·
In The Little Book of Behavioral Investing, James Montier relates a story by Paul DePodesta, of Moneyball fame, in the 16th chapter of the book.
That chapter also happens to be a shortened version of the 2008 research piece that Seth Klarman refers to in the last post.
DePodesta’s story weaves together casinos, baseball, and the importance of a good process. It begins with him playing blackjack in Vegas: Continue Reading…
·
Out of curiosity, I went digging for more info on the strategy Ben Graham used in his early fund back in the 1920s.
As was pointed out in the last post, he was buying undervalued stocks (the long-only portion) found through his own fundamental analysis, along with a separate hedging strategy, and some margin debt thrown in for good measure.
There’s was nothing really funky going on beyond that. Graham was very much focused on risk — minimizing losses — but, unlike his post ’29 strategies, he clearly was trying to maximize gains too.
In an article written in 1920, Graham outlined his hedging strategy. Continue Reading…
·
We’re halfway through the year, so this is another quarterly update on my attempt to read more books this year.
Mostly, this is for my own accountability but if you see something interesting, even better. You can find the last quarter’s reading list here.
These are the books I’ve read over the last quarter. Continue Reading…
·
Anyone expecting a repeat of last year’s performance has to be disappointed. Global stock markets left much to be desired for the first half of 2018. Of course, markets can crush high hopes sometimes.
Usually, when that happens, bond markets offer a little recompense. That didn’t happen over the last six months. The few bond indexes I track for the asset tables (and many others) have all performed worse than 3-month T-Bills YTD.
That shouldn’t be a surprise though. Broadly, global stock markets have performed well since 2008. That wasn’t going to continue forever. And it’s hard to squeeze a high return out of low-yield bonds. Those two things combined are enough to reset expectations for the next several years.
The brings me to a few ultimate unanswered questions. How do investors react if low expected stock returns materialize in a low bond yield world? How many “long-term” investors stick with their strategy? Will investors take on more risk in the hopes of getting a higher return? Are they prepared if they’re wrong? Will they accept low or negative returns over the next few years? Continue Reading…
·
Michael Mauboussin is out with a new piece. In it, he lays out the ingredients that drive market cycles, both normally and to extremes, and how to cope with it.
The normal fundamentals that drive market cycles, when combined with our own biases, can lead to extreme asset prices.
Procyclical feedback loops commonly start with fundamental economic strenght taht becomes virtuously self-reforcing. For example, an increase in consumer demand leads to greater business investment, which leads to higher employment, which spurs additional demand. The process also works in the opposite direction.
Whether up or down, a trend in fundamentals can morph into a feedback loop that pushes asset prices to an extreme. While it is difficult to isolate the exact cause of a procyclical extreme, we can offer a taxonomy that captures much of the behavior we observe. The boundaries between these categories are blurred, but they reflect most of what we see in markets.
This is a normal part of the cycle. It’s only when irrational thought permeates that you see extremes like the Dotcom and the housing bubble and busts. Continue Reading…
·
Bull markets can play tricks on investors perception of risk. So much so, that the end result can be costly.
Since the instant people recognized markets move in cycles, it’s been a recurring theme. Each bull market produces a fresh crop of investors — new investors absent experience and experienced, but absent-minded investors — believing it can never get worse.
It leads investors into a false sense of security through optimism and overconfidence, confusing skills with luck, “brains with a bull market,” believing high returns are easily earned and risk is nonexistent.
The longer a bull market drags on, it gets easier to forget what came before it. The result is investors take chances they normally wouldn’t take but leave themselves dangerously exposed to what inevitably comes next.
It’s one of the easiest mistakes to make. It’s probably one of the most warned about too.
Seth Klarman did exactly that to the MIT Sloan Investment Club in October 2007. Continue Reading…