An Escape Hatch
For those of you long-term readers of my blog, Tommy the Chimp was the first time I posed a “Can you believe this?” question. On December 12, 2014 I related the story of lawyers who sought a court order to prevent a pet monkey from being kept in a cage. In case you are wondering, even in the world’s epicenter of monkeys (i.e. New York) it remains legal to keep your monkey in a cage. More recently, I wrote a “can you believe this?” discussing Recognition Days and for your information International Vulture Awareness Day is coming up on September 3. Here’s the latest: An escape hatch has been installed in the Office of the Chancellor at one of our nation’s finest universities. Yes, I said an escape hatch. Can you believe this?
The background: as reported in the Wall Street Journal, the staff of the Chancellor of the University of California at Berkeley (Cal Berkeley) was “deeply disturbed by recent occupations”. As a result, the chancellor’s office paid $9000 for a second exit for the Chancellor and staff, funded by California residents of course. Let’s translate: students are once again protesting in the Dean’s office, and the Dean and staff don’t like it. The Chancellor requests and receives approval to spend other people’s money to build a secret door and avoid dealing with unruly students. Am I the only one who is NOT surprised by this? Perhaps we shouldn’t read too much into this inane development because we are talking about a college campus and we are talking about California. We know that is not the real world, for sure.
But I see a parallel quest for an escape hatch on Wall Street. As I have said in recent posts, people are concerned about the vulnerability of the market. Consternation about elevated stock prices, rising interest rates and a fractured political system dominate the discussion. Investors don’t just sit around and wait for something bad to happen. They build what they believe are escape hatches, or safety measures to avoid the pain of a negative market surprise.
Escape hatches take many forms. Some investors use options and other derivative securities to “hedge” their portfolio. Others implement stop/loss orders. In fact, many program traders write algorithms that include stop/loss orders. Well, let me tell you that stop/loss orders will only control losses in an orderly market. And the markets are not always orderly, folks.
I am concerned that other “escape hatches” are prevalent, and they will be as ineffective as the Chancellor’s solution. Let’s be honest about this: avoiding the real issue is NOT the way to solve a real (or perceived) problem. If the Chancellor wants to end disruptive student sit-ins, arrest the unruly students and teach them a lesson. Or expel them. Investors who try to avoid market declines may be engaged in a futile effort too. There is no “escape hatch”. Simply put, the best way to overcome a market decline in my opinion is to invest for the long term. My advice: Don’t let short term events throw you off course as you invest for your long term goals.
