Push is Easier than Pull
5 mins read
This Years’s Economic Landscape
External economic factors impact our money. This is more than just a story of numbers. Its also about how we prepare for them, what our outlook is, and how we react when things change. While we’ve talked about that a little bit in the previous newsletter, I want to point out one very important principle that is not only true for money, trade, and business, but is itself a principle enshrined in Islamic law and used extensively in works of Fiqh.
But first, let’s talk about where the economy is going this year.
1. The Broader Economic Picture: In 2024, IMF projects the world's economy to grow by 3.1%, and then a little more to 3.2% in 2025. This means things might get a bit better than they were the year before. Prices, which have been rising (inflation), are likely to go up less quickly, down to 5.8%. But, there are worries about governments possibly reducing their financial support and the problems caused by countries having a lot of debt. The US economy looks strong, with wages increasing and low inflation. However, J.P. Morgan thinks the global economy will grow more slowly in 2024, with an increase of only 0.7%. They expect a slow and steady recovery, but there are challenges like fewer jobs available and the impact of higher interest rates taking time to show. Overall, while there are some good signs like better wages and lower inflation, we can't ignore the risks of slower growth and issues related to government spending and debt.
2. Global Influences and Economic Growth Dynamics: Our world's interconnectedness means that global shifts, regulatory changes, and geopolitical risks influence our financial strategies. Emerging economies, particularly in Asia, are expected to drive growth, though at a slower pace compared to the pre-pandemic era. Advanced economies like the USA and the eurozone are likely to experience sluggish growth due to high prices and tight monetary policies. This global economic scenario requires adaptable and resilient planning.
3. Inflation’s Effect on Investing: In response to the challenges that traditionally “safe” investments like cash and fixed-income are facing, there's a noticeable shift towards investing in real assets, commodities, and securities that are protected against inflation. There’s obviously a lot to say about why fixed income has been “safe” in the past, but the puzzling part should be “Why is cash not safe?” and its mainly answered by looking at the deleterious monetary policies implemented over the last few years. The 2024 world economic outlook from a number of sources (EY, IMF, UN DESA) indicates that inflation rates are expected to stay above the targets set by central banks in many developed countries. This high inflation can reduce the value of money and significantly affect personal financial planning. Therefore, understanding and preparing for these inflation trends is essential for maintaining and increasing your wealth.
How to Preserve Value in Economically Trying Times
To protect against a decrease in money value (inflation) and to help in wealth growth, diversifying into assets that are stable is important. For that there are a few things you can do. One thing I do (full disclosure) is purchase precious metals ETFs. I use GLD, SLV, and SPPP as my savings account. They are liquid, so I can cash out at any time. The use of all three holds value despite volatility between the individual metals, and I earn a decent return on them, better than any high interest yield account.
Another way to offset this negative growth in value is through commodities, and more specifically metals (other than gold etc. mentioned above). Metals often gain value when stocks and bonds drop during inflation. Adding them to your portfolio provides balance, as they usually move opposite to market trends. This can stabilize your investments in volatile economic times, helping protect your wealth from inflation's impact. Now I don’t have a lot to offer on this right now, but I do have an opportunity that I will send out to you all in the near future, so be on the lookout for that.
Another thing that used to store value is crypto currency, and specifically Bitcoin. It is no wonder that after the crypto winter of 2023, eleven (11) spot Bitcoin ETFs were launched recently in 2024. I looked through all of their prospectuses, and they are all very straightforward. None use futures or derivatives. With the Halving of bitcoin coming up, I’m sure their value is bound to rise. (Another disclosure, of the eleven ETFs, I hold GBTC). What is the point of me mentioning this? Remember in 2022 when all we heard was “Bitcoin bad, dollar good”? Remember when crypto was described as an alt-right, fascist means of money? Remember when we were told bitcoin mining was destroying the environment? Remember when bank heads were publicly saying that crypto and BTC were the currency equivalent of the Anti-Christ? Pepperidge Farm remembers. The whole time this was being said, big banks were developing wallets, accumulating coins, and positioning themselves for devaluation of the dollar.
Risk Management: A Principle Enshrined in Islamic law
One principle that we find as a universal between risk management, Islamic law, and even natural law is: “Push is easier than pull.”
Under Islamic law, scholars expressed this with the exact phrase, “Push is easier than pull” (Arabic: al-Daf‘ ashal min al-Raf‘). This principle emphasizes that "pushing," which involves taking precautions and preparing for a situation before it happens, is akin to the health concept of "prevention is better than cure." Pushing occurs before a problem is established, whereas "lifting" refers to the removal of harm after it has already occurred. The core idea is that it's easier and more appropriate to take preventive actions before a problem arises than to deal with the consequences afterward. Similarly, preventing a situation is easier than rectifying it once it has happened. When we say that pushing is 'easier' then it means relative to the individual responsible. Imam Badr al-Dīn Al-Zarkashi's uses the terms 'stronger' instead of ‘easier’. This is in relation to the outcome. It suggests that the action of pushing is inherently more effective than lifting, independent of the individual's obligations.
In the context of this idea, let’s assume a trader who bought shares at $100, then lost $50 dollars. What does he need to do to recover from this loss? After losing $50 from an initial $100 purchase, you’d think “Hey I’m only down by half, so I need to make back the 50% I lost!” But if you thought that you’d be wrong. To return to your original amount, you’d need to gain 100% on the $50 that remains. Recovering from a loss (pulling) is harder and requires more effort (a 100% gain) compared to the relative ease of maintaining the original position (pushing), where no loss would have occurred. This aligns with the principle that it's easier to prevent a problem (a loss) than to rectify it after it has happened.
And this is in line with natural laws as well. Newton's third law of motion suggests that forces always act in pairs. When you push something, it pushes back with equal force. This principle implies it's generally easier to maintain an object's state (like pushing it along) than to change it (like pulling it against its current direction), as each action triggers an equal and opposite reaction. In risk management, the idea is that every action or decision in risk management can have an equal and opposite reaction or consequence. When you apply a strategy to mitigate a specific risk (so using stop limits when trading or just a buy-hold strategy when investing), there's often a corresponding reaction or trade-off in another area (you keep more of your money or at least lose less of it without that). Trying to beat the market is the equivalent of pulling a weight, up a mountain, in adverse weather. 9 times out of 10 it won’t really work.
Stop Trading and Start Investing
One of the biggest mistakes that new investors make is mistaking trading for investing. While I am not opposed to trading stocks and options, unless you are going to treat it like a second job, you are almost always going to lose money. What’s the difference between trading and investing? The former means you are constantly waiting for changes in price and trying to arbitrage that to make money. The latter means you are buying goods or companies for the long term that have the potential to increase over time. Keywords: “over time.” The risk you carry in losing ten thousand dollars invested over 20 years, is infinitesimal compared to the risk of losing ten thousand dollars on a badly placed stock or option trade over 15 minutes. And that takes us to the idea of risk management.
Risk management and capital preservation are more important than constant gains for several reasons. Risk management rests on the idea that “keeping more of my money is more important than making more of yours.” All trades are trade-offs. They are based on asynchronous information. The more you know, the less likely you are to get taken advantage of. High on “Hopium” you can want to hit it big, but you end up losing everything. If you don’t want to lose big, the first step would be to invest, not trade. If you’re going to trade, then “Tight stops or you die” should be your mantra.
Capital preservation is a fundamental principle of wealth management, aiming to safeguard the original value of invested capital while minimizing the risk of loss. Benjamin Graham said, "The essence of investment management is the management of risks, not the management of returns."
Capital preservation, i.e. the management of risk i.e. not losing money when you don’t have to, helps mitigate the impact of market volatility and shields investments from sudden downturns, which is essential for long-term financial stability. Sure, constant gains are desirable, but the protection of your money through effective risk management is vital for long-term financial security and stability. So what should you be doing with your money in 2024? Whatever you do, make sure that you are focused on keeping more of your own money than risking it and making others rich.
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