Many of the trades Alexander implemented followed one of two patterns. First, when investors across the globe were doing the same thing, Alexander would purposely seek to do the opposite. Stockbrokers called this approach the contrarian. Alexander knew that most investors do not fear losing money as much as they fear looking foolish by taking risks that others avoid. When an investor is caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are apathetic when losing money as long as they are joined by a few thousand other investors. So when a market is widely known to be in a bad way, even if the issues are illusory, many investors get out.
A good example of this phenomenon was the crisis of the U.S Farm Credit Corporation. When it looked for a moment that Farm Credit was going to go bankrupt, investors stormed out of Farm Credit bonds because having been warned of potential bankruptcy, investors could not be seen in the proximity without endangering their reputation.
But in an age where failure is not allowed, when the U.S government bails out firms such as General Motors in order to preserve national interest, there was no way the government would let the Farm Credit bank default. The thought of refusing to bail out an 80 billion dollar industry that lends money to America's distressed farmers was ridiculous. Alexander knew this. The investors selling Farm Credit bonds for far less than they were worth weren't necessarily oblivious. They just simply could not be seen holding those securities in fear of having their reputations slandered. Since Alexander was not constrained by appearances, he sought to exploit people who were.
The second pattern of Alexander's investment strategy was that in the event of a major dislocation such as a natural disaster or stock market crash, he would seek secondary and contingent outcomes.
A good example is Chernobyl. When news broke out that the Soviet nuclear reactor had exploded, Alexander bought oil futures. Instantly in his mind, less supply of nuclear power equaled more demand for oil. And he was right. All his clients made a large killing. In addition, Alexander bought American potato securities. A cloud of waste from the explosion threatened european food and water supplies including the potato crop, placing a premium on uncontaminated American potatoes.
The key to adopting these two auspicious types of investment strategies is playing the game of What if? All sorts of scenarios can be introduced into What If?
Imagine for example, you are an institutional investor managing several billion dollars. What if there is a massive earthquake in Tokyo that reduces Tokyo to rubble. Japanese investors are induced into a state of panic and try to get their yen out of the Japanese stock market.
According to Alexander's first investment pattern of being a contrarian, he would put his money into Japan on the assumption that if everyone is trying to get out, there must be some bargains. He would buy the securities in Japan that appeared least desirable to others. The first investment would be to buy shares of ordinary Japanese insurance companies. The rest of the world would probably assume that ordinary insurance companies had a great deal of losses due to the earthquake. But in reality, the real losses reside mainly with Western insurers and with only special Japanese earthquake insurance companies. The shares of ordinary Japanese insurers would be cheap.
Then with Alexander's second investment pattern using the concept of contingency, he would buy a few hundred million dollars worth of Japanese government bonds. With the economy in temporary despair, the government would eventually lower interest rates to encourage rebuilding and simply order their banks to lend at those rates. Lower interest rates would mean higher bond prices.
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