Weekly Insider (Riffing & Ranting on Moonshine, Sunbeams & Mentos)

The beauty of the market: it tests ideas. Good, bad, all can get financed by true believers (or at least believers that others will believe). The ones that are right (or lucky) after taking the leap of faith get riches—though those can be temporary as what Mr. Market giveth, Mr. Market can taketh away. The others get regret: longer lasting (alas, chemical emotions effect on physical memory). Of course bad ideas can and often do force the hand of check-writers if those ideas are proffered by persuasive proselytizers—mental alchemy. Only time will tell if the ideas are solid gold or dead lead. But boy do we all love a good story.

As I’m fond of saying, Mother Nature can't be fooled—but people can. Government galvanizers and energy evangelists can only temporarily lead you to misunderstand the laws of physics—fortunately they cannot alter them.

I predict we will look back on this “Inconvenient Period” as one of naïve ignorance superimposed on greed, wrapped in moral authority. It’s not the first time many have shown an abdication of reason in response to a good story. It surely won't be the last. More in a moment…

But before I riff and rant further: it appears the Great Unwinding is underway in accordance with the Mentos theory of risk management. Plop one in a soda bottle and keep your hand on it and everything is fine, for as long as you keep your hand on top. There’s no shortage of Great Unwindings:

Davos dignitaries debate dollop of the dollar and the delusion of "decoupling". Speaking of dollars: whoever hearts Huckabee doesn't heart him enough as he's running out of greenbacks—and needs to put his faith on that old slogan on the back of the green.

The Dark Night has taken Heath Ledger—all over general society news. And society general's ledger is—well, over. History doesn't repeat but this Rogue Trader is rhyming—through an amplifier. If the US slows, China slows. If China slows, high-priced, high- expectation plays drop fast and far. Commodities drop. Oil drops. Levered speculators drop.

Some smart people might even decide to go back and make an honest living: as doctors and dentists. So the less honest can take their cash. As is said when a man with money meets a man with experience. The latter walks away with the money, the former with the experience.

Which leads me back to my riffing and ranting. Nearly a year ago, I lamented the march of the biofools. I predict they shall soon see their reckoning. Let me say it again now: so as to not be noise later when popular passions shift as they're apt and oft to do. I name no names and I point no fingers. Your inferences and interpretations are your own.

Some capitalist cum-hippies have been using pension plan and retirement dollars entrusted to them to chase Moonshine and Sunbeams (ethanol and solar) sending 100 proof to our pumps and the cosmos to our cable boxes. The doctors and dentists duped (and possibly defrauded) by some investors—drawn by those investors past successes (see: Halo Effect) have paid a pretty penny to price up private rounds. The only investment that seems like a sure thing is backing the possible class action suits brought on by law firms like 'Snaggum, Dupem & Burnham.' Surely the ailing economy will be blamed as culprit for the colossal collapse of the biofool bandits. It will be shown that those doctors and dentists who abide by the Hippocratic oath (First, do no harm) hath been overpowered by the Hypocrite Oath—as defined by Ambrose Bierce, “One who, professing virtues that he does not respect, secures the advantage of seeming to be what he despises.” Shave with Occam’s Razor, take an honest look in the mirror and the two answers are clear: nuclear power, electric cars.

Meanwhile, the markets gyrate like a hula girl and the likes of Bill Miller, Warren Buffett, Bill Nygren, Seth Klarman, Mason Hawkins, Wilbur Ross and other value vets are at the Luau licking their chops and waiting to feast. Klarman's 'avalanche of opportunity' seems here. Fear and despondence seem to pervade all. Everything that worked for the first half of 2007 continued to work in the second half (price momentum, high expectation, high growth, emerging markets)—and the cheap stuff got cheaper.

Speaking of Miller, a few months ago he was quoted in a Toronto paper and pointed out one of the behavioral biases I’m fond of writing about: recency bias—the vividness of recent events that are often out of proportion with the actual risks. It explains why insurance premiums skyrocket after a hurricane. Quoting Miller, “A few years ago when a couple of German tourists were killed in Miami, attendance at Disney World fell way off, because that was dramatic-even though more people are killed driving to Disney World from Miami. The point is that when you see events which are dramatic, recent and cause people to lose money, you can be sure that individuals will overreact. And therefore, they typically would provide good opportunities in the market.”

Sound advice, indeed. Lastly, watch out for a paper making the rounds, called “Walk Versus Wait: The Lazy Mathematician Wins” done by researchers at Harvard and Caltech. They derived an (imperfect) formula that shows its better to wait for the bus than walk to the next stop on a regular route—as you risk the bus passing you by or wasting energy. The same holds for the market. Patience is a virtue—and as my rant above implores, ignorance is not.