That Chesterfield Moment

“Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk.” – Seth Klarman

I never watch movies anymore. Not that I don’t enjoy them, I just don’t really have time anymore. Actually, I take that back, there is always time, it’s just a matter of prioritizing. I think the last movie I watched in an actual theater was back in 2013 before my wife and I started having kids. Since then it just hasn’t been a priority for me. I’ll occasionally throw on a new release if I’m on a long-haul flight when I have to travel, but I usually end up falling asleep somewhere in the middle of the programming anyways.

Instead of watching new releases, I like to ruminate on key scenes from old movies that I enjoyed back when I was much younger and had time to watch movies. One of my favorite scenes comes from the Quentin Tarantino written dark comedy called True Romance. I don’t recall precisely when I first watched it (I think I was in college) but it had a stacked cast (Christian Slater, Patricia Arquette, Dennis Hopper, Val Kilmer, Gary Oldman, Christopher Walken, Brad Pitt, and James Gandolfini) and was highly entertaining.

Let me break down one of my favorite scenes of the movie for you. The scene takes place inside the trailer of Clifford Worley (played by Dennis Hopper) who is the father of the protagonist and main character of the movie Clifford (Christian Slater). The see opens with a scene of Don Vincenzo Coccotti (Christopher Walken) paying a visit to Clifford Worley in an attempt to find the whereabouts of Clifford’s son Clarence who is presumed to have stolen a bag of drugs from local Detroit mob leader (and Coccotti’s boss) “Blue” Lou Boyle. Coccotti first tries to rough Worley Sr. up to get him to disclose the location of his son Clarence but is unsuccessful. Over the course of the interrogation Worley Sr. realizes that the mobsters were going to torture him and eventually kill him whether he tells them the whereabouts of Clarence, or not.

At this point, Clifford makes a decision, knowing his life is coming to an end, of whether to let the gangsters continue to torture him to his death or to take the end of his life into his own hands while protecting the whereabouts of his son.

Worley Sr. calmly asks Coccotti for a Chesterfield cigarette (that was previously offered to him) before launching into an extremely insulting tirade that ends up infuriating Coccotti, who then swiftly guns down Worley Sr., killing him.

“Could I have one of those Chesterfields now?”

The brilliance of the scene was the Chesterfield moment — the light bulb moment Dennis Hopper’s character has when he realizes that his fate was sealed. It speaks to the very core of human “freedom”, of having the ability to take one’s fate or destiny into their own hands.

The scene was longer and much more dramatized than the short summary I gave above but the message was clear. After seeing the warning signs of gangsters and torture, it was during that Chesterfield moment that Hopper’s character decided to take matters into his own hands.

Now I don’t want to get too morbid here, and investing is certainly not as perilous as dealing with mob bosses (at least I hope it isn’t!). However, this particular scene exemplifies the importance of having a solid plan B for what to do when the unexpected arrives.

We’ve discussed before how the future is uncertain and the only thing within our control as investors is limiting our downside. We can’t predict the future, nor can we predict when a scandal will hit one of our portfolio companies (Facebook/Cambridge Analytica) or when the senior management of a great company that you invested in smokes up a tweetstorm (Tesla) or ends up being a creep (JD.com).

The only thing we CAN do is prepare for the worst. It’s unclear as to whether or not Dennis Hopper’s character in the scene actually knew what was coming for him ahead of time, or if he acted on the fly.  But the outcome was precisely what he intended — a controlled, swift end to his life.

The last couple weeks have been a rollercoaster of market volatility and the risks we see are about as clear as Don Vincenzo Coccotti lurking over you: late cycle, a strong US dollar,  rising rates, higher energy costs, Quantitative Tightening, trade wars, EM weakness and geopolitical disruptions (the latest involving a murder of a Saudi reporter). Whether a big correction happens now or in 18 months (and by big I mean really big..), I don’t think anyone would argue that global assets on a whole are starting to feel very risky right now.

Preparing for the worst doesn’t necessarily mean having to liquidate your holdings and crawl into a bomb shelter either. It can be something as simple as rebalancing your portfolio and taking some money off the table in asset classes that have significantly outperformed as of recent (US Equities/Tech, I’m looking at you). Gold, oil, precious metals, and even cryptocurrencies all make for fantastic hedges and should all be considered when looking at personal asset allocation with real money at stake that may affect your livelihood.

As we enter into what is traditionally a seasonally strong period in the markets (banks earnings started off with a bang last week) just ask yourself if you really want to play chicken with this market right now. Do you have a plan in action to execute when we finally reach that Chesterfield moment?