A reprise of what some people knew in advance of the Great Financial Crisis. Includes a link to what I wrote 10 years earlier, where I got a lot right, and a lot wrong.
Eight reasons why simplicity in investing works. Avoid anything that relies on options, or trading strategies. Buy and hold. Reduce turnover. Focus on quality.
The best of the bunch, and my prediction that no effective action would happen with respect to Social Security has proven true so far. Seven years have burned away. Eight years until the crisis. The Greenspan Commission hosed Americans by raising “contribution rates” when it really didn’t need to do so. Nothing should have been done in the early 1980s, leaving the Social Security system to face insolvency in the mid-2000s decade. There could have been a reasonable reckoning then. As it is, we are still facing a train wreck in 2032, and Greenspan drained our pockets unnecessarily.
Cute idea, but it never saw the light of day. A way for mutual fund companies to reduce systemic risk, while allowing investors to make money during crises. On the other hand, maybe we should have some funds that pay on credit default swaps.
Written just before Volmageddon, I deal with factoids in the ultra-smooth 2017 market, and try to point out how “The Little Market that Could” was not as good as it was celebrated.
That’s all for now. I will put out some more posts, including “best of” posts in the short-run.
Active managers as a group are very similar to the index.? That shares move from active to passive managers does not affect their valuation, just as one active manager selling to another does not.
This was rejected at the founding of Social Security because of the socializing of America’s private companies as a result.? Also, given that politicians would never make decision immediately after a crisis, there would be the tendency to buy in when expensive, and becoming the ultimate dumb money of the market.? Assets subject to the whims of politicians rarely get managed well — they are the worst at greed and fear.
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Note: this is the last “Best of Aleph Blog” post for a while.? My policy was don’t decide on what’s best for a year.? As it is, given that my posting rate has slowed, these posts may come even more rarely, because there won’t be enough in some three month windows to justify a post.
It is very difficult to get a high real rate of return over a long time.? This article peels apart the math, and brings out the quantitative factors that play a role in the analysis.
Clarifying the return series that I use for my forecasts of future stock market returns, and is it likely for an investor to earn a 3% real return over a long horizon?
Because of underfunding, there will be more cuts. ?Depend on that happening for the worst funds, and at least run through the risk analysis of what you would do if your pension benefit were cut by 20% for a municipal plan, or to the PBGC limit for a corporate plan. ?Why? ?Because it could happen.
This is an underrated report from the US Government, but even it is forced to downplay how the situation is for Social Security and Medicare.? Things aren’t getting better, and time is running short.? The next time I write about this is when the 2018 report comes out.? Until then remember my more recent piece?Notes from an Unwelcome Future, Part 1.
This is timely.? Are US firms too short-term in their orientation? No.? To be more controversial, if companies in the rest of the world imitate the US, they will be better off.? They don’t push the present hard enough, and the great long-term returns don’t materialize as a result.
This was a fun piece to write.? It is a high quality problem (usually), but the rules are the opposite for firms with undervalued stock, which is more common.
Often it takes time for an investment thesis to work.? Thus, look at old ideas that have gone nowhere… maybe the work is about to pay off.? Also, other ways to find ideas to buy.
How to think about asset credit risk for financial institutions.? Also, why a “brain dead” 10% leverage proposal for banks is a bad idea, and really not a conservative idea at all.
Supposedly Hank Greenberg said that to Warren Buffett at one point.? This was written when BRK wrote a huge retroactive cover for AIG, capping prior bad underwriting decisions.
Why the main municipal pension fund in South Carolina ran into troubles, and what lessons we can learn from that.? (Put on your peril-sensitive sunglasses before reading this…)
Fertility doesn?t turn on a dime. ?When women conclude that the rewards of society (money, power, approval of peers) go to those with fewer children, that?s a tough cultural idea to overcome. ?I would conclude that it will take a lot longer than a single five-year plan to turn around birthrates in China? if they can be turned around at all. ?All across Asia, marriages happen at lesser rates, happen later, and produce fewer children. ?China is one of the more notable examples.
A lot of people got skinned by the bankruptcy of Horsehead Holdings, which was unfair to stockholders, but sadly, legal.? That said, those that owned the company missed several significant points regarding risk control, and that is why they lost.
On a rare time that I agree with Paul McCulley — we both think the Fed in general should not invert the yield curve.? Also, how the Fed could be genuinely independent, unlike their “independence” that they talk of presently.
It ain’t all dirty, and it ain’t all clean.? Sometimes non-GAAP is a correction, and sometimes it is abusive of economic reality.? You have to analyze it carefully.
Remember, earnings estimates are off of non-GAAP earnings.? Do not confuse them with prior GAAP earnings for making an estimate of the growth in the value of corporations.
“What municipalities lose businesses and people? ?Those that treat them like milk cows. ?Take a look at the states, counties and cities that have lost vitality, and will find that is one of the two factors in play, the other being a concentrated industry mix in where the dominant industry is in decline.
The more a municipality tries to milk its businesses and people, the more the businesses begin to hit their flinch point, and look for greener pastures. ?With the loss of businesses and people, they may try to raise taxes to compensate, leading to a self-reinforcing cycle that eventually leads to insolvency.”
“Money does not flow into or out of assets. ?When a stock trade happens, shares flow?from one account to another, and money flows the opposite direction, with the brokers raking off a tiny amount of cash in the process. ?Prices of assets change based on the relative desire of buyers and sellers to buy or sell shares near the existing prior price level. ?In a nutshell, that is how secondary markets work.”
In general, I think there is?no?value in preparing for the ?total disaster? scenario if you live in the developed world. ?No one wants to poison their own prosperity, and so the?rich and powerful?hold back from being too rapacious.
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The sun will rise tomorrow, Lord helping us? so?diversify and take moderate risks most of time.
After a certain point, additional risk reduces returns, because average people cannot stomach making the tough decisions when things are too good, or things are too bad.
My modified “Fed Model” as a measure of the equity premium inherent in the well-known Dividend Discount Model applied to the market as a whole.? Then I break the equity premium apart into three concepts that are simpler to understand.
My take on the Brexit, before and after the vote.? It is still my opinion that Britain is better off outside the EU, and that the worries regarding it remain overblown.
On another type of charlatans, the political sorts.? Two of the few things I had to say prior to the elections in 2016 — the first one about how the problems were bigger than the government could solve, yet the politicians would still promise solutions.? The second was in the same vein, but at greater length.
Last set of charlatans, the ones at the Fed.? Using money finance has always led to bad results.? Much as I think the Fed talks about monetary policy lags, and then acts like they don’t believe that, that is a small error compared to helicopter money.? (This one got me a 15-minute interview on an English-speaking financial radio in Seoul, Korea.)
Two real long-term problems that our world will have to face.? High private and governmental debt around the world, which may lead to some weak nations defaulting on dollar-denominated debt.? “Weak parts of the Eurozone and Japan are possibilities, along with a number of emerging markets.”? Pensions are another issue, and most of the news globally is depressing.? So much for not having children and not saving.
Though I always consider illiquidity to be a risk factor, for the economy as a whole, liquidity is overrated.? Public policy should not be geared to making all/more assets tradable.? Things that are genuinely illiquid should remain so, lest you have financial crises like the recent housing bubble, where too much money was lent against illiquid assets.
Actual asset performance is more important than liquidity. Analyze your investment selections carefully.
The first two articles on The Economic Philosopher’s stock valuation model that I have written.? As an update, the market is currently priced for a 3.8%/year return over the next ten years, not adjusted for inflation.? This is the best model available on future returns, bar none.
“My advice to you tonight is simple. ?Be skeptical of complex approaches that worked well in the past and are portrayed as new ideas for making money in the markets. ?These ideas quickly outgrow the carrying capacity of the markets, and choke on their own success.”
It is possible to over-save, and underspend.? You should leave some inheritance for your heirs, but don’t deprive yourself of the benefits that having some assets provides.
In general it is better to take payments over time than to receive it as a lump sum.? If you do have a lump sum that comes to you, take care not to spend it too rapidly.
How would you live if you were trapped in Venezuela, Turkey, Zimbabwe, or some other badly run country with high inflation.? Here are a few bits of advice.
Truly gruesome.? What’s the difference between what a buy-and-hold investor earned on Ken Heebner’s main fund versus what the average investor earned on the fund?? Really, it’s astounding.
Over time, all classes of risky assets tend to become correlated with each other.? This is because investors naively diversify their risky assets across these classes, and then engage in panic selling behavior with all of these classes as a group.
As the yield curve steepens, more investment opportunities become uneconomic.? Don’t say that monetary policy is accommodative when you are tightening.
At Christmas, the Wall Street Journal republishes a vacuous opinion piece by Vermont Royster that is little better than liberation theology for conservatives.? He twists Scripture out its contexts to make it mean what is never meant.? Bogus beyond measure.
The currently final episode on my investing errors, covering the last eight years.? Note that Valero has made me five times on my initial investment, though, and I still own it now.? This piece has more of the bright side of what I learned.
“None of the ways I mentioned for getting more money for spending out of investments is likely to produce a lot of additional spending in aggregate across the economy. ?As a result, I think that the Executive Branch, the Congress, and the Federal Reserve should be cautious of trying to make asset values rise, or encourage more borrowing against assets. ?It will likely not have any significant effect to grow the economy over the intermediate -to-long term.”
Quarterly earnings reporting is necessary for proper oversight.? If we did not have earnings guidance, a cottage industry would grow up to give it because investors want to know whether companies are performing adequately or not.
This is a tough question, but I give a clear answer:
Now, since I set up the eight rules, I have doubled down maybe 5-6 times over the last 15 years. ?In other words, I haven?t done it often. ?I?turn a single-weight stock into a double-weight stock if I know:
The position is utterly safe, it can?t go broke
The valuation is stupid cheap
I have a distinct edge in understanding the company, and after significant review I conclude that I can?t lose
A theoretical discussion about what assets are worth, settling on the unhappy idea that it is utterly relative, and that changing macroeconomic situations can affect things markedly.
“The basic idea of retirement investing is how to convert present excess income into a robust income stream in retirement. ?Managing a pile of assets for income to live off of is a challenge, and one that most people?are not geared up for, because poor planning and emotional decisions lead to subpar results.”
How I did a bad job for Hovde on Scottish Re and National Atlantic Holdings.? Also, what I did to mitigate the errors.? (And I am supposed to be really good with insurance companies…)
On why the Consolidated Audit Trial [CAT] is a bad idea.? Preventing “flash crashes” is not a desirable goal; they teach people not to use market orders, and to be careful.? The market is a place for big guys, not little guys.
Some academic literature implicitly treats risk premiums as “free money” if you hold it long enough.? But there’s the problem: can you hold it long enough?? Also, sometimes the extra returns are so small that they are not worth the risk.
Some things aren’t meant to be highly liquid, and it is foolish to worry about the lack lack of liquidity.? The second article covered some good questions that I got asked, including bonds that are predominantly “bought and held,” and the limitations on investment banks to hold inventory post-crisis.
What do you recommend when stocks and bonds are likely to return the same amount over the next ten years?? I leaned toward the bonds, which so far has been the wrong call.
How to analyze the cycles that investment ideas go through.? People think about it linearly, which helps lead to the booms and busts.? The second article gives 16 practical applications of the idea to illustrate the general theory.
In this article, I argue that China has been indirectly encouraging its banks to run huge risks by financing illiquid assets with liquid liabilities.? Again, the risk hasn’t materialized yet.
I discussed the unwillingness of Doubleline to cooperate with Morningstar to analyze certain Doubleline funds, and why it was reasonable in some ways for Doubleline to refuse, and Morningstar to not give favorable ratings.? That said, I concluded that Morningstar should apologize to Doubleline.? This article earned me polite calls from both sides, and one request to take the article down voluntarily.? I politely refused.
It is a fatal attraction, but if you are going to write about investing, you will have to make some predictions about markets.? Just try to keep them from being too outlandish.
This was the first of what was going to be sixteen articles.? I was thinking of turning it into a book.? Things have been too busy for that.? This article is about figuring out what you want to do in life.
Many amateur investors give up on a strategy just as it is about to start succeeding, and choose a strategy that has performed well, only to watch it underperform.
I give you at least five reasons why you should bid out your personal insurance policies every three years or so.? Underwriting rules and premiums change, and some companies take advantage of loyalty.
