one big pyramid scheme

I have not written a blog entry about the recent financial upheavals, although I have been meaning to.

At first things had the grim logic of a horror film, of course the clues had been there, we had been cocky and arrogant, and now was the time of our come-uppance. Every morning the news seemed to be reporting something that was impossible, Northern Rock, Bradford and Bingley, and most shocking to me Halifax Bank of Scotland. You had dealt with these businesses all your life, you knew people that worked for them.

Then the news got a bit boring, basically the same sort of story every day, generally without any real insight or understanding.

Now the news media have turned the page, and are starting to do the human interest type stories, there is talk of JK Galbraith, 1929, and Keynesian economics. The latter on Radio Four granted.

We have started to hunker down for the long term.

I work to the assumption that markets following a gently rolling sine curve, with a general tendency to move upwards. However you can easily lose money by buying high, and selling low. The opportunities to make real money, rather than just trade on a rising market, require quite particular insight and opportunities.

With hindsight it is obvious that the rate of acceleration was diminishing, we were nearing the peak. Now we have even more obviously reached the peak, and like a cartoon character, after running fruitlessly on the spot for a second, we are now starting to plunge down.

The statistics are slow coming, but the old model, of borrow, spend, borrow to buy on a rising market, dinner parties and an end to the economic cycle, are now clearly gone.

More telling is the attitude, I can see it in myself, I have weaned myself off the desire to spend. Spending is a transitory pleasure, but in uncertain times it is safer to just leave that money unspent. We have that sort of extreme nervousness that means we don't know what to do, in uncertain times, often doing nothing is a pretty good option. Indecision reigns.

Suddenly we all feel poor.

We are all starting to re-balance our attitudes to spending, to having, to what we want. Perhaps we might begin to see more clearly that money is not an end in itself, and that we are capable of more than simply accumulating and passing on money. Strangely that score does not seem to count for so much now.

The test of any theoretical model is just how long it lasts. I have been patiently buying shares for a few years now, and sensed that we were at the top of the market, but still could not quite believe it. The recent upheavals have totally wiped out some of my shares, and left others worth vastly less. Generally you have not lost the money until you actually sell, or in the case of bank shares, till they get nationalised. Therefore there is some degree of theoretical comfort there. However my portfolio will never be quite the same again, and moving back into profit territory will need to await shares reaching rock bottom then climbing back up to current valuations. My older purchases will be in loss for a long long time, however anything that I buy now will hopefully turn a profit much sooner.

I reckon that the current recession will last around five years. Not exactly five years, but that sort of ball park figure. In the meantime the best strategy seems to be just buy big blue chip type shares. Now boring is good. Not every business will still be around in five years, but many of them will and they will be making profits. So diversity is good, boring is good, blue chip is good. Volatility is there for a reason. Volatility reflects uncertainty and ignorance. Small investors are simply not nimble enough to make money on volatile markets, they make money through pound cost averaging, buying shares when they are low, and out of favour.

We live in uncertain times, where once risk brought reward with little likelihood of failure, now risk simply means exposure to catastrophic consequences.

If we are not buying things because they are cheap, or they will make us a profit, then we need to think more carefully about what things are actually worth to us, and have the courage to continue to make those choices.

We were all caught up in a glorious pyramid scheme, we all bought in, and as long as more and more people kept on buying in, we all made money. But it was all bound to end. We had abandonned common sense. More and more people bought houses thinking that it was a one way bet, until house prices reached insane multiples of income, and traditional first time buyers were priced out of the market, replaced by highly leveraged buy to let investors. As with property, so with so many other things. We were caught up in a frenzy, thinking the old rules no longer applied. Buying into things we did not understand, thinking that investment was a one way bet, that credit was good, and capital was bad.

Looking back it seems so quaint now. Maybe it all will be different next time. Or maybe it will just take us a longer time to forget the lessons we have learnt.