Quote for the Week

What the economists call fabrication or demand in use is inversely correlated with price. Or, more simply, you know, if gasoline prices go up, other things equal, you’re going to drive less. So price and demand are inversely correlated: basic economics. And that’s the way it is for things that are used. But in financial markets, it isn’t the case. That actually, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they’re going down. The higher they go up, the greater the demand for them. That’s why you see people chasing mutual fund performance; it’s why you see the bubbles that you saw in technology and Internet stocks where all the money flowed in after they’d gone up a lot… It’s been very well established that demand follows price. — Bill Miller (source)

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Here’s what I’ve been reading for the past three months:

• The Victorian Internet: The Remarkable Story of the Telegraph — Tom Standage tells the history of the invention of the telegraph. The story covers the early use of the optical telegraph, the creation of the electric telegraph, and how the new technology reshaped society and industry. (notes)
• Ubiquity: Why Catastrophes Happen — Mark Buchanan, through numerous examples, explains why complex dynamic systems become unbalanced and slip into chaos. Systems that sit on the edge of instability, ensure change while being impossible to predict. (notes)
• Buying Disney’s World — Aaron Goldberg tells the story of how Walt Disney World came to be: why Walt wanted a second park, how massive land purchases went almost unnoticed, how engineers tamed the swampland, and how they designed, funded, and built the park. It’s a testament to what makes Disney different from other companies. Notes to come.
• The Endurance: Shackleton’s Legendary Antarctic Expedition — Earnest Shackleton’s harrowing attempt to be the first to cross the Antarctic continent on foot met disaster days before reaching their initial destination. Stranded, trapped on an ice pack, the ordeal lasted twenty months. It’s a story of leadership and survival. Notes to come.
• Invention and Innovation: A Brief History of Hype and Failure — A new read I just started that combines technology and history. Vaclav Smil looks at innovations throughout history that fell far short of the hopes and promises that surround each one or outright failed.

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Quote for the Week

Elroy Dimson of the London Business School once defined risk as meaning that more things can happen than will happen. That is a fancy way of saying we don’t know what will happen, but it is a useful formulation when we take up the task of risk management. If more things can happen than will happen, we can devise probabilities of possible outcomes, but — and this is a big “but” — we will never know in advance the true range of outcomes we may face.

For example, the average annual inflation rate in the United States was only 1.4 percent from the end of 1954 to the end of 1965. But in 1965, who could have imagined that inflation would average nearly five times that rate over the next 15 years?

In short, our forecasts are wrong from time to time.

That observation sounds like a platitude, but consider the kinds of questions it provokes. How will we deal with surprises — outcomes different from what we expect? What are the consequences of being wrong in our expectations? This is the point when risk management begins to live up to its real meaning. Risk means the chance of being wrong — not always in an adverse direction, but always in a direction different from what we expected. — Peter Bernstein (source)

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Quote for the Week

Three parts of investment policy are important:

1. Deciding the right asset mix for the particular investment fund.
2. Accepting and working with the reality that each investor’s long-term gross returns for each asset class will very likely be “average” for that asset class — minus manager fees, taxes, and so on — and accepting the corollary reality that underperforming is much more likely than outperforming.
3. Sustaining policy commitments at market highs and at market lows, exactly when that rascal Mr. Market is doing his very best to do his worst.

The reality is that “roughly right” is all we can ever hope for on long-term asset mix, because even the most sophisticated investors must make their judgments on the basis not of facts, but on probabilistic estimates of two great uncertainties, markets and human reactions to markets, and without knowing the consequential leads and lags that will surely be part of the real world. — Charles Ellis (source)

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2022 ended with fears of a recession, rising interest rates, and higher and rising inflation costs. It was the first year in a long time where both stocks and bonds were down. “Experts” predicted more of the same.

2023 proved them wrong. A diversified portfolio, made up of broader asset classes, returned 12.8% for the year. US, International, and Emerging Market indexes, broadly, were up double digits. In fact, the S&P 500 even set a new all-time high!

Bonds performed well. Even cash — via ultrashort-term treasuries — earned a respectable 5% on the year. In other words, 2023 was a great year overall — for those who stuck with it.

Years like 2023 are why investors should not put much weight into market or economic predictions. Markets are noisy in the short run. Pessimism is fleeting. Discipline is key to surviving it.

Markets have a knack for recovering after a loss. The US market, in particular, has a 100% recovery rate. It doesn’t always happen the next year, but it does happen.

Markets are resilient. Investors should take comfort in that. The discipline to hold tight is as big a contributor to long-run returns as your portfolio’s makeup, if not more so. Continue Reading…