In this series, I disclose my WORST investing mistakes ever. ?Personal errors: cellular auctions, mistiming small cap value, and small deal arbitrage. ?Professional error:?Manufactured Housing Asset Backed Securities ? Mezzanine and Subordinated Certificates.
How a stream of excess income during working years becomes a stream of income in retirement years. ?It’s harder to do than you might expect. ?Includes a list of strategies and pitfalls.
I feel stronger about this than when I originally wrote this. ?Bitcoin and the other cryptocurrencies are just a speculative crapshoot, and the attempt to have a currency without the legal structure of a government will fail, unless it is a commodity like gold. ?Also, the blockchain is an overrated resource hog that lacks the flexibility possessed by life insurance company policy management systems.
Like the prior article, there are people with too much time on their hands thinking up nutty and useless ideas. ?There is enough risk in the world already; we don’t have to add to it.
I think active managers have to grow up and accept that passive investing isn’t evil; it just cuts against the economic interests of active managers like me, at least for now. ?When it gets really big, the paradigm will shift…
A short and lonely post where I told you in advance that crude oil would hang around $50/barrel “for a few years.” ?And, my reasoning was on target as well.
There are seven problem areas in investment return modeling that are rarely dealt with, and certainly never as a group. ?That’s why I would encourage you to be at least least slightly skeptical of any simulation analysis that you might receive. ?This goes 10x for the schmendricks that propound multivariate normal simulations.
Every dollar in the door may be the same, but not every sale or promise made is equally good. ?The contribution margin matter a lot. ?Earnings, especially future earnings, always matters more than revenues.
It is little known that I analyze simple and complex investment situations for third party clients so that they can know whether they have a good deal or not. ?Do you need help with an investment situation that puzzles you?
Yield curves only shift in a parallel fashion about 40% of the time. ?The actual way that yield curves tend to move tend to overstate long bond durations [interest rate sensitivity] by two years versus a parallel yield curve shift.
The start of a nine-part series on my worst investment mistakes, beginning with a boiler room scam, undue pessimism from macroeconomic forecasts, and Caldor (spit, spit).
I never completed this series, but here I explain how most financial risk statements are useless to average people. ?It would help a lot if plain language and straight talk scenarios were employed.
How do you cope with worry in investing? ?What if there are other things to worry about that you aren’t considering? (I also never wrote part 2 for this one.)
Because of the behavior of investors, and increasing interconnectedness between markets, the degree that risky assets diversify each other has been decreasing over time. ?There is really only one diversifier for risky assets — high quality bonds, whether short or long.
Continues the fictitious conversation between me and a friend on the topic of how there are no objective prices in the market, much as we might like them.
What do you do when the only cheap, safe companies embed a lot of economic cyclicality? ?I.e., they rely on economic growth in order to do really well…
During this era, I started contributing articles via tumblr to Yahoo Finance. ?That also meant that every article would start with a picture, graph, or photo.
In my view, these were my best posts written between August and October 2014:
Down 70%+ since then. ?In general, complexity is not rewarded in investments, and particularly insurance companies. ?It also helps if you choose lines of business that are good risks, which long-term care and mortgage insurance aren’t.
Survivorship bias has an effect on all of our investment statistics. ?Try to combat that by reading history books — the only thing more volatile than markets is history.
The first thing to remember is that retirement is a modern concept. That the world existed without retirement for over 5000 years may mean that it is not a necessary institution. For a detailed comment on this, please consult my article, ?The Retirement Tripod: Ancient and Modern.?
Money management is far harder when you have to draw funds regularly to cover expenses. ?Also, most people overestimate how much money they can draw from investments.
…Howard Simons, astutely would comment something to the effect of: ?The stock market is not a futures contract on GDP.? ?This much is true, but why is it true? ?How can the market go down on good economic news?
People don’t need assets as much as they need streams of income derived from the assets (dividends, capital gains) that allow them to purchase the goods and services that they want and need. ?(Low interest rates mean assets aren’t worth as much.)
Some naively say, ?Dividends don?t lie.? ?Well yes, the money you receive is yours, but is the company as healthy after the dividend? ?Will they be able to keep it up? ?Often that is not the case.
This is a more logical way to think of the equity premium by decomposing it into three more understandable parts: yield curve slope, credit spread, and?economic earnings.
It is better to have an accurate uncertainty, than an inaccurate certainty. ?We are better of professing ignorance of what we don?t know, than being certain about things where we are wrong.
Self-regulation is a better idea in theory than practice. ?Either it needs to be regulated, or not. ?Adversarial regulation is unavoidable if regulation is needed.
The guy from the National Futures Association emphasized the idea that mandatory membership in the association as a requirement to do business was paramount for an SRO and I can see that. ?The SRO then has the ?death penalty? hanging over the heads of those they regulate. ?That said, consider this: the CFA Institute may dream of the day when all involved in investing *must* hold a?CFA Charter.
I have no doubt that this would be a good thing. ?Ethics codes are good for the industry, and to kick out bad apples would be a good thing.
Whether on a micro-level (a business) or on a macro-level (a government) the way to build value comes from a simple concept. ?What can I/we do to enable the goals of others? ?Growth and success come through service.
Asset classes that average in the results of astounding successes and total failures do not adequately represent what can happen to individuals in their specific investments.
Registered Investment Advisers [RIAs] offer value to their clients in 10 ways, most particularly helping them to not sell in a panic or buy out of greed.
Why most people who read Buffett don’t understand the value of insurance float properly. ?It is valuable, but not as valuable as naive acolytes of Buffett believe.
This set of posts is unique in going through how the insurance entities of Berkshire Hathaway allow Buffett to hold as much as he does of his stocks/businesses through his insurance companies. ?It also explains as much as can be publicly known about the secretive Harney Investment Trust.
If you are investing in any levered, inverse, or non-equity fund exchange traded product, then read the fine print of the prospectus. ?If you fail to do that, you have no right to complain if you lose money.
Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals. ?If there are no good deals, profitable investing sits on cash, and waits for a better day.
It is better to measure investments against similar alternative investments in order to decide where to invest money, rather than using target prices or yields.
Where I suggest that VIX-type products must be used tactically, if at all. ?(Note: the logic of this article is fine, but the graphs have not aged well.
Solves two pension problems — participants don’t have to make investment choices, and they get an income that they can’t outlive. ?Gives them greater choice over how big of a pension to have.
Can contingent claims theory for bond defaults be done on a cash flow/liquidity basis?? KMV-type models seem to fail on severely distressed bonds that have time to breathe and repair.
It’s not an easy question, particularly when it comes to shorting or being levered long, but I do offer some ideas that are better than things I have read.
The time that I?did a competitive study of the most aggressive life insurers, and how it did not dissuade my client’s management team from trying to imitate them.
With quotations and links to the source documents, I show what Ben Graham really said in the article commonly cited to say that he gave up on value investing.
The tech market washes out about every eight years or so.? The broad market, which is a more robust beast, washes out far less frequently.? My question: are these variants of the same phenomenon?
When do employee and corporate incentives line up?? Ideally, incentive schemes should reward people with a fraction of the additional profitability that resulted from the additional work that they did.? Difficulties: measurement impossible in many cases, people could receive a bonus when the firm is not profitable, neglects synergies (both positive and negative).
To my readers, for a little while, I am going to be doing some “best of” posts along with some smaller articles. ?You should see eleven “best of” articles before this is done. ?If this bugs you, just turn me off for a little while. ?These articles are important, because there are some re-publishers that mine these pieces for content, and sometimes translate highlighted articles into languages other than English.
This era probably had the greatest density of “Rules” posts. ?In my view, these were my best posts written between May and July?2013:
Thinking about the different streams of income in society, and which might be more likely to fail. ?Also, thoughts on how low interest rates fit into this picture.
On how life insurers compromise rules on reserving using reinsurers that they own as subsidiaries. ?Also examines other ways that insurers weaken solvency.
On how insurance has changed for investors over the past ten years, Price-to-Book vs Return on Equity Diagrams, and miscellaneous issues for those investing in insurance companies.
Really, it is not an insurable risk, which is why most companies underwriting LTC have lost money on it, and coverage has become less and less generous.
“As for those with long-term care policies, if they are old, keep paying on them, you will likely do well on them when you finally need to draw on the policies.? You have benefits that benefits that can no longer be purchased.? Enjoy the exclusive club you are in.”
“In summary, all news is not equal.? The reactions to news, and the lack thereof, can tell us a lot about the intentions of large market actors.? Do your homework well, and prosper off of the knowledge that it gives you regarding reactions, over-reactions, and under-reactions.”
The beginning of my arguments against the pointy-headed Financial Stability Oversight Commission [FSOC] and their inability to understand the solvency of non-bank financials.
It’s easier for a generation to become prosperous if they push the bills onto their children and grandchildren. ?Eventually it catches up with a nation, and reduces opportunity for average people.
There is probably money to be made in analyzing the foibles of money managers, to create new strategies by taking on the opposite of what they are doing.
The trouble with VAR and other mathematical models of risk is that if it becomes the dominant paradigm, and everyone begins to use it, it creates distortions in the market, because institutions gravitate to asset classes that the model makes to appear artificially cheap.? Then after a self-reinforcing cycle that boosts that now favored asset class to an unsupportable level, the cashflows underlying the asset can no longer support it, the market goes into reverse, and the VAR models encourage an undershoot.? The same factors that lead to buying to an unfair level also cause selling to an unfair level.
Benchmarking and risk control through VAR only work when few market participants use them.? When most people use them, it becomes like the portfolio insurance debacle of 1987.? VAR becomes pro-cyclical at that point.
“Unions create inefficiency.? This creates an opportunity for new technologies that perform the same function, but aren?t as labor-intensive.? (E.g. integrated steel vs. mini-mills)”
If businesses anticipate a flow of financing, they will depend on it.? Then a diminution or increase in the flow of investable funds will affect markets, even if the flow of investable funds remains positive or negative.
During a panic, it is useful to reflect on the degree to which the real economy has been driven by the financial economy.? In the Great Depression, the degree was heavy; in the seventies, it was light.? Today, my guess is that it is in-between, which makes it difficult to figure out the right strategy.
Market rents are typically fixed in size.? When a strategy to exploit a particular market inefficiency gets too big, returns to the rent disappear, or even go negative prospectively, even if they appear exceedingly productive retrospectively.
If an asset-backed security can produce a book return less than zero for reasons other than default, that asset-backed security should not be permitted as a reserve investment.
A somewhat humorous article of mistakes that I have made in job interviews. ?Also a comment on making sure that you fit the culture of the firm at which you are interviewing.
So you think that the market is overvalued? ?How do you adapt to that condition, while still leaving some room for opportunity if the market continues to rise.
I have a saying, ?Don?t buy what someone wants to sell you. Buy what you have researched.?
And so I would tell everyone: don?t give brokers discretion over you accounts, and don?t let them convince you to buy unusual bonds, or obscure securities of any sort.? By unusual bonds, I mean structured notes, and eminent men like Joshua Brown and Larry Swedroe encourage the same thing: Don?t buy them.
Understand yourself, understand the advisor, understand the counsel that is offered, and finally, we wary of what you here through the media, including me.
