Why should anyone listen to them. How can an anlayst miss earning by 50%? (as so many of them did) Why aren’t any of them fired? Because their job is to generate DEALS, not to piss off managements. If you realize how little brokerage commissions are as a part of overall revneues for the likes of Goldman, Morgan Stanley, JP Morgan, Citi and BA, you will soon realize where the top priorities lay.

SO WHAT DO I DO; MR SMARTYPANTS? I maintain, and continue to do so, that the best (although hardly foolproof) ways to grow your wealth is to focus on two factors:1.read your history and 2: understand human behavior.

History always repeats itself, although with varying shades. Hundreds of years of history are there for us to examine. We don’t need a brokerage house shill to tell us what or why. The second part is more difficult, for as the cartoon character Pogo famously declared, “We have met the enemy, and he is us”. It is only the strong and the committed that can profit (and profit immensely, I might add) from undertandinf how the human mind is affected by various sensory effects and how it causes us to react.

But like the Whitney’s Einhorns and Chanos? sighted above, (Buffett is a separate example), amongst others, REAL returns require HARD WORK and the confidence to say that the emporer has no clothes.

THseasonE EMPORER, in this case, is the investing world we face this coming holiday .What do I know? The US deficit is now in the trillions. The banks are technically insolvent. Entitlement programs will NEVER be funded, yet Washington is proposing another trillion dollar program. Foreclosures are rising, credit is non-existent. The system is broken. And with all this money in the system, nobody knows what the true price of anything is. To think an exit strategy will come off without unintended consequences is the height of folly.

I know Austria has just nationalized two banks. I know England,Greece Ireland, Portugal, Spain and Italy are broke and will NEVER pay their social obligations to their more and more mutinous populations. I know China is the biggest Ponzi scheme in history. I know Russia is in the latest stages of implosion; I know capitalism is in retreat, that protectionism rears its ugly head a little more as each day passes. There is more, but you getr the point. These are things I (we) KNOW: No clown inb New York or London has to tell us. Clearly, the timing is the issue. Remember Keynes? famous dictum about the market remaining irrational longer than you can remain solvent”

A HOLIDAY STORY TO FINISH THE YEAR Many of you may be familiar with the works of DH Lawrence through his “novel Lady Chatterley’s Lover”, one of the early tomes (along with “Fanny Hill”) which introduced young, pimply-faced boys to the shock and awe of sex in novels (although by today’s standards I’ve seen television commercial more pornographic than what is in the book): But I digress. He is also the author of a short story titled “The Rocking Horse Winner”. I present this synopsis as perhaps a cautionary tale for 2010.

It is the story of a young boy who gets visions of the winners of Ascot’s horse races while madly riding his rocking horse.. At first he wins enough money to pay off the family debts, but that is not enough; the household goes mad with greed and he must keep riding to produce winners until he dies from exhaustion.”Although they lived in style, they felt always an anxiety in the house. There was never enough money.” After the boy’s initial bet wins, the house seems to say: “There must be more money; there must be more”. When the boy wins even bigger, the voices become louder and more urgent: “There must be more money!”. The boy asks his emotionally bankrupt but greedy mother about luck, and she responds,”I don’t know. Nobody ever knows why one person is lucky and another is not.” The boy continues to manically ride the rocking horse. “Now! Now take me to where there is luck! Now take me” The voices in the house rise to a fever pitch: “There must be more money! Ohhh,there must be more money!” “More than ever. More than ever”. The boy eventually dies of nervous exhaustion and his uncle mourns:”eighty-odd thousand to the good…but, poor devil, poor devil, he’s best gone out of a life where he rides his rocking horse to find a winner”

Happy and Healthy Holiday and New Year wishes to all. Hopefully, we will revisit each other in 2010, and I look forward to seeing some of you soon.

Best regards

Chuck Karasick
December 19, 2009
Lugano
079.463.7231