Monthly Archives: August 2015

One of The Oldest Professions

The Code of Hammurabi

The Code of Hammurabi

August 31, 2015

Surely one of the oldest professions is being a lender of money.  As far back as 9,000 BC there is evidence of money lending.  The Babylonian civilization which thrived around 1750 BC had rules that governed the lending and paying back of debt, as laid out in the Hammurabi Code. From the money changers in the Temple of Jerusalem at the time of Christ, to today’s global mega banks, the history of lending money is very long.  Lending money today is changing, and we investors should examine how the ancient act of lending continues to evolve.

There are essentially two main ways to deploy or invest money.  I can buy and own an asset, or I can lend money.  When I buy a stock, a piece of art or gold, I own the asset.  As the owner I make money if the value of the asset goes up.  Lending money can be accomplished in a number of ways.  If you opened a savings account as a child you were lending money to the provider of the account, which was typically a bank.  They paid you a rate of interest with a promise to return your money when you wanted it.  If you invest in a bond or a fixed income product in actuality you are lending money.  The borrower just happens to be a government, a municipality, or a corporation.  When I loan money I am merely providing my capital to someone who needs it, and who promises to do two things, pay me back and pay me a little extra known as interest.

The world of lending is enormous and includes all the governments and companies in the world that borrow money.  The bulk of this lending is done in what is called the public market, where securities represent the loan.  A large and growing private lending market is now emerging.  Today’s innovative borrowers and enterprising capitalists are changing long-established approaches to lending money.  Potential borrowers are looking beyond traditional ‘intermediaries’ like banks.  Instead borrowers and investors have developed ways to conduct business directly with one another.  Private lenders have found they can lend money to credit worthy borrowers (both individuals and companies) and earn attractive rates of interest.  In the past several years pools of capital have been created to help diversify the major risk of lending, defaulting borrowers.  The old school approach of an investor lending to one borrower provides for a binary return, the investor makes money if the loan is repaid, or loses if the borrower defaults.  With the right lending vehicle, the loan risk can be spread among many different borrowers.  Not all will default and, just like an investor in the stock market who attempts to diversify their stock portfolio risk, the loan portfolio has diversified risk.

Low interest rates have caused investors with capital to seek new ways to deploy their money. The private lending markets offer potentially attractive opportunities to suitable investors but of course the risk, and any illiquidity, have to be properly understood.  Private lending to creditworthy borrowers is a market that is growing, and worthy of further understanding.

Carl Gambrell


What’s Next?

Hilly RoadAugust 24, 2015

On Thursday of this past week I had outlined what I thought was a good “weekly”.  It was centered around an observation from a recent beach trip involving a little girl screaming frantically for her mother and looking for someone to help her.  That little girl’s scream for help transformed itself into investors’ screams for help on Friday as the market experienced one of its worse one-day sell-offs ever.  Following a week or so of uncertainty surrounding China and its economy, global investors finally acted with vengeance sending all the equity markets down.  For the week, the DJIA was down 5.82% and the S&P 500 was down 5.77%.  The source of all the fear was a slowdown in the Chinese economy and how that would affect all of the emerging markets.  We have waited and waited for an elusive 10% sell-off in the market and after Friday’s global move we have it.  The DJIA is now down 10.3% from its high but the S&P hasn’t hit the down 10% level just yet, and is only down 7.6% from its high. The key question is what’s next?

It has been a while since we investors have had that sinking feeling of dread following a bad week in the market.  Last year was one of the least volatile periods in recent history, but as I look at a market down 500 points in one day like this past Friday, I scratch my head wondering why and, more importantly, how do I feel about what just happened? Following the financial crisis we have been in a one-way, upward moving market.  The reality is that during that move several issues may have caused many investors to take risks with which they are uncomfortable.  There is no doubt that the long protracted period of ultra-low interest rates has caused many income-driven investors to seek returns outside of their comfort zone. These traditionally conservative income investors would prefer to have had their money in bonds or bank cds, but low interest rates forced them into higher-returning alternatives like stocks.  I question the commitment and staying power of this investor group as the market becomes more uncertain.

In times like last week, the strength and resolve of all investors get tested.  There are many positions of stocks that are being held by “weak-handed” investors.  A weak-handed investor is someone that is not really comfortable with their portfolio’s inherent risks.  No one knows what the near term holds.  If the market is going to continue to be volatile, investors should not panic but they should assess the level of risk and exposure to stocks with which they are comfortable, and adjust their portfolio to that level of comfort.  Market risk is difficult to gauge but no one knows your comfort level on risk better than you.

Carl Gambrell