January 17, 2004

Classic Blunders Dept.

WE VERY MUCH WONDER -- if Wallace Shawn had a chance to do it all over again, would he do so?

Mr Shawn, as you may know, is the actor whose fame in life comes from playing Vizzini, the cunning Sicilian in "The Princess Bride." In that movie, Messer Vizzini leads the band of kidnappers who abscond with Princess Buttercup; a move which prompts both hero Westley to follow in hot pursuit and Vizzini to shout "Inconceivable!" all the time. But it was a role Mr Shawn played almost too well. For now that his energies have turned to different things, the people still recall his role as Vizzini.

We don't know if Mr Shawn would play Vizzini all over again; but we can imagine the thousands of people now stuck with bad Argentine bonds would have made different investing decisions, if given the chance. Megan McArdle reports on the full story here. Her commenters largely hold the same view as we do on the matter: there's no denying it's a sad situation, but it still brings to mind another Vizzini saying -- "You fell victim to one of the classic blunders!"

We will admit the greatest classic blunder still involves a land war in Asia. But in our mind, "investing in securities backed by shaky Governments" is up there with "speculating in commodities." And it's not as if history hasn't borne this out: not just in Argentina (see the comments on Ms McArdle's site for more on that) but elsewhere in emerging markets. Indeed, the Wall Street Journal story she cites on the matter makes the whole thing sound like a repeat of the Mexican Savings Bank Crisis (1).

PAY YOU BACK? INCONCEIVABLE!: EVIL VIZZINI exults upon learning Westley (in foreground) sunk all his money into Argentine bonds, leaving him virtually penniless. At Vizzini's right is Princess Buttercup, preparing for her new job overseeing lending to shaky Governments.

Anyway, all kidding aside, the Argentine situation is proof of an oft-told and important investing lesson: when it comes to the risk-reward principle, don't get so focused on the reward that you disregard the risk.

Speaking of risk-reward and classic blunders, remember when we were griping about cattle futures? Well, we are pleased to say that this topic was of interest to several folks. As such, we thought we would give you an update.

The contracts fell nearly TWO THOUSAND points, according to the good people at barchart.com. This was the equivalent of a 21 percent loss -- but as we discussed before, the extremely high leverage and volatility inherent to commodities trading means the loss was much more than that for speculators. In the end, long-players likely lost not just their initial investment, they likely lost it several times over, depending on what their initial margin requirements were.

We don't deny that we're not sympathetic to either the cattle traders or the Argentine bond buyers, as both groups were playing very dangerous games. However, we are sorry that they had to learn a very important lesson the hard way. Namely, that the inconceivable happens much more often than one would hope.

(1)Back in the Seventies, a whole bunch of Yankee investors got burned when their money, placed in high-yielding Mexican savings accounts, was devalued by the Mexican Government. For an in-depth look at that crisis, see Andrew Tobias' take on the matter in his "The Only Investment Guide You'll Ever Need," pp. 3-5.

STANDARD DISCLAIMER: We're not licensed financial advisors -- we just have opinions on this type of stuff. So consult with an expert before you make any investment decision, read the prospectus, past performance not indicative of future results; people can and do lose so much money they end up hocking the wife's engagement ring and selling Billy's braces; you know the drill.

Posted by Benjamin Kepple at January 17, 2004 03:49 AM | TrackBack

Long live Vizzini! Too bad he died.

Point of order on "Never get into a Land war in Asia". The historical facts on this topic are: with the exception of the entire Vietnamese mess [French and US both]the basic rule on land wars in Asia is: Western Armies annihilate Eastern Ones. Now, we have to take Hun and Mongol as 'western' for this arguement to fully work , but they are certainly not 'eastern' in location or outlook.

Let's look at the last century of Chinese military expereince: After getting thorouoghly drubbed by Charlton Heston [Gordon, actually] in the 19th century, they ran up against him again [ably supported by David Niven] at the siege of Peking! Most people do not realize that the Peking Relief Expedition fought its way though 10 times its number of regular troops armed with modern weapons - with almost no casualties. Some years later, Mao's Peoples' Army spends most of its effort on the squalid forces of the Nationalists and [wisely] avoids the Japanese.

The Russo-Japanes war of 1905 seems to be an anolmaly until you notice that the Japanese were far more modern and 'western' in their tactics and equipment [they appear to have paid attention to the US Civil War] than the antiquated armies of the Czar.

Although tough and determined, the Chinese and Jaspanese armies of the mid-20th century were utterly destroyed by their American opponents. In each case inital successes were followed by disastrous defeats [less than 10% of the Chinese 19th Route Army remained alive after the Korean War]. Once complacency [or near-psychosis in the case of MacArthur] fades, the armies of the West have been not merely victorious, but overwheming.

The special case of the Viet Nam war offers this collorary: Superior tactical and operational art are no match for excellent strategy, pursued with unwavering vigor. War was forever proven to be a contest of wills, above all. However, it should be noted that those pundits believed that no military victory was possible in Viet Nam were obviously not heeded by the North Vietnamese General Staff.

The bottom line is that land wars in Asia are emminently winnable - but not always quick and easy, and we seem to have developed a taste for quick & easy warfare.


Posted by: OldFan at January 20, 2004 03:21 PM