Every now and then I do something off-topic with Aleph Blog. This is one of those times.

I’ve talked about math pedagogy perhaps half a dozen times since starting this blog back in 2007, and if you are a long-term reader, you know that I think the powers that be DON’T HAVE A CLUE AS TO WHAT THEY ARE DOING!

What, am I flustered? No, no. I am being perfectly serious, and in my opinion moderate. One of my daughters, my wife and I are all good math tutors. We can take on the hard cases and make them learn. In my opinion, the height of good math education in the US occurred in the 1950s, before I was born. I remember as a kid reading the older textbooks and thinking how wonderful it would be if these were the textbooks at my school.

But that’s not my main reason for writing this evening. I want to explain that students need a firm grounding in their math facts if they want to succeed with math. Otherwise, they will feel dumb, hate math, and not want to study it.

All of my children, with varying degrees of intelligence, were able to work through the 100 math facts for addition, subtraction, multiplication and division… getting them to get all of them right in five minutes by third grade, and three minutes by fifth grade.

Is memorization the highest expression of math skill? No. But it enables other skills that won’t emerge unless basic calculations are easily done. It is a mercy to children to drill them until the facts are lodged in their heads for easy retrieval.

To give a different example, my daughter who was our best math student came to me and said that the work I had done with her on precalculus was far better than what public schooled students had received.

Oddly, the public schooled students had proceeded far beyond my daughter in terms of titles of courses taken. But they lacked the ability to actually DO the calculations when they got to college. My daughter became a TA. MAny of them did not.

Part of what I did in teaching her, and other children of mine was always go back to first principles. As an example, with Trigonometry — the unit circle. I would show how everything is derived from the unit circle. The ability to work things out from basic principles is fundamentally different from the seemingly bright children who focus on learning the algorithm to solve problems, but don’t really get the concept as a whole.

Now, don’t get me wrong, problem solving was the main driver of math in our home school, but not to pass tests — it was to promote understanding.

Okay, back to the basics. Do you want your younger children to have a firm foundation in math? I have a spreadsheet that many people have used for drill. You can download it here.

It’s pretty simple. It gives the basic 100 math facts randomized for addition, subtraction, multiplication and division, and a new one my skilled daughter asked for, one that mixes all four, so the student has to think extra hard as the student tries to solve it.

95% of children with repetition and encouragement can memorize their math facts and become more confident to absorb higher level math. Take the opportunity to genuinely improve your child’s math ability, and get them to learn their math facts. After that, they can move on to higher aspects of mathematical reasoning. (Ignore the math ideologues in the public schools, it is as if they want children to do doctoral work before the finish elementary schools. The ideologues are sophomores in the truest sense — wise fools who try to tell you the mankind is different than what it genuinely is, without any real proof for their veracity. They hide behind the shelter of the government, even though they should be fired for incompetence.

In summary, with math, go back to basics. Your child will do far better than his peers.

PS — This is true of the basics across subjects. (Insecure school districts fake progress by having students take so-called college level courses that truly are not such, as my daughter saw amidst her “peers.)

Before I start, let me mention what I thought about returning to blogging. When I briefly wrote for The Balance, I kept coming up with ideas that I could not easily post there, and so I started keeping a list for future blog posts. I also found that many of the articles I was being asked to update needed serious work, to the degree that it was the equivalent f writing a whole new article. In the end, the level and type of work there just did not fit me. I didn’t write enough for their requirements, so they fired me.

I was fine with that. I was not impressed with them, and they were not impressed with me. I am thankful that they gave me the opportunity; we learn more when we fail than when we succeed.

Now, I have roughly 40 ideas to write about. That doesn’t mean I couldn’t use some more of them. My email is still listed on the contact page. Feel free to drop me a note. My rule is that I read everything that comes to me, but I only have time to give replies to less than half of what I receive. If a question is of more general interest, I often turn it into a blog post.

Anyway, I’m glad to be back writing. I missed it, though I needed some rest in order to make me want it again. On to tonight’s post.

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In mid-summer, Tadas Viskanta of Abnormal Returns asked bloggers to opine on a variety of questions. The first on was on Value Investing. Here was the question:

Is value investing dead? Seriously, it?s been quite some time since it had any meaningful outperformance.?Josh made the case that maybe the world has fundamentally changed.?Or is this just the kind of talk you hear at a turning point?

https://abnormalreturns.com/2019/07/08/blogger-wisdom-the-death-of-value/

Here was my unredacted answer:

Value investing can?t die.? Saying that value investing can die is like saying that ordinary principles of running a good business can change, and that?s ridiculous.
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That said, types of value investing can go out of favor.? Some of that may have happened because quantitative value investing got overdone, leading to a variety of risk-premia common to value investing getting too small.? Also, two other things have played havoc with traditional value investing.? A) interest rates are too low, and thus every marginal idea can get financing. B) some large companies have found ways to reinvest free cash flow at above average rates of return for a long time.
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Traditional value investing assumes that capital is scarce and good organic investment ideas are scarce.? During brief periods of time where that isn?t true, traditional value investing will underperform.? We have had that in spades for the last ten years, and as such, my performance vs. the S&P 500 has stunk.
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That brings up the last point, behavioral aspects: I was at a Baltimore CFA meeting within the last three months, and the speaker asked: ?How many of you are value investors??? I stuck my hand straight up, and two others did at half-mast.? The speaker said, ?Oooh, three! That?s the most I?ve had admit that in a while.?? Lots of value investors have given up.
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So, there are few practitioners left on the field, and value premia are now fat amid general overvaluation of the market. Is value investing dead?? Seems so. Long live value investing!

Tadas left out the first paragraph of my answer. It reminded me of the brief period of time where I wrote for Minyanville. The first and only piece I shared with them was Buy-and-Hold Can?t Die. Minyanville renamed it to: Four Reasons Buy-and-Hold Investing Is Not Dead.

I really wanted to make the point in the title that buy-and-hold investing is a fundamental strategy that anyone could easily pursue, and as such, it can’t die. Performance comparisons are usually done to an index that is bought and held.

I wanted to say the same thing about value investing. Yes, it is having its worst period of underperformance EVER. But buying assets that are temporarily out of favor is a simple and fundamental strategy. It can’t go away permanently.

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So, what of the current market? I value looking a little better? Maybe. Who can tell?

There’s been a little bounce, which has gotten more ink than it deserves. Even a year of outperformance would not be enough — 2013 came and went — a blip in a growth wave. There are strong businesses throwing off significant cash flow yields, and are growing their earnings as well. Many face limited competition. That’s what I have bought and continue to buy.

Eventually the growth in underlying value will pay off. Eventually the high-fliers will hit the inflection point of the S-curve of their growth as opportunities to deploy capital for high returns dries up. But when those will happen is uncertain. I keep following my rules because they make sense, and the time to switch your strategy is when it is going well, but the improvement is flatlining. Changing when your strategy is doing badly is a recipe for getting whipsawed.

And so I soldier on… waiting for value investing to return to prominence. It will happen — just not on schedule.

It’s been interesting watching the views on the Fed regarding policy change over the last year and a half. Their views on GDP growth and Fed funds reversed as they followed their trailing indicators. After all, what economic variable moves later than unemployment?

Have a look at the rest of the graphs:

If you have been looking at my Twitter feed, would know that I am a fan of using the yield curve to target monetary policy. The yield curve does two things moderately well.

• It gives the view of market participants as to where interest rates will go in the future. That doesn’t mean the forecast is right, but it does show what the major players are thinking on average. Call it the wisdom of crowds (of money). This may not forecast all that well, but it is usually closer to accurate than the Fed’s macroeconomic modeling.
• It helps you understand the profitability of banks (and other financial firms). The slope of the front end of the curve is a proxy for the profitability of bank lending. When it is not profitable for banks to lend, they don’t lend as much and the economy slows down.

You could put the Fed on autopilot using a rule that would adjust policy such that the difference between the 10-year Treasury note yield and the 3-month Treasury bill yield is around 0.50%. If the Fed did that, Fed funds would have to be 0.65% lower than now. To keep life predictable, the rule could avoid making changes until the slope of the curve got to 0% (loosen 0.50%) or 1% (tighten 0.50%).

But here’s the problem with a rule like that: I don’t doubt that it would work in the short run. In the long run, the lack of recessions would lead to the situation that we are in now. Debt levels get too high, the economy grows slower, and when the slowdown finally comes with Fed funds near zero, it becomes a crisis like the Great Depression or 2008-9. Too much bad debt. We need recessions to force bad debts to liquidate when there is a small amount of bad debts to reconcile.

Perhaps then policy should force the yield curve to invert once every five years, say with a slope of -0.50%, and hold it there for a year or so.

On the bright side now, the banks are in decent shape. The places that are weak are corporate America, low-income consumers, and the government itself. I expect corporate defaults to be rather stiff in the next recession. I just hope we don’t get a series of sovereign debt crises globally. No telling what that would bring.

One last thought. The Fed has an opportunity to rationalize its asset policy, and move back to a classic set of assets — short maturity Treasuries. They could slowly sell off the Mortgage-backed securities and the Treasuries longer than 5 years and reinvest in shorter Treasuries. As a result, the yield curve would steepen and banks would lend more, lessening the need for monetary policy to loosen.

Anyway, that’s all. The Fed is behind the curve, in more ways than one. Perhaps the economy is picking up a little now — after all, the 30-year Treasury bond yield has been rising.

Before I start this evening, I want to comment on what posts were popular while I was gone. Here they are, in declining order of popularity:

• The US is not Japan, but there are some Similarities
• The Venn Diagram Method for Greatest Common Factors and Least Common Multiples
• Contact Me
• The Permanent Portfolio
• What Caused the Financial Crisis?
• Annotated ?In Hoc Anno Domini?
• On the Structure of Berkshire Hathaway

The first thing that fascinates me is how different these articles are. Second, the first two articles are old — 2011 and 2008 respectively. There are a few math pedagogy articles at my blog, but not many. It is something near to my heart as math was my favorite subject as a boy, followed by science and the social sciences.

It also highlights the peculiarity of my blog. I cover a lot of ground, and I am fairly certain that every post loses some of my audience. Anyway, it is nice to be doing this again. I hope you all enjoy it. And to Tadas Viskanta at Abnormal Returns, thanks for taking note of my return. That meant a lot to me.

On to tonight’s post:

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A friend of mine wrote this to me:

I am VERY interested to have your opinion on this.? First a few assumptions.? While equality of opportunity in a free market economy is ideal and a goal to be pursued, equality of outcome is both impossible and not something to be pursued for many reasons, including the consequences of stifling innovation and competition.?
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The question – While there will always be income inequality in a free market economy, does crony capitalism have the effect of increasing income equality by means of subsidies, regulations, protection of monopolies, etc?
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The reason for the question is this:? I think that my lefty friends are on to something when they point out the gross disparity of income that exists in our country.? They believe that the solution is bigger government and something that looks more and more like socialism.? I am arguing that smaller government, more local control, and slowly killing crony capitalism will result in more fairness.??
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In this Forbes article from May of last year, the author notes that a typical CEO in the 1950s earned about 20x the amount of the average worker whereas today the number is 361x.? Is this actually deserved?? I understand that there is and should be a disparity here but isn’t some part of this disparity due to distortion of markets caused by government policy?? Brink Lindsey in this National Review article makes the case that it is and that conservatives need to recognize it.
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What say you?

This may sound a little noncommittal, but inequality of income is partly due to the government, technology, culture, and part is unavoidable, regardless of the technology, or social or governmental structures. Let me take each in order.

Yes, big government likes big labor and big business, and it tends to squeeze out smaller businesses. Part of this is a matter of convenience — if you are big, it would be nice to have a “one stop” solution. It is a lot more expensive for small businesses to comply with regulations in relative terms.

I recognize that problem as a state-regulated RIA. If I wanted to get bigger, the initial phase of it would require a lot more work. I can stay at the level I am, and do it all myself, and keep my offering simple. Personally, I like that, because I think it is best for my clients, but if I just wanted to gather assets to enrich myself, the next phase would be difficult. Once you are big, it gets a lot easier. You can spread the fixed costs of regulation over a much wider revenue stream.

Also, the government is focused on creating “jobs.” Though politicians may inveigh about creating high-paying manufacturing jobs, the statistical apparatus measures all jobs, and that is what receives the most attention. Unemployment is low, but the share of total income going to labor is also low.

When enterprises get larger, the pay differential will naturally increase, as those in a hierarchy derive some income from the oversight of those below them, whether it is done well or not. Enterprises are larger now than in the 1950s.

Technology can encourage or discourage income inequality. Information technology has helped to eliminate a lot of middle income jobs, as information technology allows the same things to be done with lesser-skilled people, whether here in the US, or abroad.

This brings up another unpopular point: though inequality may be increasing in the developed world and China, it is decreasing globally, as lower paid workers abroad get much better pay doing work that otherwise would be done in developed countries. Since we increasingly have a global economy, and that economy is becoming more equal, why should we be so concerned about the local effects in the US?

That brings up the social and unavoidable aspects of inequality, which are less popular to consider. Many younger people in developed nations consider prosperity to be their birthright, and work less hard in school than their peers in developing nations. Is it any surprise that incomes to those who are lazy lag, or even decline? This phenomenon is well-known, all the way back to ancient Greece, if not further. “Shirtsleeves to shirtsleeves in three generations” is well-known phrase, expressing how the children of the wealthy get lazy, and wealth is lost.

This is the main reason why I doubt that the same families will maintain their dominance, even as inequality persists. The elites rotate over time, as Pareto taught. It is not a fixed class structure, as in the times where ownership of land dominated, but the names and faces change as fortunes are won and lost.

Our current educational establishment is turning out children that are less bright than their parents. If the children are less bright or motivated than their competition, will their incomes not sag? America does better than most other countries in aggregate as we give people more freedom, and teach them to be flexible. But that doesn’t mean that the children will do better than their parents.

We also accept more immigrants (as does Canada) who are motivated by the freedom to grow their enterprises. This is another aspect of some of the xenophobia in the US as some rural natives resent wealthy immigrants who don’t share their values.

Summary

I tried to teach my children to be industrious, smart, and pursue occupations that would make a difference for them and their families. Only a few of them listened, and they are doing well. That is America in microcosm.

Yes, you can argue about big government, labor, and business, but that is only a part of the puzzle. Incomes might become more equal if Uber, Lyft, and Airbnb could level the taxi and hotel industries, which have government regulations protecting them. Removing regulations tends to gore those in the middle class that are protected by the regulations versus those that want to be in the middle class that would like to compete against them.

What matters most is the culture of a nation, and how they are motivating the next generation to compete. We are doing that moderately badly, and that accounts for the relative loss of stature of the USA versus the rest of the world. This places the blame on the American people themselves, as they have not committed to having a culture of excellence, and getting their children to implement that.

Dear Friends,

After a year off, it’s time for me to get back in the saddle and blog again.? I’m going to restart in a way similar to the way that I began — writing shorter posts, and being light on graphics.? I’ll go into what I did during my time off bit-by-bit as I go on. But for now, here is today’s post:

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Yesterday there was an article published on Triple-S Management which I found to be poorly done in some ways.? That said, GTS has its share of negatives:

• There are a lot of claims outstanding from Hurricane Maria on GTS, though there may be some good reasons why the claim settlement is slow.? That said, in my own investing on Katrina, I was able to find and short reinsurers that had understated their claim exposure — that happens.? In that case, though, the errors were realized within two months, not two years.
• Triple-S management is not a great management team, but paraphrasing Buffett, I’d rather have a mediocre management team in a great business, than a great management team in a mediocre business.
• That great business is health care insurance in Puerto Rico, where GTS has a leading position.? Cutting against that are their other insurance businesses, which I think they might be better off exiting.? Most insurance management teams don’t do well managing multiple lines of business. Focus is a plus in insurance.
• AM Best did downgrade the P&C sub of GTS?(Triple-S Propiedad) pretty severely after the Maria claims were revealed, which *did* take a long time to surface.? But AM Best is “inside the wall” and has a lot of data that is nonpublic.? They would have asked the questions regarding large claims posed by the article above.? Since that time AM Best has become more positive on the creditworthiness of the entire GTS enterprise, inding Propiedad.? None of GTS’s entities are “under review with negative implications anymore.”
• All of the significant exposure to loss for Propiedad is in Commercial Multiperil.? I confirmed that from the year-end Statutory statements, which are not public documents, but should be.? (NAIC, let the data be free!)

Here are my main difficulties with the article:

1. After a major disaster, everything moves slower in insurance, and insurers play hardball to a higher degree.? That’s normal business.? There are reasons why a claim may paid out at lower values or not at all — terms or conditions of the contract were violated, damage happened for reasons not covered in the insurance, negligence of the insured, the cost estimates are wrong, etc.
2. The writers say that GTS only has the amount of its market capitalization to play with to make claim payments after its reinsurance is exhausted.? GTS trades at at a price-to-tangible book ratio of 43%.? The net worth of GTS, though not entirely available to pay claims, is around $900 million.
3. And, I looked around to see if GTS parent company is on the hook to provide capital support for Propiedad.? They have promised another $10 million, but looking through some of the filings at the SEC, and the 2018 year-end statutory statements for Propiedad, I saw no guarantee listed.? AM Best identified such a guarantee for the Triple-S Blue subsidiary in the most recent press release, but did not say something similar about Propiedad in the November 2018 press release, which would have been a material factor in both the ratings of Propiedad and GTS as a whole if it had existed after the release of the Maria claims.? As such, in a pinch, GTS could send Propiedad into insolvency/runoff, or, play a political game with losses if necessary.
4. As it is, the expected remaining losses for P&C in Puerto Rico is in the $2 billion range.? That makes the estimate that Propiedad has $1 billion remaining to pay unlikely, and makes the $309 million seem reasonable compared to its market share (9-21% depending on how you measure it).
5. Insurers in setting initial reserves, are supposed to put out their best estimates.? That may be considerably lower than what insureds are asking for — it’s a negotiation, after all.? If claims as they are processed are paid out at higher rates than the estimates, it will show up as an increase in “claims incurred in prior years.”? That hasn’t been happening in the GAAP or Statutory statements so far, but who can tell for sure — maybe the article is right, and there are some big bombs remaining.
6. But the three claims mentioned in the article totalling $170 million will likely be settled for less.? The other alleged $900 million of claims are difficult to analyze or verify.? It’s just scuttlebutt, which could be right, but who can tell?? It doesn’t fit with the total likely remaining claims in Puerto Rico of $2 billion, or, maybe the $2 billion estimate is wrong.? (By this point, those estimates should be good.)
7. The article briefly questions the retroactive reinsurance cover for Propiedad, but it’s really pretty simple.? After a disaster, getting insurance for claims is tough and expensive.? Typically, the policy names a total claims attachment point for when claims will start being paid that seems unlikely to be hit, and the reinsurer pays proportion of the claims above that point up to a limit.? (Buffett has done a lot of these deals on reinsurance of asbestos claims.)? What it does mean is that another insurance company had to get enough confidence on the total claim level? to write the business.? They probably got to look through all of the claim files, settled and pending.? (The reinsurer in question is a very large and well-known one, one with very high-quality underwriting processes.? I think it would break confidentiality from downloading the documents from the NAIC if I revealed its name. The answer is at the top of? page 14.17 of the annual statutory statement of Propiedad.)
8. Finally, the writers of the article allege all manner bad things that will happen to the health business of GTS either from a scandal, or what will happen from lack of full payment of claims on damaged Puerto Rico government buildings.? Puerto Rico does not likely want Propiedad to go insolvent.? They would rather work out some sort of deal that extracts the most it can out of the GTS parent company without leading them to send the company into runoff/insolvency.? The Puerto Rican government could indeed threaten GTS with the loss of some or all healthcare business, but they could not seize the healthcare company.? In the worst case scenario, if Puerto Rico ended up with an insolvent Propiedad, and told GTS that they would never get healthcare business again, GTS would go into runoff, and the dividends paid by the company as it went out of business would exceed the current stock price.? In the meantime, GTS is a large employer in Puerto Rico, and they would have to deal with all of the layoffs.? I don’t think this scenario is likely to happen.? If claims from government entities are too high for Propiedad to deal with, the Puerto Rican government would likely work out some sort of deal.

If you think this is unlikely, remember that in the financial crisis, all sorts of large entities got special treatment when they teetered near bankruptcy.? I am not saying that is the case here.? I think GTS, AM Best and the retroactive reinsurer are correct, and the writers of the article are wrong regarding the claims exposure.

Am I certain of this?? Of course not.? Though I made money speculating on Katrina’s effects on Montpelier and Ren Re, I lost money on Scottish Re.? I am fallible.? I am making considerable surmises in this piece I am writing now, as are the writers of the piece I am criticizing.

Last point: I would be almost certain they have more money on the line for this one than my clients and I do, for whatever that is worth.

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Disclaimer: There are a lot of things that I don’t know here, so I could be wrong.? As with anything I write, do your own due diligence.??

Full disclosure: long GTS for clients and me

(And, oh yeah, this didn’t end up short, now did it?)