Here’s an excerpt from Elliott Management’s 2013 Shareholder Letter in which Paul Singer provided some great advice on investing during turbulent times saying:
We should all be humble enough to realize that once every 20 or 30 or 40 years, values go to real extremes. Any investment program must take into account the impossibility of knowing when and to what extent such extremes might occur.
At such times, managers must determine which positions are worthy of holding. It takes a subtle combination of humility, good research, steadiness, fortitude and willingness to bail if the thesis is just wrong. Those who suddenly adopted a risk-management process only in the dark and frightening days of November and early December of 2008 paid dearly for their over-confidence, casualness or (in the case of many executives of the world’s largest financial institutions) complete stupdity.
During calm times, money managers and businesspeople alike can get away with blindered approaches to their tasks, ignoring what might happen and proceeding blissfully unaware the status quo is not the inevitable and everlasting way of the world.
Preserving private capital for long periods of time is the exception, not the rule, in history. But during turbulent periods, in which the basic terms and conditions of private capital – and life in general – are subject to abrupt and unpredictably wrenching adjustments, it becomes really challenging to try and figure out what might happen that is both unforseen and harmful.
The lack of a coherent hedging approach can impair capital, credibility and the decision making of portfolio managers at the worst possible time.
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