Search Results for “dollar weighted returns” – Page 2

The Best of the Aleph Blog, Part 34

Posted on 23 May 2018 by David Merkel

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In my view, these were my best posts written between May 2015 and July 2015:

Learning from the Past, Part 5b [Institutional Stock Version]

Learning from the Past, Part 5c [Institutional Stock Version]

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…)

The SEC Pursues a Fool?s Errand

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.

On Partnership Investing

What do you have to be careful about if you are entering into a partnership?

On Risk-Based Liquidity and Systemic Risk

On how the Federal Government is making a mess of post-crisis policy.? The best policies would be:

Regulate banks, money market funds and other depositary financials tightly.

Don?t let them invest in one another.

Make sure that they have more than enough liquid assets to meet any conceivable liquidity withdrawal scenario.

Regulate repurchase markets tightly.

Raise the amount of money that has to be deposited for margin agreements, until those are no longer a threat.

Perhaps break up banks by ending interstate branching. ?State regulation is good regulation.

Advice to a Friend on a Concentrated Private Stock Position from His Employer

How to analyze a large position in your employer’s stock.? Lots of potential for gain and loss because of the lack of diversification in one stock.

There?s a Reason for Risk Premiums

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.

On Bond Market Illiquidity (and more)

On Bond Market Illiquidity (and more) Redux

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.

Yes, Build the Buffer

More reasons why you should keep a supply of cash on hand.

Coping With Zero

In this period, I couldn’t find any new stocks to buy.? What should I do?

Stocks or Bonds?

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.

The Phases of an Investment Idea

Sixteen Implications of ?The Phases of an Investment Idea?

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.

Avoid Indexed Life Insurance Products

Why indexed insurance products give subpar returns with reduced volatility, assuming the insurer stays solvent.

Asset-Liability Mismatches and Bubbles

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.

How To End Index Gaming

?…in this short post I would like to point out two ways to stop the gaming.

Define your index to include all securities in the class (say, all US-based stocks with over $10 million in market cap), or

Control your index so that additions and deletions are done at your leisure, and not in any predictable way.

Gundlach vs Morningstar

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.

What is Liquidity? (Part VIII)

The occasional series that never ends.? Ten things that affect the liquidity of an asset, and explaining the Treasury “flash crash.”

It?s Difficult to Make Predictions, Especially About the Future

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.

We Eat Dollar Weighted Returns ? VI

In which I analyze the Hussman Strategic Growth fund and the large negative difference between time-weighted and dollar-weighted returns.

Stock Valuations: Micro and Macro

Can valuation measures applied to individual companies be used to value the market as a whole?? Under what conditions, or, is there a better way?

The School of Money, First Grade

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.

Pick a Valid Strategy, Stick With It

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.

Bid Out Your Personal Insurance Policies!

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.

Twenty Enduring Posts

Posted on 28 July 201528 July 2015 by David Merkel

This morning, I looked at the fall in the Chinese stock market, and I said to myself, “It’s been a long journey since the last crash.” After that, I wrote a brief piece at RealMoney, and another at what was then the new Aleph Blog, which was republished and promoted at Seeking Alpha, and got featured at a few news outlets. ?It gave my blog an early jolt of prominence. I was surprised at all of the early attention. That said, it encouraged me to keep going, and eventually led me away from RealMoney, and into my present work of managing money for upper middle class individuals and small institutions.

I try to write material that will last, even though this is only blogging. ?Looking at the piece on the last China crash made me think… what pieces of the past (pre-2015) still get readers? ?So, I stumbled across a way to answer that at wordpress.com, and thought that the array of articles still getting readers was interesting. ?The tail is very long on my blog, with 2725 articles so far, with an average word length of around 800. ?Anyway, have a look at the top 20 articles written before 2015 that are still getting read now:

20.?Got Cash?

Though I write about personal finance, it’s not my strongest suit. ?Nonetheless, when I?wanted to write some articles about personal finance for average people, I realized I needed to limit myself mostly to cash management. ?A few of the articles in the new series “The School of Money,” should be good in that regard.

19.?Book Review: Best Practices for Equity Research Analysts

I write a lot of book reviews. ?I have some coming up. ?I was surprised that on this specialized got so many hits after four years.

18.?On the Structure of Berkshire Hathaway, Part 2, the Harney Investment Trust

This is a controversial piece on the most secretive aspects of what Buffett does in investing. ?I have tried to get people from the media to pick up this story, but no one wants to touch it. ?I think I am one of the few admirers of Buffett willing to be critical… but so what? ?Hasn’t worked on this story.

17.?Learning from the Past, Part 1

This short series goes through my worst investing mistakes. ?It’s almost finished. ?I have one or two more articles to write on the topic. ?This one covers my early days, where I made a lot of rookie errors.

16.?On Trading Illiquid Stocks

I describe some of my trading techniques that I use to fight back against the high frequency traders.

15.?De Minimus Laws

Here I do a post aiding all of my competitors, giving the relevant references to the de minimus laws for registered investment advisers in all 50 states, plus DC and Puerto Rico. ?Note that I got my home state of Maryland wrong, and I corrected it later.

14.?The Good ETF, Part 2 (sort of)

Reprises an article of mine explaining what makes for exchange-traded products that are good for investors.

13.?On Bond Risks in the Short-Run

A piece giving advice on institutional bond management. ?Kinda surprised this one still gets read…

12.?Should Jim Cramer Sell TheStreet or Quit CNBC?

Cramer generates controversy, and thus pageviews as well. ?As an aside, TheStreet.com is down another 20% since I wrote that. ?Still, the piece had my insights from brief discussions that I had with Cramer, way back when.

11.?An Internship at a Hedge Fund

Basic advice to a young man starting a new job at a hedge fund.

10.?Q&A with Guy Spier of Aquamarine Capital

I have always enjoyed the times where I have had the opportunity to interact with the authors of the books that I have gotten to review. ?Guy Spier was a particularly interesting and nice guy to interact with.

9.?The Good ETF

This is the predecessor piece to the one rated #14 on this list. ?Brief, but gets the points across on what the best exchange traded products are like. ?It was written in 2009.

8.?We Eat Dollar Weighted Returns ? III

I’ve been banging this drum for some time, and the last one in this series was quite popular also. ?This article highlighted how much average investors lose relative to buy-and-hold investors in the?S&P 500 Spider [SPY]. ?Really kinda sad, underperforming by ~7%/year.

7.?Portfolio Rule Seven

Now, why does my rebalancing trade rule get more play than any of my other rules? ?I don’t know.

6.?The US is not Japan, but there are some Similarities

I had forgotten that I had written this one in 2011. ?Why does it still get hits? ?In it I argue that the US will get out of its difficulties more easily than Japan. ?(Maybe this gets read in Japan?)

5.?Actuaries Versus Quants

My contention is that Actuaries are underrated relative to Quantitative Analysts, and have a lot to offer the financial markets, should the Actuaries ever get their act together.

4.?Can the ?Permanent Portfolio? Work Today?

Does it still make sense to split your portfolio into equal proportions of stocks, long Treasuries, T-bills, and gold?! ?Maybe.

3.?The Venn Diagram Method for Greatest Common Factors and Least Common Multiples

I was shocked at this one, written in 2008. ?This post explains a math concept in simple visual terms for teachers to explain?greatest common factors and least common multiples.

And now for the last three:

2.?On Berkshire Hathaway and Asbestos

1.?On the Structure of Berkshire Hathaway

0.?Understanding Insurance Float?(oops, miscounted when I started… so much for being good at math 😉 )

Should it be any surprise that the last three, the most popular, are on Buffett, Berkshire Hathaway and Insurance? ?People go nuts over Buffett!

The one novel thing I bring to table here is my understanding of the insurance aspects of BRK. ?Each of the three deal with that topic in a detailed way. ?Aleph Blog is pretty unique on that topic; who else has written in detail about the insurance company-driven holding company structure? ?Aside from that,?many don’t get how critical BRK is to covering asbestos claims, and don’t get the economics of insurance float. ?Many think float is magic, when it can lead to an amplification of losses, as well as an intensification of gains.

These last three pieces got really popular in March, around the time that BRK released its 2015 earnings, even though they were one year old.

Anyway, I hope you found this interesting… I was surprised at what gets read after time goes by. ?One final note: for every time the most popular pre-2015 article was read, articles that would have been rated #22 and beyond got read 10 times… and thus the long tail. ?It’s nice to write for the long term. 🙂

Full disclosure: long BRK/B for myself and clients

Even with Good Managers, Volatility Matters

Posted on 16 October 2014 by David Merkel

This is another episode in my continuing saga on dollar-weighted returns. We eat dollar-weighted returns.? Dollar-weighted returns are the returns investors actually receive in a open-end mutual fund or an ETF, which includes their timing decisions, as opposed to the way that performance statistics are ordinarily stated, which assumes that investors buy-and-hold.

In order for active managers to have a reasonable chance of beating the market, they have to have portfolios that are significantly different than the market. ?As a result, their portfolios will not behave like the market, and if they are good stockpickers, they will?beat the market.

Now, many of the active managers that have beaten the market run concentrated portfolios, with relatively few stocks comprising a large proportion of the portfolio. ?Alternatively, they may concentrate their portfolio in relatively few industries at a time, as I do. ?Before I begin my criticism, let me simply say that I believe in concentrated portfolios — I do that myself, but with a greater eye for risk control than some managers do.

My first article on this topic was Bill Miller, who is a really bright guy with a talented staff. ?This is the “money shot” from that piece:

Legg Mason Value Trust enthused investors as they racked up significant returns in the late 90s, and the adulation persisted through 2006.? As Legg Mason Value Trust grew larger it concentrated its positions.? It also did not care much about margin of safety in financial companies.? It bought cheap, and suffered as earnings quality proved to be poor.

Eventually, holding a large portfolio of concentrated, lower-quality companies as the crisis hit, the performance fell apart, and many shareholders of the fund liquidated, exacerbating the losses of the fund, and their selling pushed the prices of their stocks down, leading to more shareholder selling.? I?m not sure the situation has stabilized, but it is probably close to doing being there.

Investors in the Legg Mason Value Trust trailed the returns of a buy-and-hold investor by 6%/year over the time my article covered. ?Investors bought late, and sold late. ?They bought after success, and sold after failure. ?That is not a recipe for success.

Tonight’s well-known fund with a great track record is the Fairholme Fund. Now, I am not here to criticize the recent performance of the fund, which due to its largest positions not doing well, has suffered of late. Rather, I want to point out how badly investors have done in their purchases and sales of this fund.

As the fame of Bruce Berkowitz (a genuinely bright guy) and his fund grew, money poured in. ?During?and after relatively poor performance in 2011, people pulled money from the fund. ?Even with relatively good performance in 2012 and 2013, the withdrawals have continued. ?The adding of money late, and the disproportionate selling after the problems of 2011 led the dollar weighted returns, which is what the average investors get, to lag those of the buy-and-hold investors by 5.57%/year over the period that I studied.

(Note: in my graph, the initial value on 11/30/2003 and the final value on 5/31/2014 are the amounts in the fund at those times, as if it had been bought and sold then — that was the time period I studied, and it was all of the data that I had. ?Also, shareholder money flows were assumed to occur mid-period.)

Lessons to Learn

Good managers who have ideas that will work out eventually need to be bought-and-held, if you buy them at all.
Be wary of managers who are so concentrated, that when they receive a lot of new cash after good performance, that the new cash forces the prices of the underlying stocks up. ?Why be wary? ?Doesn’t that sound like a good thing if new money forces up the price of the mutual fund? ?No, because the fund has “become the market” to its stocks. ?When the time comes to sell, it will be ugly. ?If you are in a fund like this, where the fund’s trading has a major effect on all of the stocks that it holds, the time to sell is now.
There is a cost to raw volatility in large concentrated funds. ?The manager may have the guts to see it through, but that doesn’t mean that the fundholders share his courage. ?In general, the more volatile the fund, the less well average investors do in buying and selling the fund. ?(As an aside, this is a reason for those that oversee 401(k) plans to limit the volatility of the choices offered.
Even for the buy-and-hold investor, there is a risk investing alongside those who get greedy and panic, if the cash flow movements are large enough to influence the behavior of the fund manager at the wrong times. ?(I.e., forced buying high, and forced selling low.)
The forced buying high should be avoidable — the manager should come up with new ideas. ?But if he doesn’t, and flows are high relative to the size of the fund, and the market caps of investments held, it is probably time to move on.
When you approach adding a new mutual fund to your portfolio, ask the following questions: Am I late to this party? ?Does the manager have ample room to expand his positions? ?Is this guy so famous now that the underlying investors may affect his performance materially?
Finally, ask yourself if you understand the investment well enough that you will know when to buy and/or sell it, given you investing time horizon. ?This applies to all investments, and if you don’t know that, you probably should steer clear of investing in it, and learn more, until you are comfortable with the investments in question.

One final note: I am *not* a fan of AIG at the current price (I think reserves are understated, among other things), so I am not a fan of the Fairholme Fund here, which has 40%+ of its assets in AIG. ?But that is a different issue than why average investors have underperformed buy-and-hold investors in the Fairholme Fund.

Book Review: The Investor’s Paradox

Posted on 27 April 2014 by David Merkel

Investing is paradoxical, as many that read my blog would know. The market has cycles. ?There are overall boom/bust cycles. ?There are minor cycles between the major cycles. ?Strategies fall in and out of favor. ?What is an investor to do? ?Even harder, what should one who selects assets managers do?

It is hard to select talented investment managers. ?I know this, because I have done it many times in my career. ?This book points out the difficulties in selecting managers. ?Were the returns due to skill, or did he hit a lucky streak? ?If you are looking at the numbers only, it would be hard to tell. ?Asking managers detailed qualitative questions could help, as could looking at the current portfolio, and asking:

Does the portfolio fit the stated style of the manager?
Does it fit his description of how he tries to make money?

This book summarizes many issues in picking managers:

Strict mandates vs looser mandates
The ways in which we deceive ourselves willingly, to believe a nice manager, or con man
How hedge funds grew and changed
Can managers adapt to new market environments successfully, or should they persist with their model which used to work, but is now out of favor?
How do you deal with funds that are too complex for the ordinary retail investor to understand? (I would say avoid them.)

The book includes a chapter on Madoff, and while it doesn’t break new ground, it does point out why custodians and auditors are important. ?If there had been an independent custodian, or a real auditor, Madoff’s scam could never have happened. ?I also appreciated the reference on page 125 as to the methods that scammers use to gain the confidence of those they scam. ?This is one case where bright people get fooled. ?I would encourage readers to read “The Big Con,” or even marketing books, to make themselves skeptical.

The book has a firm hand on what leads to risk/return among managers — Concentration, Directionality, Compelexity, Illiquidity, and Leverage. ?LTCM is held out as an example of a disaster waiting to occur.

The book explains different types of investors, and why they take the risks they do. ?Different investors take different risks.

The author gives his own summary of how to interview fund managers, though I found it to be light. ?As a former buy-side analyst, I had to interview CEOs, and while I used a few techniques of the author, there are more techniques that can be used. ?I appreciated the allusion to “Colombo,” because purposely dumb questions can reveal the honesty of the one being interviewed, and may reveal details that could not be gotten through a smart question.

At the end, he points out how pension plans will not be likely to meet their return goals. ?He is right, and efforts to break that paradigm through allocations to alternative investments are also unlikely to work. ?Hedge funds don’t respond well to volatility.

This is a good book, but I have one further main objection.

Quibbles

When the author discusses Simon Lack’s analysis of hedge funds (P 190), he wrongly dismisses the significance of dollar-weighted versus time weighted rates of return. ?If a manager’s returns are so volatile that it leads investors to buy high and sell low, that is the manager’s fault. ?Good managers limit risk so that their investors don’t panic. ?Also, since dollar weighted returns are what investors receive as a whole, that is the actual result of the investing, and is the way that all investment managers should be measured. ?And as such, Lack’s arguments are correct. ?Investors would have gotten more out of investing in T-bills, which absolutely, would not be much more, but less is less. ?Lack is correct, and the author is wrong.

Who would benefit from this book:?If you hire mutual fund managers, you could benefit from this great book.? If you want to, you can buy it here:?The Investor’s Paradox: The Power of Simplicity in a World of Overwhelming Choice.

Full disclosure: I asked the PR people for a copy of the ?book, and they sent it.

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.

Also, it should be noted that value managers have client bases that often invest more in bad times, and take profits in good times, so their dollar-weighted returns are often higher than the time-weighted returns. ?Educated, contrarian investors do better.

Best of the Aleph Blog, Part 21

Posted on 9 May 2013 by David Merkel

These articles appeared between February 2012 and April 2012:

We Eat Dollar Weighted Returns ? III

What did a buy-and-hold investor get owning SPY?? 7%/year.? What did the average holder get? 0%.? A warning against over-trading.

Against Risk Parity

Against Risk Parity, Redux

Expressing skepticism over a strategy using leverage to extract returns out of lower-yielding asset classes.? Why not but subordinated asset-backed securities instead, and how did they do in the crisis?

Individual Investing Can Be Tough

Individual Investing Can Be Tough, Redux

The investment game is competitive, and I give a few tips on how to avoid the risks.

Musings on the ?400% Man?

Understanding small asset managers, and why you might want to invest with them.

Thinking about the Insurance Industry

I take a tour through the insurance industry after the carnage of the credit crisis.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 3 (On Acquisitions)

Lists all of the notable acquisitions of Berkshire Hathaway from 1977 to 2011.? Analyzes Buffett’s strategy, which has been remarkably consistent over 40 years.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 4 (10K Issues)

Goes through the main risks of Berkshire Hathaway.

Replacing Defined Contributions

I propose a hybrid plan that would replace 401(k)s, and other participant-directed DC plans.

The Rules, Part XXXI

The offering of liquidity through limit orders is a real service to the market, and on average gets rewarded in lower overall execution costs.? In choppy markets, it can really add value.

Buy-and-Hold Can?t Die

Buy-and-Hold Can?t Die, Redux

Explains how every investor (even speculators) has the option of holding on? for a long time, and why that can be valuable.

The Anti-Consultancy Consultancy

Call me, and I will tell you to fire the consultant, and listen to your middle managers.

Easy in, Hard out

It is always easier to loosen monetary policy than to tighten it.? The next tightening cycle will be particularly rough, should the Fed ever choose to do it.

Gold does Nothing

This post got a lot of play over the internet.? I was really surprised at how much response it received.? Gold has few industrial uses, but is pretty; that’s why it is so interesting.

Misunderstanding the Tax Debate

Misunderstanding the Tax Debate (II)

The debate should be about what income is, and not about what the rates should be.? Wealthy people have clever advisers that minimize “income.”? Doesn’t matter what the tax rate is.? The debate should focus on income.

Simple Retirement Calculator

Gives a simple way of analyzing whether you have saved enough or not.? Quick answer: you haven’t saved enough, particularly for the wretched investment environment that we are in now.

Sorted Weekly Tweets

Posted on 21 January 202322 January 2023 by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Running at the beach

Non-US

New Zealand Prime Minister Jacinda Ardern’s resignation highlights the complexity of post-Covid economic challenges https://t.co/wYjiYV0MLi People got tired of an overly interventionist leader who did not listen. Jan 20, 2023
Argentina’s plan to repurchase $1 billion of its deeply distressed dollar bonds has emerging-market investors scratching their heads https://t.co/hlu9qSfIrI If you are going to do this, don’t announce it in advance. Just do it quietly. Jan 19, 2023
Entrepreneurs Flee China’s Heavy Hand: ‘You Don’t Have to Stay There’ https://t.co/Ijh5EWbg9A China faces a talent and capital drain. Once you experience freedom, no level of economic incentives will get you to return to Communist China. Jan 19, 2023
India may have already surpassed China as the world’s most-populous nation https://t.co/pJiou6pys7 India’s culture would have to change a lot for it to have a fast-growing economy. Cultural change is difficult, so it is not likely Jan 19, 2023
How Rich Are Gulf Countries? Region’s Wealth Funds Have $3 Trillion to Spend https://t.co/KNNvnYr0BT Finding new ways to lose money Jan 18, 2023
China’s population started shrinking in 2022 for the first time in six decades https://t.co/W3S9zvd3Aw This is not news. Anyone paying attention knew this was coming 15 years ago. Jan 18, 2023
The UK is poised to threaten social media bosses with prison if they break new safety rules. That’s sensible, says @parmy https://t.co/uMKTmduBFs Not sensible. We don’t jail corporate leaders for tortious corporate actions. Instead, we fine the companies severely. Jan 18, 2023
Russians became the top foreign buyers of real estate in Turkey last year, helping sustain the world’s hottest housing market by tripling purchases https://t.co/JHIAXw2uHe Also happening in Georgia. Many Russians escaping Russia, and becoming significant in nearby nations. Jan 18, 2023
Western banks struggle to exit Russia after Putin intervention https://t.co/C1tdCYaYzK The wind-down strategy seems the most compelling Jan 17, 2023

Credit Issues

The rapid meltdown of Americanas has left Brazilians with the prospect of losing a ubiquitous company known for its iconic red-and-white logo and holiday sales https://t.co/do9eD4mroq Things like this don’t happen by accident. Management may have corrupted their accountants. Jan 20, 2023
Property markets face a deepening debt crisis as the era of easy money ends, and the fallout is everybody’s problem https://t.co/fFKTSmtiqI Stick to low leverage, quality and only “B” properties that are necessary… Jan 20, 2023
US watchdog cracks down on private equity securitization vehicles https://t.co/rjSGcuzh7i NAIC: 1) always late 2) underfunded 3) lacks smarts 4) states don’t listen to them 5) tries to grab control of credit questions, botches it, & gives it back to the rating agencies Jan 18, 2023
Opinion: More rotting assets are lurking in the shadows of the financial system https://t.co/kn6eaxfGMq Definitely opinion & biased. Many of the things stated here are wrong. That said, if defaults pile up from CLOs, let the entities funding them default, and don’t bail them out Jan 19, 2023
Big banks might need to be broken up if they become too big to manage & are unable to fix significant regulatory lapses, a top federal banking regulator said Tuesday https://t.co/ThWQ1ujBId Regulators most willing to break up the big banks likely have the least ability to do it Jan 18, 2023

Portfolio Management

Baillie Gifford admits ‘humbling year’ after $14bn loss on Tesla and Shopify https://t.co/2fA5cLEtwT Evaluate using dollar-weighted returns, like the PE guys do. Jan 20, 2023
Corporate fraud is widespread – and largely undetected, study says https://t.co/GEyfWRziKA Cash flow conquers all. If things were that bad, you would see a lot more insolvencies. There is bending GAAP, and breaking GAAP. The former is common, the latter is not. Jan 20, 2023
Questioning the Illiquidity Premium https://t.co/8Q7lbVMxij Simply put, you shouldn’t buy an illiquid investment unless you will likely get a premium return versus similar illiquid investments. Realizing an illiquidity premium is never guaranteed Jan 17, 2023
Investing When Your Time Horizon Is Short https://t.co/lmLOsMtFwv If your assets need to spent in 3 years or less on average, don’t own stocks. Jan 17, 2023

Science

Propulsion System Could Get Us From Earth to Neptune in 1 Year https://t.co/iIuEIL25yp This isn’t likely. Transferring kinetic energy with extreme accuracy would be tough. Jan 20, 2023
Companies are turning to microbes to alleviate fertilizer’s negative impact on the environment https://t.co/UIqd68kEf2 Milorganite has existed for years, Yara. But other technologies here could be game-changers. Jan 20, 2023
A nuclear-powered copter on Saturn’s moon Titan. Blimps on Venus. Space engineers are planning innovative flying machines to explore far-away worlds. https://t.co/LWiEDPiztg At least unmanned missions are cheap. Pity they won’t find any life out there aside from microbe stowaways Jan 19, 2023
New research finds that global temperatures would be about 0.1°F higher, had it not been for an increase in atmospheric dust https://t.co/LQmqIbtmVv Think of volcanoes. This isn’t news. Jan 19, 2023

Auto Finance

Can You Use a Home Equity Loan to Buy a Car? https://t.co/hg91niTa5L Could be a good idea if you pay it down quickly (<5 years), but not otherwise. Jan 19, 2023
The steep plunge in used car prices – what it means, and what’s ahead https://t.co/cslWrGFhbQ In general, the fall in prices is far greater the older and cheaper the cars are. Once new cars are being bought and sold in volume, recent used car prices may decline more rapidly. Jan 18, 2023
Hangover Time for Used-Vehicle Dealers. For Buyers, Patience Will Pay Off | Wolf Street https://t.co/HP7R7jyREj It’s likely that the prices of used autos will continue to fall. Jan 17, 2023
How Auto Lenders Can Help the Growing Ranks of Troubled Borrowers https://t.co/GA7XI7VDmy The low end is experiencing greater credit stress Jan 17, 2023

Politics

It’s Time to Put a Brake on the Debt-Ceiling Charade https://t.co/XQ4RAnotdG Switzerland has an expenditure cap that requires balanced budgets over time. It would be a lot better than what we have now. Jan 18, 2023
A looming, high-profile fight in New York speaks to a widened interest in state judicial appointments since the U.S. Supreme Court overturned Roe v. Wade https://t.co/uwNJeEeHxz New York, where liberals fight liberals. Jan 18, 2023
Lawsuits across the U.S. are challenging policies aimed at getting homeless people off city streets https://t.co/mIFMoYyamI I’ve known some homeless people over the years. The main common factor: lack of self-control, which is a skill that can be lost or developed. Jan 17, 2023

Private Equity

Private equity’s slowdown in 3 charts https://t.co/GTXKsF1wDD The situation is extended and ugly. What can we say? Watch for writedowns. Jan 20, 2023
Inside The Secretive World Of Shark Tank Deals: Who The Real Winners Are https://t.co/tMyOhmeC4h Interesting article. I’ve never been impressed with “Shark Tank”, because like all investing, acting quickly leads to ruin. This helps prove it. Jan 20, 2023

Crypto

Binance Is Bleeding Assets, $12 Billion Gone In Less Than 60 Days https://t.co/rgdl1GniHM Bye, bye, Binance Jan 20, 2023
Genesis Global Capital is laying the groundwork for a bankruptcy filing as soon as this week https://t.co/0WuMU0SrE9 Which will likely lead to a Gemini bankruptcy… Twin bankruptcies, and it is only the beginning. Jan 18, 2023

Companies

Meme stock Mullen risks drowning its investors by issuing a ton of shares, argues @chrismbryant https://t.co/Vvt5SYVoqG This is a rational response to meme stock investors: stuff them full of stock. Jan 19, 2023
Looming Twitter interest payment leaves Elon Musk with unpalatable options https://t.co/oJmCngeWjC If Twitter is worth no more than $15B at best, then basically the banks will own it, unless Musk tries to fold it into $TSLA, or some recapitalization that spreads the pain Jan 17, 2023

Odds and Ends

California Has a Gas-Price Mystery: Too High, But Why? https://t.co/FlrG5NHpsB Low refining capacity, low number of gas stations per driver — blame California regulations. Jan 20, 2023
Appliance makers are betting that internet-connected “smart” appliances will help transform their businesses and customer relationships—but not all consumers are plugging in https://t.co/z2p59IWD06 Better to buy simpler appliances, they break less, & fancy features are marginal Jan 20, 2023
A major Hollywood producer just pulled back the curtain on how hard it is to make movies—and how the streaming model killed the independent film https://t.co/LkO6HxoEj3 In general, this is good. Edgy content is usually bad content. Jan 20, 2023
Tech startup workers are grappling with what the market tumult means for their finances. https://t.co/gbBj7Y8ijd It’s a big risk to give up a lot for the startup company you work for in order to have a chance at a big score. ~80% don’t succeed. Jan 19, 2023
The Financial Accounting Standards Board is moving to permit companies to apply a certain accounting method to more tax-credit investments https://t.co/Kfdvz15ydT This is an interesting corner of investing. The accounting issues matter less than risk-based capital issues Jan 19, 2023
Fake meat companies promised to halt climate change, protect animals and make people healthier— while making billions. But they’ve turned out to be another food fad https://t.co/gYtcLlx7D8 It comes down to lower quality at a higher price Jan 19, 2023
Something has been killing American young people in sharply rising numbers, but it’s not vaccines, @foxjust says https://t.co/d0WWDl5z5S Large increases due to accidents, homicides, suicides, & C19 Jan 19, 2023
Bob Prince, who helps manage the world’s largest hedge fund, says more people need to lose their jobs before inflation will be brought under control https://t.co/GH6YFITkMR No, the Phillips curve does not exist in the presence of global trade. Don’t create a financial crisis Jan 18, 2023
Food waste is a major contributor to climate change. This startup wants to reroute your kitchen scraps from the landfill back to the farm https://t.co/svDMWmZAaH But why make them pay to do this? This is your cause. You should pay for it. Jan 18, 2023
The Consumer Financial Protection Bureau is weighing new restrictions on fees companies charge to wire money abroad https://t.co/998tjpQ24v It’s fine if compensation is disclosed or undisclosed, just not both. https://t.co/HWWVFqqmCr Jan 17, 2023
Going electric is often prohibitively expensive for truck drivers operating at US ports. One California startup may have a solution https://t.co/sy5KNgEFql All-in, a lot of the supposed environment advantages go away when applied to extremely heavy vehicles. Jan 17, 2023
CES, the consumer electronics convention held in Las Vegas this month, felt a lot like the flashy auto shows of yesteryear, with a techy twist https://t.co/mMJPoHDJWj Just be for real; flashy niche ideas that are costly will not pay off. Jan 17, 2023

Replies to Notes & Comments

Posted on 4 December 2020 by David Merkel

Photo Credit: Andrew Steele || 42 (with apologies to the late Douglas Adams)

My last post generated its share of comments. Let me respond to a few of them, and add a little more.

Yes, I live outside Baltimore. I have lived more of my life in or near Baltimore than anyplace else. Am I a critic of Baltimore? Of course, everyone near/in Baltimore is a critic of Baltimore. But Baltimore is more complex than most outsiders can understand. It is a “city of neighborhoods.” Positively, it means that if you are in a good area, you can rely on that. Negatively, it means that if you are in a bad area, you can rely on that. It is not a consistently good or bad city, and that was true when I went to Hopkins as well. I lived one year in a relatively bad area of Baltimore, and during that time worked in a different bad area of Baltimore. They are still bad, almost 40 years later, and Baltimore is no better off on the whole. What Baltimore needs is not more money, but a consistent set of directions for the police, such that they can act to the extent desired by the communities that they serve. That said, the amount of Baltimore that is unsafe is maybe 10% of the city, and everyone who lives there understands that.
Maryland has some of the best medical assets in the country, including Johns Hopkins (my alma mater), University of Maryland, and NIH. As a result, we have a large portion of the state devoted to healthcare and biotechnology. Other outstanding industries of Maryland include software, defense/intelligence, REITs, and hotel management. These are the overweighted industries of Maryland. Do I have friends in these businesses? Of course, but I have little knowledge of what they do, and I am not a defender of these industries per se.
Telling your children not to “Blame the Ump” is indeed correct. Children and adults need to respect the governing authorities, even when they are wrong in minor ways. One reason our society is weak is that we don’t have respect for authority. We respect the office, even if the person holding it is a jerk. FIghting over small matters is not a virtue. With respect to the Presidential election, I say what I always say — if there is genuine evidence, it will be undeniable. Conspiracies rarely happen. THere is too much profit to be made from disclosing a conspiracy for it to happen. Also, when there are many parties looking over the details it is hard for a conspiracy to exist.
The same logic applies to those who deny the spread of the C19 virus is not real. I have too many friends of friends who have become very sick or who have died from it for it not to be true.
On #6, my bond management strategy is twofold. One, I try to keep costs low, and because I am small, that means using ETFs and closed-end funds. Two, I focus on mispriced risks and prevailing trends. I hold a variety of short bond funds for liquidity, which is around 50% at present. I earn less than 1% on those assets. I have 25% of the assets in TSI which yields around 6%. Then there are the two ETFs invested in short foreign government bonds and emerging market sovereigns denominated in dollars. The first pays off because of US dollar deterioration. The second does well because of their relatively high yields.
The 10-year estimate for equity returns on the S&P 500 is now 1.88%/year not adjusted for inflation. We are now in the 97th percentile. Should you be concerned? Yes, particularly if you are invested in growth stocks, particularly the hot FANGMAN stocks.
Much as the US is a free market place, there is a dislike in the government for companies that become too powerful. I remember as a youth reading articles about how the US should break up GM (pitiful company that it ended up being). Often those sentiments come at or after the apex of the company — the government may not really need to act, as the “Alexander effect” may kick in — they have conquered all that they can, and there are “no more worlds left to conquer.” That may sound aggressive with respect to Apple, Amazon or Google, but that legislators or government executives are musing about breaking them up should give everyone pause — not because they will be broken up a la AT&T, but that the interest of the government is often an indicator that their market cap has outgrown their relevance.
Regarding #13, I agree with the comments of Publius left at the blog. Monetary stimulus should not affect relative prices much, but with assets, lowering financing rates will allow marginal businesses to survive so long as easy conditions continue. That makes it harder for the Fed or other central banks to easy hyper-easy policies, even though they should bite the bullet, and just let weak firms die. Creative destruction has to do its work, or we will have a slow growing economy where capital is not deployed to achieve the best returns.
On the inequality part of the comments on #13, I don’t mean to be a controversialist. I mean to tell the truth in a way that most aren’t willing to face. My long forgotten piece called Rethinking Comparable Worth is still correct. Think of the spread of income across the world as a whole. Yes, for some activities, there is more capital investment in some places than others, requiring higher educated workers than in other places, with those workers earning higher wages for now. But as technology improves, those same benefits come to those with lesser skills. That brings a slow but persistent equalization of wage rates as the technology “de-skills” skilled workers. Who benefits? Lesser skilled workers, and the creators of technology. As wage levels equalize for occupations over the world, the world becomes more equal, but for the lower skilled in the developed world, it leads to losses for them. That leads to the nationalism that is rampant in Europe and the US — why are our relative incomes suffering?! They suffer because what they are doing is in excess supply, and they should retrain for something better rather than carping to the government. No one owes you a living. Plan ahead, and look for something better rather than imagining that the government has your back. It doesn’t.
Though I agree with Lacy Hunt and Gary Shilling regarding deflation, where I am a little different is what might change matters. QE loses potency with repeated use. There is only so much that you can lower rates, and the effect on stimulating GDP declines. Eventually the government will reach for something with more firepower, like forcing the Fed to buy new issues of government debt. Remember that central bank independence is a myth during stressful times. They are a creation of the government, and not independent from them. When things are calm, we can indulge fantasies of central bank independence as we enjoy s’mores around the campfire and let ourselves get scared as we tell each other ghost stories.
If I had to phrase it in a different way, pretend national and local governments don’t exist. That is the way the global economy is heading regardless of government policies. Positively, one thing that it has changed (temporarily reversed by C19) is that the worst poverty in the world is being reversed by the triumph of capitalism. There are genuinely fewer people in such grinding poverty. Fewer people with hunger problems, aside from those that self-cause their problems.
Immigration to the US mostly does not absorb existing jobs, but performs jobs that most Americans don’t want to take on, like picking produce. They take on the hard work but low pay positions. Do any of you want that? Maybe the children of immigrants will compete with the children of “natives” but in general most immigrants don’t compete with existing Americans for their jobs. Yes there are some technologically skilled that get hired in the US, but that is because we don’t produce enough technologically skilled young people from the “natives.”
Not all of my children listened to me. The ones that listened to me are doing well, and ones that didn’t are not. (A few of them are in-between.) I say the same to all those who read me. Pursue skills that are differentiated, and are not easily obsoleted. Anything that can be replaced by technology or offshored is not a safe place to be.
One last comment, which I posted in response to a LinkedIn post by Christof Leisinger, who I have some respect for. Here is the response:

It is a future risk when the ECB and Fed intervene in the repo funding markets, that the markets would become dependent on the Central Banks. It would be difficult to wean the repo markets off their assistance, but in one sense it makes sense for the Central Banks to do it permanently if you are going to have repo markets.
Repo markets are inherently unstable because you are financing long-term assets with short-term liabilities, and accounting for them as a short-term loan. It works fine until you have a crisis in the long asset, with prices falling hard, and the scam is exposed.
Now, the bad thing about the Central Banks taking over the repo markets is that it removes one more price out of the free markets, and will allow repo markets to balloon as they become riskless to outsiders. This is the same as people not paying much attention to bank deposits because of the existence of the FDIC.
I realize we are in the “brave new world” where Central Banks are imagined to be omnipotent, but if there is a significant financial crisis that the ECB or Fed feels that it has to bail out amid rising consumer price inflation, the creation of additional credit at that time will prove toxic.
LinkedI n Post

To my readers: I ask that you interact with my posts civilly and pertinently. I keep comments open on my blog, and I have done so for 13 years, amid a general closing down of comments across the web. Don’t abuse the freedom I offer here by going off-topic, or being abusive in your speech.

WIth that, let me say that appreciate my readers and commenters. Thanks for your efforts, and let’s keep things constructive.

Full Disclosure: Long TSI for my clients and me

On the Migration of Stock

Posted on 17 January 2018 by David Merkel

This should be a brief article.? I remember back in 1999 to early 2000 how P&C insurance stocks, and other boring slower-growth industries were falling in price despite growing net worth, and reasonable earnings.? I was working for The St. Paul at the time (a Property & Casualty Insurer), and for an investment actuary like me, who grew up in the life insurance business it was interesting to see the different philosophy of the industry.? Shorter-duration products make competition more obvious, making downturns uglier.

The market in 1999-2000 got narrow.? Few groups and few stocks were leading the rise.? Performance-conscious investors, amateur and professional, servants of the “Church of What’s Working Now,” sold their holdings in the slower growing companies to buy the shares of faster growing companies, with little attention to valuation differences.

I remember flipping the chart of the S&P 1500 Supercomposite for P&C Insurers, and laying it on top of an index of the dot-com stocks.? They looked like twins separated at birth, except one was upside down.

When shares are sold, they don’t just disappear.? Someone buys them.? In this case, P&C firms bought back their own stock, as did industry insiders, and value investors — what few remained.? When managed well, P&C insurance is a nice, predictable business that throws of reliable profits, and is just complex enough to scare away a decent number of potential investors.? The scare is partially due to the effect that it is not always well-managed, and not everyone can figure out who the good managers are.

So shares migrate.? Those that fall in the midst of a rally, despite decent economics, get bought by long-term investors.? The hot stocks get bought by shorter-term investors, who follow the momentum.? This continues until the gravitational effects of relative valuations gets too great — the cash flows of the hot stocks do not justify the valuations.

Then performance reverts, and what was bad becomes good, and good bad, but as with almost every investment strategy you have to survive until the turn, and if the assets run from the prior migration, it is cold comfort to be right eventually.

As an aside, this is part of what fuels dollar-weighted returns being lower than time-weighted returns.? The hot money migration buys high, and sells low.

Thus I say to value investors, “Persevere.? I can’t tell you when the turn will be, but it is getting closer.”

“Bank” Some of Your Gains

Posted on 17 October 201717 October 2017 by David Merkel

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Recently I read Jonathan Clements’ piece Enough Already.? The basic idea was to encourage older investors who have made gains in the risk assets, typically stocks, though it would apply to high yield bonds and other non-guaranteed investments that are highly correlated with stocks.? His pithy way of phrasing it is:

If I have already won the game, why would I keep playing?

His inspiration for the piece stems from a another piece by William Bernstein [at the WSJ] How to Tell if Your Retirement Nest Egg Is Big Enough.? He asked a question like this (these are my words) back in early 2015, “Why keep taking risk if your performance has been good enough to let you reduce risk and live on the assets, rather than run the possibility of a fall in the market spoiling your ability to retire comfortably?”

Decent question.? If you are young enough, your time horizon is long enough that you can ignore it.? But if you are older, you might want to consider it.

Here’s the problem, though.? What do you reinvest in?? My article?How to Invest Carefully for Mom?took up some of the problem — if I were reducing exposure to stocks, I would invest in high quality short and long bonds, probably weighted 50/50 to 70/30 in that range.? Examples of tickers that I might consider be MINT and TLT.? Trouble is, you only get a yield of 2% on the mix.? The short bonds help if there is inflation, the long bonds help if there is deflation.? Both remove the risk of the stock market.

I’m also happier in running with my mix of international stocks and quality US value investments versus holding the S&P 500, because foreign and value have underperformed for so long, almost feels like 1999, minus the crazed atmosphere.

Now, Clements at the end of the exercise doesn’t want to make any big changes.? He still wants to play on at the ripe old age of 54.? He is concerned that his nest egg isn’t big enough.? Also, he thinks stocks will return 5-6%/year over the long haul (undefined), versus my model that says 2-6%/year over the next ten years.

What would I say?? I would say “do half.”? Whatever the amount you would cut from stocks to move to bonds if you were certain of it, do half of it.? If disaster strikes, you will pat yourself on the back for doing something.? If the market rallies further, you will be glad you didn’t do the whole thing.

What’s that, you say?? What am I doing?? At age 56, I am playing on, but 10-12% higher in the S&P 500, and I will hedge.? At levels like that future market outcomes are poor under almost every historical scenario, and even if the market doesn’t seem nuts in terms of qualitative signals, the amount you leave on the table is piddly over a 10-year horizon.? If I see more genuine nuttiness beyond certain logic-free zones in the market, I could act sooner, but for now, like Jonathan, I play on.

Full disclosure: long MINT and TLT for me and my fixed income clients

Me Too!

Posted on 22 October 201623 October 2016 by David Merkel

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I have sometimes said that it is common for many people to imitate the behavior of others, rather than think for themselves. ?There are several reasons for that:

It”s simple.
It’s fast.
And so long as you don’t run into a resource constraint it works well.

People generally have a decent idea who their smartest friends are, and who seems to give good advice on simple issues. ?If your neighbor says that the new Chinese food place is excellent, and you know he knows his food, there is a very good chance that when you go there that you will get excellent Chinese food as well.

You might even tell your friends about it; after all, you want to look bright as well, and its neighborly to share good information. ?That works quite well until the day that Yogi Berra’s dictum kicks in:

Nobody goes there anymore. It?s too crowded.

The information indeed was free, but space inside the restaurant was not, even if patrons weren’t paying to get in. ?And even if they have carryout, the line could go around the block… a hardship for many even if?you are getting the famous Ocean Broccoli Beef. ?(Warning: Hot in every way.)

Readers of my blog know that the same thing happens in markets. ?Imitation was a large part of the dot-com bubble and the housing bubble. ?When a less knowledgeable friend is making what is seemingly free money, it is very difficult for many people to resist the temptation to imitate, because if it works for him, it ought to work better for the more knowledgeable.

As such, prices can get overbid, and the overshoot above the intrinsic value of the assets can be considerable. ?It all ends when the cost of capital to finance?the asset is considerably higher than the cash flow that the asset throws off. ?And as with all bubbles, the end is pretty ugly and rapid.

But what if you had a really big and liquid strategy, one that threw off decent cash flow. ?Could that ever be a bubble? ?The odds are low but the answer is yes. ?It is possible for any strategy to distort?relative prices such that the assets inside a strategy get significantly above intrinsic value — to the point where they discount negative future returns over a 5-10 year horizon. ?(As an aside, negative interest rates are by definition a bubble, and the instruments traded there are in big liquid markets. ?The severity of that bubble collapsing is likely to be limited, though, unless there is some sort of payments crisis. ?The relative amount of overvaluation is small, and has to be small.)

Indexing as Imitation

Today, indexing is a form of imitation in two ways. ?The first way is not new — it is a way of saying “I want the average result, and very low fees.” ?It’s a powerful idea and generally a good idea. ?If used for long-term investment, and not short-term speculation, it allows capital to compound over long periods of time, and keeps people from making subpar investment decisions through panic and greed.

Then there is the second way of imitation: indexing because it is now the received wisdom — all your friends are doing it. ?This is a momentum effect, and at some point even indexing through a large index like the S&P 500 or Wilshire 5000 could become overdone. ?The effects could vary, though.

You could see more larger private corporations go public because the advantage of cheap capital overwhelms the informational and other advantages of remaining private.
You could see corporations reverse financial engineering, and issue more cheap stock to retire expensive debt. ?On the other hand, it would be more likely that credit spreads would tighten significantly, leaving debt and equity balanced.
You would see pressure on corporations with odd capital structures like?multiple share classes to simplify, so that all of the equity would trade at high multiples.
Corporations could dilute their stock to pay for resources — labor, land, intellectual capital and physical capital. ?Or, buy up competitors. ?If you think that is farfetched, I remember the late ’90s where it was cool for executives to say, “Let the stock market pay your employees.”
People could borrow against their homes to buy more stock, or just margin up.

If you see what I am doing — I’m trying to show what a distorted price for publicly traded stocks in an big index could do — and I haven’t even suggested the obvious — that an unsustainable price will correct eventually, and maybe, in a dramatic way.

I’m not saying that indexing is a bubble presently. ?I’m only saying it could be one day. ?Like the imitation illustrations given above, when a lot of people want to do the same thing without bringing additional information to the process, shortages develop, and in some cases prices rise as a result.

One final note: active management would get more punch at some point, because informationless index investing would lead to some degree of mispricing that active managers would take advantage of. ?At the rate money is currently exiting active management and going into indexing, that could be five years from now (just a guess).

As with all things in investing, the proof will be seen only in hindsight, so take this with a saltshaker of salt. ?As for me, I will continue to pick stocks. ?It has worked well for me.