{"id":22896,"date":"2008-11-24T00:01:00","date_gmt":"2008-11-24T00:01:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=436"},"modified":"2008-11-24T00:01:00","modified_gmt":"2008-11-24T00:01:00","slug":"bendita-sea-la-mentalidad-avestruz","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/bendita-sea-la-mentalidad-avestruz\/","title":{"rendered":"Blessed is the Ostrich Mentality."},"content":{"rendered":"
It is common knowledge that ostriches bury their heads in the ground when they sense danger, as if doing so would keep them safe. Clearly, shutting out their senses does nothing to protect them from the actual danger surrounding them. With this \u00ab\u00bblifesaving strategy'<\/span> They manage to change only one reality: their own. In this way, they avoid the stress that would result from being aware of the real situation around them, but they do not in any way manage to improve their precarious situation. It merely improves their own futile subjectivity.<\/div>\n
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Similarly, we can say of ourselves that we are aware that we find ourselves in a hostile situation, that grave danger lies in wait for us, or that our prospects for the future have been dramatically diminished by adverse circumstances; that is the premise <\/span>sine qua non<\/span> so that we can react and try to prevent harm as far as possible. Not only is it physically impossible to resolve anything if we bury our heads in the sand, but the damage \u2013 if left unaddressed \u2013 will be far more devastating.<\/p>\n

\"\"<\/a>Applying these all-too-obvious syllogisms to the circumstances of an investor in a hostile environment such as the current one, we arrive at revelations that are curious, to say the least. It is, regrettably, all too common these days to come across investment portfolios severely affected by various forms of carnage: Structured products trading at 15, 30 or 50% of their value, equity and fixed-income portfolios (preference shares and perpetual debt) with unrealised losses of more than 50%, and various investments in derivatives adrift.<\/p>\n

Some of these investors, whose financial assets have been decimated, act with the Head-in-the-sand mentality<\/span>. In other words, faced with the unrealised losses in their portfolios, they bury their heads in the sand without exiting the markets and without doing anything to remedy their situation. They thus follow the advice of the very same fund managers who have caused them harm by exposing their assets to excessive risk: Now is not the time. Taking a loss would be suicide. You\u2019d be selling at the worst possible moment. We\u2019re hitting rock bottom. There are plenty of opportunities right now\u2026<\/span> Keep it up \u2013 it\u2019s war! In the midst of mental ostrich-ing,<\/span> The strategic criterion is: \u00ab<\/span>I don\u2019t make losses, so I don\u2019t lose out<\/span><\/a>. As for the bag (<\/span>or structured products, or whatever<\/span>) \u00bbIf it goes up, I\u2019ll recover and it will all have been just a nightmare\u2019<\/span>. And until that happens, keep your head buried underground with the manager\u2019s foot on top of it, lest you be tempted to lift it up, take a look at the bigger picture and take the bull by the horns, thereby putting an end to the profits of those managers and custodians. And when, from his mini-bunker \u2013 or, as it\u2019s also known, a hole in the ground \u2013 he asks the manipulators of his money in a voice from beyond the grave: \u00abHow are things up there?\u00bb<\/span> The answer will be: \u00abDon\u2019t worry, the danger\u2019s almost over. Hang in there a bit longer, and don\u2019t you dare stick your head out \u2013 that way, nobody\u2019ll see you.\u00bb<\/span>.<\/p>\n

\"\"<\/a>We can say much the same about property owners at the height of the property bubble, followed by a global economic depression: \u00abI don\u2019t sell my properties, so they\u2019re worth more than the market suggests\u00bb<\/span><\/a> The only difference compared with the \u2018head-in-the-sand\u2019 approach taken by stock market investors is that many property owners bought at prices lower than today\u2019s (if they had bought the properties at a price higher than today\u2019s market price, the statement would be identical to the previous one: \u2018no realised losses = no loss\u2019). \"\"<\/a>However, just because we bought cheaply years ago and are not making a loss does not mean that the value of our property is not falling. If the market price falls, the value of our properties \u2013 and therefore our wealth \u2013 falls too, regardless of whether we sell them or not and whatever valuation method we use. If we also factor in the opportunity cost of our properties not appreciating in value over other markets, scenarios and types<\/span>, the difference in the performance of our assets over time will be staggering.<\/p>\n

Sadly, the investor who has lost money on the stock market and the property owner facing a downturn often turn out to be the same person. And if this happens at the same time, In that case, the \u2018head-in-the-sand\u2019 mentality becomes doubly devastating for wealth<\/span>. And this tragicomedy has been playing out ever since share prices were 50% higher than they are today! It is not the same to disregard our capital growth over a few months as it is to do so over an entire cycle. To disregard the positive and healthy growth of one\u2019s capital over a number of years is to squander precious time that is very difficult to recoup over the course of our investing lives. And This contempt becomes an aberration when we are faced with a global recession <\/span>such as the existing one.<\/p>\n