The Perspective - September 2018

“Those who cannot learn from history are doomed to repeat it” 

--George Santayana

 In this month's edition I want to reflect on and discuss the 10 lessons our firm learned from the 2008 Financial Crisis. Last week was the 10-year anniversary of Lehman Brothers declaring bankruptcy and the financial world changing forever; we must never forget these lessons we learned during that frightening time or we will be doomed to repeat history. 

1. Things that have never happened before are bound to occur with some form of regularity. Youmust always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse. 
2. Nowhere does it say that investors should strive to make every last dollar of potential profit;consideration of risk must NEVER take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis. 
3. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast,ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
4. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down. 
5. The latest trade of a “whatever is working” (Technology and chasing returns now) creates a dangerous illusion that somethings market price approximates its true value. This mirage is especially dangerous during periods of market exuberance (potentially right now). The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism. Defense is equally important (if not more so) than offense. 
6. Having clients with a long-term orientation and thinking is crucial. Nothing else is as important to the success of an investment firm. We thank our #TeamAuctus clients for the trust and confidence they have shown in our process. 
7. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds. Diversification will have seemed to fail in the short run, however it is the only thing that will save you. 
8. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs. (See: HEDGE FUNDS and PRIVATE EQUITY) 
9. Ratings agencies and Wallstreet analysts are highly conflicted, unimaginative people. They are blissfully unaware of adverse selection and moral hazard. Investors should not take them at face value, they have other agendas. We always do our own due diligence, we always are cynics and skeptics, we always trust but verify from our relationships and sources.
10. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians. 

Conclusion

I thoroughly hoped you enjoyed this edition of “The Perspective”. We take great pride in our stewardship of our clients’ finances and reflect a lot on the experience we gained from the 2008 financial crisis. While we don’t see another crisis of that magnitude on the horizon, we do remain diligent in our evaluation of risk and its relationship to potential return. We are always happy to give up some upside return to protect clients’ downside risk. I am honored and humbled by the trust and confidence you have placed in Auctus Advisors, and our team looks forward to continuing to earn it every day. As always, please contact us with any questions!

David B. Miller
Managing Partner | CIO