June 2012 – Page 3 – The Aleph Blog

Strong Hands

Posted on 8 June 2012 by David Merkel

When I started writing this blog, my Major Article List was a big thing to me.? I wrote some pretty good things at RealMoney.com, and I wanted to have a record of the best of that.? I only wish I had done the same thing for my Columnist Conversation comments, because many of them were far better than most articles at RealMoney.? Give TST credit, they would frequently take my best comments, and turn them into posts, and pay me for them.? They did not have to do that.

But, I would love to republish many of my best timeless posts here.? I offer a deal to RealMoney: In exchange for being able to republish old posts and comments of mine here, I will offer you new posts of mine, or the best of my old posts at my blog, so long as they are timeless.

Regardless, when I was at RealMoney, I wrote a series that dealt with the motives of various investors as it stemmed from their balance sheets.? For those that have access to RealMoney, here are the articles (note: I wrote different titles than what was used):

Managing Liability Affects Stocks, Pt. 1
Separating Weak Holders From the Strong
Get to Know the Holders? Hands, Part 1
Get to Know the Holders? Hands, Part 2

The main idea is this: There are a wide variety of investors, and they have differing abilities to hold assets.? Why should investors have differing abilities to hold assets?? And why should that matter?

When will you need the cash?? That should be a central question for every investment adviser, dictating asset allocation.? This is basic asset-liability management.? This gets neglected in investing more often than most imagine.

Mutual funds know that money will be pulled if they underperform.? This forces them to be more short-term in investing.? An exception can be closed-end funds, since they have captive capital, so long as the discount to NAV doesn’t get too great, and they attract activist investors.
Same thing for hedge funds; they tend to be volatility-averse on average; and their investors may be technically more sophisticated than mutual fund investors, in practice, they make the same mistake of chasing performance.
Average individual investors chase trends; that is very short-term.
ETPs react to the market.? Indexed investing amplifies a market as it grows, and muffles a market as it shrinks.
Endowments can resist short-term underperformance for a few years, then the trustees get antsy.
Same thing for Defined Benefit [DB] pension plans, but more so.
Most banks and insurers have short liability structures so they can’t allocate that much to long duration assets like stocks and esoteric illiquid assets.? Life insurers could invest there, but the risk-based capital regulations make it unworkable.? That leaves P&C insurers writing long-tailed business; many of them are value investors, and use the long-duration liabilities (as Buffett calls it “float”) to invest in a wide number of cheap assets where it may take a while for value to be realized.
Trusts, limited partnerships, etc., hinge on how much leverage they employ and how often the terms of the leverage shift, as well as any limitations on when capital must be distributed.? Sometimes that’s not obvious, as in the failure of many mortgage REITs when the repo haircuts got boosted in the midst of the financial crisis, leading to forced selling, as they did not have enough capital to post as margin against all the assets that they held.? The forced selling led to falling prices for mortgages, which led to further increases in the repo haircut, which created a self-reinforcing spiral until a new class of investors held many of the mortgages, and many mortgage REITs were bankrupt or broken.

With respect to institutional investors, my experience is the more of the investment is done internally, the more patient the capital tends to be.? Perhaps that’s the illusion of control, but I tend to think that investors have more trust in their own reasoning than in the reasoning of external managers.

The longer the time that you can invest and wait for returns, on average, the more aggressive you can be in investing.? The investor that can “Buy-and-hold” can take on the most difficult situations if there is a sufficient discount in the price to make the wait worthwhile, and avenues that allow for change to be encouraged.

So, when I think of how my investment is affected by those that invest alongside me, I divide them up this way:

Strong Hands — long liability structures, excess capital, experienced, patient, never compelled to do anything; they can live with short-term losses.
Weak Hands — no balance sheet or short liability structures, have to make a certain return each year, less experience, leveraged; they can’t live with short-term losses.

When I go through 13F filings, I note the quirkiness of the assets held, and often held for a long time.? Almost all of the 13Fs that I track I would classify as strong hands.? They don’t care about the next quarter; they are thinking about the next 3-5 years.? They care about the growing underlying value of the businesses; they wouldn’t care if stock market was only open one day per month.? Some, like Seth Klarman, do little on the long side when opportunities are not compelling.? Like underwriters at well-run insurers, when an insurance market is nuts, you stop writing business, and spend time improving your skills.

So for my own investing this past period after I finished my 13F analysis, I took the companies that had:

The 100 largest increases in my 13F investors
The 100 largest increases in cash invested as a fraction of market cap
The 100 with the greatest number of my 13F investors
and the 100 largest positions as a fraction of market cap,

and put them in as competitors in my ranking system, against my current portfolio.? Because of redundancy, it was about 320 companies in all.? I think it was a good exercise, because it made me think about a bunch of companies that I would otherwise never consider.? Anyway, the process is complete, and the equity portfolios have some promising new names with good prospects, and fellow shareholders that are for the most part “strong hands.”

On the Facebook IPO

Posted on 7 June 2012 by David Merkel

If you are a manager of corporate bonds, you get to learn the speculation cycle.? New IPOs may close in weeks if things are cold, and close in minutes if things are hot.

When things are hot in bonds, eventually the syndicate (“Wall Street”) decides that it is time to test the bullishness of buyers.? At such a time, they extend the time of the offering, and either lower the yield spread (raise the price), or increase the size of the deal.

When I was a corporate bond manager, if a deal was upsized by a large amount during a period while the market was hot, I would not buy.? Tough decision, but cutting against the grain is usually a good thing.? My brokers marveled that I was not participating in these large “benchmark” deals.? More often then not, they failed, and I smiled on the sidelines.? The brokers “stuffed” the ignorant buy-side that was all too willing to take risk.? Typically after that, corporate investors were more careful.

I don’t know the right value for Facebook, and I don’t think anyone does.? Too much of the value depends on future decisions, competitor actions, and economic conditions.? Valuing stocks where the positive cash flows are far out into the future is tough, should the cash flows materialize.

The last IPO I bought was Assurant [AIZ] where I was buying the company for <90% of book value,? and 9x earnings.? I’m a value buyer, so I buy companies where prospects are not fairly calculated by the market, but I avoid new issues where the price is outlandish.

Look, Wall Street works on two levels: distribute paper at a slight discount price, until buyers take it for granted and bid aggressively, leading to a mini-crisis, like it is for Facebook now.

Did Wall Street get the best price for Facebook’s current shareholders at the IPO? Probably yes.

Was that the right price? For recent investors, the answer is no.? But in any IPO process there were a wide number of ways to protect themselves:

1) Don’t participate in IPOs. When general valuations in the market? are high, IPO valuations are higher.

2) Avoid buying IPOs in hot sectors, they are often overvalued.? Only go for IPOs in sectors no one cares about, like insurance, where I offer you Assurant [AIZ} and Safety Insurance [SAFT], among others.? (I don’t suppose it helps you to learn that insurers return better than almost any other industry?? Didn’t think so… because it is a boring yet complicated business.? Even Buffett said about Assurant — “too complicated,” and he is one of the greatest insurance executives of all time.)

3) Avoid IPOs where the deal size is upsized.? When a deal is upsized that often means the underwriters are taking advantage of demand, which diminishes the likelihood of any short-term outperformance.? For this point, in the bond market, I would cut my bid, unless I really liked the credit, together with my analyst.

4) Avoid IPOs where the price talk is raised, which also limits the likelihood of any short-term outperformance.? Same thing as a bond manager, I would drop out out if the new yield did not meet my yield needs.

5) Buy IPOs when they are forced to occur and are hated, like my experience with the Prudential “C” bonds, and most mutual insurer conversions.? IPOs are like the market on steroids, you want to avoid them when things a hot, but they are interesting when things are cold.? After all, who wants to IPO when things are cold?? There are occasional situations where legal matters force a company to go public, and that can be an interesting time to be an opportunistic buyer.

6) Avid IPOs where the valuation is stretched.? It may be a great business concept, but can it grow into that fancy valuation?? Unlike Dr. Damodaran, I don’t go in for fancy reasoning that justifies high valuations.? Most investors are better off avoiding high valuation situations, and focus on more down-to-earth types of businesses.? (My recent purchases include: Crude Oil Refining & Transport, Integrated Oil Major, two basic technology companies with forward P/Es under 10, a specialty retailer that is the strongest in its category, and two insurers, one that is a holding company, and one that is a hedge fund.)

7) Finally, avoid IPOs where those that know nothing about investing are interested.? Facebook is a perfect example here, with a large number of users who love the company, but have little idea of how profits are made, or how they will grow.

IPOs are tough, I think tougher than ordinary investing, so? avoid them unless you have an edge that justifies participation.? Be tough on yourself here — what is your edge?? Share it with a friend who has expertise, and see if he agrees with you.? This is not easy stuff, it only seems easy when the market is running hot, and that is a bad place to be when it goes cold.

Full disclosure: long AIZ, for me and clients

Book Review: The Big Win

Posted on 5 June 20126 June 2012 by David Merkel

I enjoyed reading this book, but I have some issues with it.? First, let me say what I liked:

1) The author chose? a number of different investors to make his point.? They weren’t all outside passive minority investors like most of us are.? There were many that invested in whole companies, or, they were the company, and invested in incredible ventures.

2) He points out a number of significant successes and how they occurred, for seven investors.

3) He points out commonalities in? the processes in the first two chapters and the epilogue.

4) He is a sharp observer of investment processes.? He knows the game, as I do.

What I did not like:

1) Big successes are like snowflakes — no two are alike.? There was little to unify the successes of the book.?? Readers deserve a more unified theory of what leads to success.

2) The Chapter on Jimmy Rogers was weak.? Aside from what he did with Soros, there is no indication that he has made significant money since then.? No “Big Win” was recorded in the book.

3) With a few of the “Big Win” investors, it was difficult to tell whether they really had a “big win” or a moderate win.? Some of the stories had nothing dramatic behind them.

4) There was little to integrate the disparate investors, despite the chapters that attempted it.

Though I liked the book, I found nothing compelling to make me love the book.? I have read better books in this area.

Quibbles

Already expressed.

Who would benefit from this book:?? If you like a mostly unrelated set of investors that will not teach you an integrated set of ideas, you will find it here.? If you want to, you can buy the book here: The Big Win: Learning from the Legends to Become a More Successful Investor.

Full disclosure: The PR flack asked me if I wanted the book, and was kind enough to send me the prior book also, which I thought wouldbe the better of the two.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Book Review: The Kelly Capital Growth Investment Criterion

Posted on 4 June 2012 by David Merkel

I have not read this book.? I read almost all books that I review, so I disclose when I have merely scanned a book such as this.

Why scan?? First, I didn’t ask for the book.? Second, it is 800+ pages long.? Third, it is a series of academic articles defending and attacking the Kelly Criterion — it will have a very specific audience that cares about the academic side of the debate.? The popular side is covered by the book, “Fortune’s Formula,” which I have favorably reviewed here.

The simple way to phrase the argument for the Kelly Criterion is this: you have an advantage versus the markets for whatever reason.? You have an edge on average, and the odds are tilted in your favor.? You size your bets as a ratio of edge over odds.? If your edge is durable, and the odds are calculated right, the optimal decision leads to the best compound growth of capital on average.

Samuelson sits in his ivory tower, where only efficient markets exist.? Those of us that are practitioners know that the markets are hard, but not efficient.

To me, the Kelly Criterion is intuitive, whereas the ideas of Modern Portfolio Theory are a stretch.? They don’t fit the way the market operates.

Who would benefit from this book:?? If you are really interested in the Kelly Criterion debate , and are willing to pay up to get a good summary of the debate, it is available here.? Note: you have to like math.? If you want to, you can buy the book here: The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic) (World Scientific Handbook in Financial Economic Series).

Full disclosure: This book came out of the blue; did not ask for it.

Works if Small, Fails if Large

Posted on 3 June 2012 by David Merkel

The Wall Street Journal had an article on risk control that had the attitude of “here are some silver bullets.”? Ugh.? When will journalists learn that there are no simple solutions to portfolio management?

“Risk-allocation turns 50 years of portfolio theory on its head.”

Ain’t true.? Modern Portfolio Theory is garbage, but so is this.? So volatility is more stable than returns.? Volatility can be up or down, and you want to buy volatile asset classes that have gotten trashed.? You won’t do it because you are scared, but that is part of why you aren’t a good investor.? Good investors make the “pain trades.”

Here’s the question to ask: What would happen if everybody did this?? Unlike share-weighted indexing, not all strategies can be applied by everyone at the same time.? I have written about risk parity before:

So long as there are few using the strategy, it may work well, but it will not scale because volatility does not match the proportion of assets available to be purchased.? The same is true of “risk control” and “risk budgeting” strategies.? They will be “flashes in the pan;” there is no necessary reason why they will work.? There is no such thing as risk, but there are risks.

Avoid faddish ideas as described in the WSJ article.? Far better to focus on what risks you face in the investment markets, and choose assets that will not be affected by those risks,or, might even benefit from them.

Using volatility as a guide to investing will fail if it gets large enough, and during bull markets, it will be forgotten.? Non-scalable strategies work if there is a barrier to entry, and there is no barrier here.? Thus I see no long term value in the strategies proposed.

Sorted Weekly Tweets

Posted on 1 June 2012 by David Merkel

Maryland vs. Illinois

@AmyResnick One more note: MD benefits from the presence of Johns Hopkins, biotech, NIH, the REIT industry, hotel industry, etc. $$ Jun 02, 2012
@AmyResnick Martin O’Malley spoke2the Baltimore CFA society. Slick. Made many of us wonder if we lived in the same state that he governs $$ Jun 02, 2012
@AmyResnick That’s true.We live next to the US money sink, DC, and we profit from the woes of the nation along with Virginia. $$ Jun 02, 2012
@AmyResnick If my state passed a budget like that, I would b ill & annoyed. Oh wait, I live in the People’s Republic of Maryland. Never mind Jun 02, 2012

Companies

GM cuts $26bn from pension liability http://t.co/wL7hlRab $GM buys annuities from $PRU, and cashes out other pensioners; amazing gain. $$ Jun 02, 2012
Groupon Sinks to New Low as Lock-Up Expires http://t.co/NuE7dA9b A $GRPN share is now cheaper than the amount 1 can save w/a Groupon. 😉 $$ Jun 01, 2012
Chesapeake Valuation Seen Luring Major Deal http://t.co/1n6fnjzZ Natural gas assets r not worth as much; too much marginal cheap supply $$ May 31, 2012
Toyota Tsunami Recovery to Be Seen in 93% U.S. Sales Gain http://t.co/UlO4SSzC $TM stock below where it was one year ago, as w/many autos $$ May 31, 2012
“Chesapeake?s equity and net debt was valued yesterday at $9.19 for each barrel of oil equivalent” Key phrase: “barr? http://t.co/KAcfGoyH May 31, 2012
@TheStreetHub @abnormalreturns will publish my pick 4 the next decade next week. It may not beat $CHK, but there is less risk to it. $$ May 31, 2012
@TheStreetHub Once fracking starts, difficult2turn off economically; there r a lot of places to frack; don’t c NG prices rising anytime soon May 31, 2012
$JPM CIO Swaps Pricing Said 2 Differ From Investment Bank http://t.co/4jgUCTry via @BloombergNews | Not2surprising since trades moved market May 31, 2012
Icahn?s Chesapeake Stake Puts Governance Before Value http://t.co/csRUxisS Icahn has his own version of “doing well by doing good.” $$ $CHK May 31, 2012
Toll Buying Half of a 2,379-Home California Subdivision http://t.co/RDIUQiNK ?There?s not much inventory now in Orange County…? $$ May 31, 2012

Miscellaneous

Heavy rain on Baltimore. Just went out with 3 of my kids. We dug a trench diverting water awa from the house. Boy, did we get wet & dirty $$ Jun 01, 2012
@Alpha_Rook I was proud of their initiative & that they executed my idea, and not theirs, which would not have worked. Yes, it was fun. $$ Jun 02, 2012
Dating Shanghai-Style Draws 38,000 Hopefuls as Weddings Fall http://t.co/ECmp4ppU More men than women, but fewer desirable men than women $$ Jun 01, 2012
Indian-American wins U.S. Spelling Bee http://t.co/ZkjzSSAP Nandipati became the 5th consecutive Indian-American winner & 10th of last 14 $$ Jun 01, 2012
Defectors Cast New Light on Korean Camps http://t.co/TOQtTM3s US intervenes in so many places; one that is @ the top of the list ignored $$ May 31, 2012
Thx, I’m Touched & Impressed $$ RT @valueprax: Notes – AlephBlog Digest #1 – David Merkel On Corporate Bonds ( #bonds http://t.co/vXSPiApn ) May 31, 2012
Energy assets in front line of cyber war http://t.co/4UZG5wJx Ability2use stuxnet2take over SCADA systems running energy/utility assets risk May 31, 2012
10 Things Presidential Candidates Won’t Say http://t.co/8l3tPGEz 1. “I’m powerless to change the economy.” Honest talk u will never hear $$ May 29, 2012
For Healthy Eating, Bitter Is Better http://t.co/A3gPQIYV “It’s also the first step toward eating a broader, healthier diet.” $$ May 28, 2012
Sudan, South Sudan Trade Accusations Ahead of Crisis Talks http://t.co/XFpu79GQ Unless there is a way to share oil revenues, war is possible May 28, 2012
Funds May Wrong-Way Bets Before Price Slump http://t.co/u3garjlL ?surprising to see so much on the long side…trend is down in commodities” May 28, 2012
Why ‘Value’ Stocks Lag http://t.co/Uy5nwkC8 After reading this article & the comments on it, I still don’t get value is doing poorly $$ May 28, 2012
@felixsalmon I would be honored to have you as a client. I’ve done well over the last 12 years, but not the last 16 months. $$ May 27, 2012

Eurozone

Euro Area Is Running Significant Risk of Breakup, Rehn Says http://t.co/1Wx5nAEq Presence of negative German short rates is a danger sign $$ Jun 01, 2012
Negative interest rates are like antimatter. They never exist for too long, and the presence of a lot of them means things r dangerous $$ Jun 01, 2012
Berlusconi Says ECB Must Print Euros or Italy May Say ?Ciao? http://t.co/a1sAsDIJ Taking aim @ those who ejected him, back in the hunt $$ Jun 01, 2012
@The_Dumb_Money It’s the 5%+ spread over bund yields that gets people antsy; it indicates a crisis in Italian ability to pay; unstable. $$ Jun 01, 2012
“German 2-yr yields fell below 0 for the 1st time this wk while the yield on similar-maturity Spanish notes rose 11.8 bps to 5.11% today” $$ Jun 01, 2012
It may be wrong, and may harm Italy deeply, but it makes for great politics by encouraging popular resentment of fore? http://t.co/0xm4RY5l Jun 01, 2012
Why France Has So Many 49-Employee Companies http://t.co/nKcECoQK “Sir, we r up to 49 again, shall I start another new company?” “Oui!” $$ May 31, 2012
Spain Ejects Clean-Power Industry With Europe Precedent http://t.co/SFhWg1lF Amazing what happens when u stop subsidies;companies fold/leave May 31, 2012
Iceland Property Bubble Grows With Currency Controls http://t.co/o5IUO1hF Classic. Trapped cash needs 2 protect value so buys real estate $$ May 31, 2012
ECB Opposes Spain Bank Idea http://t.co/Vx9tdeua Spain has reached its notional credit limit, can’t borrow more w/o driving rates up $$ May 31, 2012
EU Proposes ‘Banking Union’ http://t.co/3lK74rxE This is an easy thing to propose, but hard to achieve without nations giving up power $$ May 31, 2012
Greek Democratic Left Demands Euro Pledge to Back Syriza http://t.co/cmkcflzR They dream that they can stay in Euro, and not pay promises $$ May 29, 2012
Leveraged Loan Defaults May Surge to 25% in Europe, Moody?s Says http://t.co/vUpMQisS If credit tightens in Europe, many defaults come $$ May 29, 2012
Greek Pro-Bailout Parties Gain Amid Euro Collapse Concern http://t.co/Ta2m8TDC “Greece is the only country…we can say it?s a failed state” May 28, 2012
Spain roundup: http://t.co/WtGRfFDP & http://t.co/KGwBE4gY & http://t.co/MvlXpx2R Credit situation for Spain as a whole is troubled $$ May 28, 2012
Unsecured Creditors Face Losses in EU?s Plan for Failing Banks http://t.co/xCQFqJqv No free lunch; watch unsec rates rise 4 bonds & CP $$ May 28, 2012
@japhychron No decoupling there that I can see. The likely credit panic is in Europe, with limited spillover the US. $$ May 27, 2012

Financial Sector

Regulators Adopt New Tools to Prevent Another Flash Crash http://t.co/8aClpGWw These regulations seem reasonable. I’m not used 2 saying that Jun 02, 2012
Volcker Rule? We need a Slurpee Rule http://t.co/a1GNBm7e “Lose $1B -> lose your job.” Great, can we apply this 2 government officials 2? $$ Jun 01, 2012
Bank says: We?re defaulting, but don?t you dare! http://t.co/PmYEk4kW Strange that many think they don’t have to pay if their creditor is BK Jun 01, 2012
Insurance Supervisors Ready to Identify Too-Big-To-Fail Insurers http://t.co/bve0otvq Less risk than banks; liab structures can’t acelr8 $$ May 31, 2012
Woman Who Couldn?t Be Intimidated by Citigroup Wins $31 Million http://t.co/CaznlXxA Post-2008 $C employee blows whistle onlousy mtges $$ May 31, 2012
Look for corporate incest, where capital structures are interlaced between parent & subsidiaries. $AIG had that in sp? http://t.co/2zz1qwmo May 31, 2012

Speculating on the Long Bond

@shamir_k @SoberLook Only 10% of my portfolio; ask u what I asked Shiller, Hoisington & Lacy Hunt: when do u leave? $$ FD: +$TLT Jun 01, 2012
@SoberLook I have too many friends who were burned on $TBT, it will b right eventually… but the trade was 2 popular amid deflation $$ Jun 01, 2012
@SoberLook True enough. I just sold my last TIPS. $TIP Thinking of kicking out my last chunk of $TLT. FD: Long $TLT (me & clients) Jun 01, 2012
Ten-Year Treasury Yield Hits Record Low http://t.co/xkfc1JP2 The benchmark 10-year U.S. Treasury yield sank to an all-time low of 1.659% $$ May 31, 2012
CHART OF THE NIGHT: What A Difference A Year Makes http://t.co/VLqVDCiK Global deflation drives people2grab 4 predictable income streams $$ May 31, 2012

Federal Reserve

He’s pretty connected $$ RT @pdacosta: Done deal? Morgan Stanley Fedster Reinhart now sees 80 percent chance of Fed easing in June. Jun 01, 2012
Rosengren Says Renewed Fed Operation Twist to Spur Growth http://t.co/5lz5Zwof If we all clap Tinkerbell will live! Hasn’t worked yet… $$ Jun 01, 2012
They assume that lowering long Treasury rates will aid growth; it did not work in the Great Depression & WWII. The Fe? http://t.co/IYHxbtML Jun 01, 2012

On Gold

David Einhorn Mocks Warren Buffett?s Stance on Gold http://t.co/JreRqj49 Good piece, I have questioned it as well: http://t.co/jNVrf700 $$ Jun 01, 2012
@vjnttp That’s why I included a link to my article on the topic; it’s more complicated than what Buffett wrote in his annual report $$ Jun 02, 2012

My Goof on NFP

@andrewhorowitz I don’t trust the ADP #s. My model uses 4 wk avg of jobless claims, adjusts4past model errors b/c errors r autocorrelated $$ Jun 01, 2012
@andrewhorowitz Yes, a little above consensus, that’s what the models show, personally I’m more bearish but the models r better than me. $$ Jun 01, 2012
@Estimize I looked at estimize for a place to lodge an NFP est, and couldn’t find it. Do you do those? May 31, 2012
@joelight It’s a blend of 2 models which have different error properties — their point estimates r 145 & 171K. Don’t know CI 4 combined $$ May 31, 2012
I don’t do this often, but here goes — projecting NFP at +158K +/- 13K May 31, 2012

US Economics

RE: @SoberLook This is what stagflation looks like.? Copper reacts to GDP. Gold reacts to real rates. http://t.co/JODgLATu Jun 01, 2012
The Surprising Global Shortage of Skilled Workers http://t.co/6fnJOUZb There r skilled workers w/o work, they don’t have the *right* skills May 31, 2012
Some people kvetch. Some start their own firms, and hire people that don’t kvetch, with skills that match.? The latte? http://t.co/XO57VQa2 May 31, 2012
Totally agree, let govts protect depositors @ most, not banks RT @simonconstable: also a stupid thing to propose. Bust companies should fail May 31, 2012

Rest of the World

Dumb: China?s Blog Censorship Rules Have U.S. Parallels http://t.co/eDmN4L4X Even in colonial times restrictions on speech in US were modest Jun 01, 2012
Intervention From Rupee to Real Shows Focus on Inflation http://t.co/Mr5sIquM Emerging Markets face inflation & policy tightens, currs rise May 31, 2012
China Has No Plan for Large Stimulus to Counter Slowdown http://t.co/Zzo9hzRG Maybe they figured out extending more loans won’t help growth May 31, 2012
Egypt’s Next Leader Won’t Be A Creature of Tahrir Square http://t.co/8UEP48Vg Revolution in Egypt subverted by military & muslim brotherhood May 28, 2012

US Politics

Startup Act Shows Silicon Valley Clout Growing in DC http://t.co/mJYKPeGu How Silicon Valley pushed 4 the JOBS Act. Scammers, PE rejoice $$ May 31, 2012
Note: the same thing will happen in 10-15 years to Social Security, but it will b cut by 25%. http://t.co/PpV5XGqO A series of bad surprises May 29, 2012
Congress Unwilling to Address Disability Plan?s Shortfall http://t.co/WrtxovbX In a few years, disability payments will b cut by 21%. $$ May 29, 2012

Aim for the Middle

Posted on 1 June 2012 by David Merkel

“Ya gotta take more risk to get more return.”? That’s the street language version of what is commonly trotted out, but it is only half true.

The truth is that moderate risk taking outperforms taking no risk or taking high risks.? This is true in bonds.? BBB bonds return best of all — they are the middle of credit risk.? There is no native group that wants to own them exclusively.? Higher-rated bonds do next best, and junk bonds do worse still on average.

Think of it this way: Those that invest in cash get a low return.? But those that invest in high-risk growth companies also get a low return, on average.? Those that take moderate risk have the best potential of making money.? That is why I focus on investors that take moderate risk relative to their peers.

Moderate risk taking does best on average, at least as far as public capital goes.?? Private capital may have more control and expertise, and can take more risk as a result.? In general, the less control and expertise, the less risk should be taken. With private equity, this is one of the tough truths: Private capital can change matters if it is large enough. Then it has to deal with changing the management of the business.? Public equity does not get there, except in rare cases.

That is a major reason why moderate risk-taking wins on average. In one sense, it is why low volatility investing and value investing work.? You are putting your money at risk, but you are doing so with a margin of safety.? Part of making money is survival; if you don’t survive round one, you won’t make money in round two and the rounds that follow.

That’s why swinging for the fences with stocks doesn’t work.? You get too many strikeouts, and few home runs.? Personally, I try to be a singles hitter in investing.? It’s doable, both intellectually and financially.

This applies to asset allocation as well. 60/40 stocks/bonds does as well as 100% stocks, and with less volatility.? 80/20 stocks/bonds did best the last time I tested — perhaps the true ratio is 70/30 given the outperformance of bonds over stocks over the last decade, but I am reluctant to think so because over the long haul, the best a bond can do is pay its coupon and return the principal.? Even in the case of premium calls, you get your principal back at what is typically an unfavorable time to reinvest.

Another reason to aim for the middle is that you will not get jolted hard during downdrafts, and be tempted to trade out at the maximum point of pain, or, buy in near the peak when the bulls are running their last lap.? A lot of money gets lost that way.

It’s also a reason to hang onto some slack cash or other safe assets, like high-quality noncallable bonds lacking weird features.? It may diminish returns in the short run, but it allows you to stay in the game of investing.? Too many people give up at the wrong time — many friends that I had that gave up on stocks in late 2002 – early 2003, deciding to focus on “what they knew”: residential real estate.? Another group gave up on stocks late 2008 – early 2009, with no place to go with their cash.

Realistic expectations are needed as well.? If you earn more than the growth rate of GDP plus a few percent, count yourself blessed and realize that it is very hard to do that consistently over the long-term.

So aim for the middle: take moderate risks, diversify, be realistic, and adjust your portfolio slowly as conditions change.? Then you can stay in the game, and compound your returns.