Both distressed investors and investors in distress are anxious and discontent because they are languishing in the doldrums of "status quo." The unanticipated tranquility of zero interest rates and the new mantra of "pretend and extend" by holders of debt instruments have sent both groups into a holding pattern that has become a bit surprising.
The meltdown in the global financial system brought out the big guns. They possessed historical skill and incomparable talent as they harvested new funding. They were convinced that the opportunistic wave of the day would be distress. There are dozens of distress strategies and theories and most of them have not yet resulted in meaningful amounts of attractively deployed capital. Likewise, borrowers who themselves are in distress as a result of high debt loads and underperforming businesses and properties are finding that banks are not interested in lending money. Amazingly, banks also are not in a hurry to perfect their security or foreclose on businesses or properties. We are all stuck in the middle of a flat sea with no waves and no wind.
I was reading one of my son's school admission applications the other night. It was an essay question asking him to discuss what mistakes had he made and what he had learned. He chose a surfing incident in which he was a bit arrogant and he had turned his back on Mother Nature. It reminded me of some great investor guidelines. I have always felt that surfing is a great metaphor for investing. Below are a few credos that characterize both a big wave surfer and a successful investor:
- Know exactly how to exit before you enter.
- Being in the right spot is more important than the size of the wave.
- The waves you let go are more important than the wave you catch.
- If you miss a wave be sure that another will come behind it.
- Stay out of the water when wild amateurs are present.
- Avoid crowded take offs.
- Don't panic in a wipeout and don't fight the current.
- Success is achieved by taking risk, not avoiding risk.
- Push too hard and you get hurt - don't push hard enough and you can get hurt even worse.
- Get in the water yourself to evaluate the current by instinct - the height and direction of the swell, the wind, the tide, the temperature, the coral reef bottoms, the peak, the trough, the time between sets and the position - data without experience will deaden your senses.
- Know where the "impact zone" is and how to stay out of it.
- Humility trumps arrogance.
- You need to be in condition for the worst circumstance in the worst situation not the best circumstance of the best situation.
- A successful outing is being able to surf another day.