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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…
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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…
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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…
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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…
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Howard Marks released his latest memo this week on the intersection of people, computers, and investing. He offers an interesting perspective on the current trends in passive investing, algorithmic investing, and artificial intelligence.
The gist of the entire memo can be summed like this: whether the decision-making process behind investing is better off in the hands of humans or computers and how that might impact markets?
Let’s cover a couple things first.
There will always be a select few people with an exceptional skill set to do it all manually (arguably, even they have an internal set of rules they follow). As for the rest of us, the evidence points to real benefits in using a rules-based or algorithmic process. So I believe the real discussion for the majority of investors revolves around just how rigid, flexible, or adjustable those rules should be. Continue Reading…
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How many people would celebrate a 6% return? It may not seem like much, but that’s what it took to turn $5 million into $100 million over a 51 year period.
It’s also a true story.
Through a combination of investments in loans and mortgage, real estate stretching across the country (was once the single largest real estate owner in Chicago), corporate bonds, railroad holdings, banks, and a gold mine, one person turned an impressive inheritance into a fortune that would make them one the richest in America.
And she did it despite the cultural norms of the time.
Hetty Green was born in 1834, into a wealthy Quaker family with a successful whaling business. What she learned about business, she first learned from her grandfather, helping with his daily correspondence, and later doing the same for her father.
The numbers are a conservative estimate. When Hetty died in 1916, she was valued somewhere between $100 to $200 million (roughly $2 to $5 billion today). Continue Reading…