The Triad Perspective

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Low Vol Fall

Last month I wrote about "The Steamroller", which I'm sure you vividly remember. Right? Of course you don't remember, you're a busy person with hundreds of emails hitting your inbox. The essence of the article was "don't take big risks for small returns"; sort of like picking up nickels in front of a steamroller.
But some investors just can't resist, and flock to risky endeavors too often.
As you've probably noticed, volatility is back in the stock and bond markets. Why, you ask? Well, low interest rates became somewhat higher interest rates. But really, the seeds of higher volatility are sown during periods of low volatility. Investors become complacent and lulled to sleep, assuming what's happened in the immediate past--what behavioral scientists call "recency bias"--will continue in the future. And it will continue--until it doesn't. Good luck figuring out when.
Wall Street, in its quest to manufacture products to sell, has developed products to bet on volatility. You can bet either way--that way, the middleman Wall Street collects his due--on higher or lower volatility. With the recent uptick in stock market volatility, let's just say some folks got a little surprise. Not the good kind.
Speculators have been betting for years that low volatility would continue. According to a recent Wall Street Journal article, one vehicle to do this was something called "VelocityShares Daily Inverse VIX Short-term exchange traded note." Yes, that's a mouthful. And it left a bad taste in these investor's mouths.
This "note" returned 46% per year--yes, per year!--from inception in 2010 until a month ago. Then, in one day, the note fell 95% in value. Gave it all back. Trading was halted. Total loss: around $2 billion. In my book, that's real money. The sponsor, Credit Suisse, a big investment bank that should know better, ended trading at the end of January. Game over.

What's the point here? What looked like a one-way, guaranteed sure thing, was a one-way guaranteed sure thing for over seven years . Until it wasn't. Then it collapsed, taking all the gains with it.
We can't profess to understand how this stuff would behave under normal circumstances, let alone stressful situations. And I'd guess that most of the speculators in this "note", if you can call it that, had no idea what they owned. They just knew it kept gaining in value.
As one of my favorite investors, Howard Marks, likes to say, " never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average ." Which means you have to be able to get through the low points, in a stream or in financial markets. You need to be able to survive short-term volatility. Clearly these "investments" didn't meet that test.
If you can't understand it, it's not an investment. It's a speculation. Don't bet the ranch on speculations. A hundred-year flood can come along and drown you.


-John Heldman, CFA

Past performance does not guarantee future results.  Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a SEC-registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request.  

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