Thursday, December 5, 2013

FLASH UPDATE: Procrastination Can Burn You


Procrastination, in delaying being short high yield, is like standing too close to the fire

I have recently read a short piece in The New Yorker discussing “procrastination”, which effects all of us in one form or another.  It is interesting that George Akerlof authored the piece.  His wife, for those that are unaware, is Janet Yellen (our soon to be new Federal Reserve Chairperson).  She may want to read closely what her husband has written on the subject of procrastination when she thinks about “Tapering”.  I have spoken to several very smart investors, many of which are much more educated than myself, but regardless of the Ivy League pedigree or the Nobel Prizes on the mantel, we can all have a case of procrastination from time to time.  

The current investment theme we are focused on and excited about is shorting high yield companies who never procrastinated when “free” money became available.  I am surprised by some potential investors’ theories which suggest that they can time the fall in high yield…or is it just procrastination rearing its big ugly head?  

George Ainslie, the well-known psychiatrist, psychologist and economist, wrote in an essay that procrastination “…is as fundamental as the shape of time, and could well be called basic impulse…”.  The word procrastination itself means “to put off for tomorrow”, and entered into the English language early in the sixteenth century.  By the eighteenth century, Samuel Johnson was describing it as “one of the general weaknesses” that prevails in all great minds.  In a study done at the University of Calgary, the percentage of people who admitted to difficulties with procrastination quadrupled between 1978 and 2002.  

In this light, I now understand why so many colleagues and intelligent investors sometimes procrastinate in making fairly obvious decisions.  I thought it was timing, but maybe in some cases I was wrong and it’s just old fashioned procrastination.  As for me, I really hate to put off what I can do today for tomorrow.  This probably comes from my strict Grandmother and all of her values.  

I can honestly say that two of the best trades I have been involved in would have been missed if I had been a procrastinator:  1) Short Subprime, and 2) Short HY.   Both trades were so cheap to have on that I never really thought about waiting for tomorrow when, for pennies, I could have it on early when bonds were at the highest levels, allowing us to maximize the returns. These two trades were the most profitable trades for myself and our investors in the crisis period.  (Of course we should have had double the size).  I encourage everyone who is looking seriously at our Short-Biased High Yield Portfolio to get invested now (or soon) as bonds are generally at their mathematical peaks and fundamentals in the HY companies we focus on are eroding fast.

Best Regards,

Michael Beattie
Chief Investment Officer


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