The Global Bond Market Has Completed Warren Buffett's Equation For Dow 100,000

The headlines that retail investors see.

The headlines that retail investors see.

On May 2, 2016, Warren Buffett said on CNBC:

If the government absolutely said interest rates are going to be zero for 50 years, the Dow would be at 100,000.

On April 29, 2016, Buffett had similarly told CNBC:

Interest rates act on asset values like gravity works on physical matter," he said. "If you had zero interest rates and you knew you were going to have them forever, stocks should sell at, you know, 100 times earnings or 200 times earnings.

As of today (for simplicity's sake - the DJIA has not moved in a huge way since then), the Dow Jones Industrial Average last closed at 17,949.37, and has a trailing 12 months P/E ratio of 19.07. Buffett's projection of Dow 100,000 would require an approximate 5.6x increase in price, leaving the DJIA trading at a TTM P/E ratio of around 106.

 For the DJIA to trade at a TTM P/E ratio of 200, it would be at about 188,250.

Dow 36,000 seems quaint by comparison.

The S&P 500 last traded at 2,102.95, at a TTM P/E ratio of about 23.74. According to Buffett's new rule, if zero interest rates were expected forever, it should actually trade between approximately 8,850 and 17,700.

I expect if this scenario were to occur, there would still be dispersion in how US stocks were valued. Facebook and Johnson & Johnson would likely still rightfully trade at higher multiples than IBM and Wal-Mart.

Warren Buffett wasn't just trolling retail investors. He meant his logic, because of course, there isn't absolutely certainty that zero interest rates are forever, or the de facto definition of forever according to his May 2, 2016 quote, which is 50 years.

But actually, the global bond market is saying it is absolutely certain that zero interest rates are forever. This last Friday, Swiss bonds due in 2064 (so, 48-year bonds, not 50-year bonds, but close enough) traded at negative yields. That is the bond market saying that it expect interest rates to be zero or below for at least that long (there are currency exchange rate expectations reasons as well, but I think they don't alter the point beyond recognition).

So are US stocks therefore insanely cheap? Although US rates are still positive, they are low enough, and plunging quickly enough, that it is an obvious question why US stocks are still so far from Buffett's target multiples.

Obviously, Buffett was exaggerating. I doubt that even though he said if interest rate expectations were zero forever, stocks "should" be at such levels, that he would rush to buy to front-run the greater fools that rush in later as stocks become appropriately priced.

But his hypothetical argument is in tune with the global chase for yield as both nominal and real interest rates stay low or go even lower.

I think that even if one was of a speculative bent, rushing to buy out of the money call options on US stocks in anticipation of a maniacal bidding frenzy to 100-200 times earnings may not be the best way to make money in case of such as frenzy, especially given the enormous speculative risk involved.

By the logic of the magic sword of necessity, there are other things that must happen in the world before this hypothesized absolute state of certainty of zero rates actually takes hold in US equity markets, in additional to the European sovereign debt markets where it is already the paradigm upon which bonds are priced.

One of these things is gold climbing to much higher prices still, also based on the logic of expectations of very low or zero real rates for very long. The noticeable rise since I started my speculative gold position has not yet been accompanied by a certainty that there is no more return at all available to savers in fixed income. That occurring should cause wider acceptance of gold as a way for savers to at least not lose too much purchasing power, compared to the dire alternatives with perpetual zero or negative interest rates.

Gold might also do better in a scenario where low rates are accompanied by not only low growth, but actual declines in revenues and earnings. In that case, stocks would not be bid to high multiples of earnings or dividend yield along with low bond yields, as the risk of falling earnings and dividends would clearly show that stocks aren't bonds.

Still, I think this thought exercise is a good argument against shorting US stocks, especially US stocks that have an easy narrative as bond replacements, such as consumer staples thought to have earnings that cannot go down. Shorting US stocks in the aggregate has generally proved an inferior trade to a wide variety of positions, like short dollar-yen, long treasuries, or long dollar. For the same reasons that make this the case, shorting individual US stocks, especially ones with a noticeable yield, also seems very dangerous, as that yield could be chased far lower.

The funny thing, of course, would be if this article marked the top. But I think the kindling is there to potentially make US stocks go much higher still. John Bogle on June 20, 2016 said at a Morningstar conference:

Well, you can only control what you can control. I think whatever your view of the world is, you have to invest. You can't put the money in the mattress and in this day and age of low interest rates, you can't put it in the money market fund or a bank CD, so invest, you must. Now, you might want to invest regularly. For people that are investing regularly, I would say for god's sake don't stop investing now. I know the market is not doing much this year, just about where it started a little bit down, but not much and bond yields are still very low, actually lower than they were at the beginning of the year, but you have to put your money to work. The alternative is – I mean, the only way to guarantee you will have nothing at retirement is to invest nothing along the way. So, you have to take your chances.

This is the logic of TINA - There Is No Alternative. And that's a quote that could be easily cited by price-insensitive buyers who have been told to focus on every 0.01% (rightly) in expense ratio, but to buy stocks purposefully regardless of valuation. They will cite Buffett's quote out of context too, just as speculators cite Buffett's quote about fear and greed out of context as well.

If that's the game to be played, I wouldn't want to participate. But I wouldn't want to be short, either.

(Thanks to everyone on Twitter whose ideas I may have stole for this article.) 

Chanos on Alphachatterbox

Jim Chanos.

Jim Chanos.

I enjoyed Chanos' interview on Alphachatterbox. The interviewer was prepared and asked questions that were interesting, though perhaps a bit too deferential.

Chanos' short-only fund has compounded at very low rates, but that's because it is not designed as a compounding vehicles. Chanos says that it delivers the prized "short-selling alpha," which allows investors in the fund to have higher gross long allocations because the short allocation in his fund hedges out the market risk.

So Chanos isn't trying to make as much money as possible, but deliver a very specific product. I think it's for that reason that Chanos says that he did not put any currency bets on regarding the Chinese credit bubble that he is regarded as having spotted early. To me, that would be the superior way to play it out, with the highest possible returns. But I could see how clients would be alarmed by such a speculative way of expressing their research.

And after all, Chanos has lasted for a long time as a short-seller. That longevity is probably due to avoiding such gambles. He's not like Crispin Odey, who seems to be in the process of blowing up with a hugely concentrated portfolio of long gold, short Japanese government bonds, and long Australian government bonds. Perhaps the macroeconomic views of both are the same, but Chanos expresses them in terms of both business structure and portfolio structure in ways that have avoided a risk of blow-up. He also says that in the US housing bubble, he avoided the credit default swap trades due to a fear of counterparty risk, and took careful steps to avoid rehypothecation risk from prime brokers.

Since Chanos is playing a clearly defined game which he wins by simply staying in, and not shooting for the stars, risk management and longevity is key.

That's how he affords those wild parties in the Hamptons.

I also find it interesting that many famous investors like Chanos have not written books. Perhaps more haven't than have (and lately, it seems that many that have written books have sort of doomed their forward returns by doing so). It's not that he doesn't want to share his knowledge. He makes presentations public, does interviews, and even teaches a course at Yale.

I guess books may be overrated.

Graham on Positioning: A Review of The Intelligent Investor, Fourth Revised Edition (1973)

Benjamin Graham nearer when he wrote the Fourth Edition of the book than in the usual portraits.

Benjamin Graham nearer when he wrote the Fourth Edition of the book than in the usual portraits.

The Intelligent Investor is a book about positioning.

It's true that it is known for many other things, such as the concept of Mr. Market, but at least in my current state of having drunk from the well of Gurevich, my last rereading makes me really appreciate Benjamin Graham's thoughtfulness on the topic of positioning oneself for the challenges the world brings through portfolio construction and maintenance as well as intellectual adaptation and flexibility.

Perhaps it is because of the legend of Warren Buffett that he himself has constructed, but many think of Graham as some kind of utterly inflexible net-net fanatic codger who could not adapt to superior styles of investing (Charlie Munger especially seems to have thrown quite a bit of fuel on the fire of this meme).

That could not be further from the truth.

I saw in the 1973 Fourth Revised Edition of The Intelligent Investor, written 3 years before Graham's death, a rich foresight in anticipating the problems and arguments that come from a world that changes. There is a brief explanation of why Graham personally thought it logical that profits from investing in net-current asset value stocks and similar situations were reasonably sure, The Intelligent Investor. But actually, the spirit of inquiry in The Intelligent Investor is about flexibly considering the full universe of actions that an individual investor can take to preserve and grow wealth. It's not about any one solution.

The main way this is expressed is through the discussions of the attractiveness of bonds, which of course involves analysis of interest-rate and inflation expectations. At the time this edition was published, inflation was rising, and Graham judged neither stocks nor bonds to be particularly attractive, though he favored bonds on a relative yield basis.

But it's not the exact allocation Graham recommended at this specific time that is interesting. Graham was careful to state that logic and reasoning should dictate asset allocation. And an individual investor who took the spirit of Graham and bought long-dated Treasury bonds in the following years, as the rates on them became extremely attractive, would have by that course of intelligent action more or less solved the problem of investment for their families for life.

Buying long-dated Treasury bonds near or at a 14% yield in the early 1980s was the act of an intelligent investor, though it required no security analysis.

Graham's intellectual flexibility is on display throughout the book, as he considers the macro counter arguments to any investing strategy, considers indexing (in that era, it would be simply purchasing all the stocks in the DJIA separately), compares the regimes of inflation and deflation and how that changes the relationships between financial assets, discusses the benefits of large cap stocks compared to small ones (he said that they may be superior as value is more quickly recognized and they are less likely to go bankrupt) and many other arguments that are as yet still unsolved not merely because they are hard, but because the world changes.

Graham's logic is so cogent that I really wish he could write something today. It sure would be comforting to hear what he would have to say on negative interest rates and today's general market regimen. Perhaps he would call stocks still the better relative value on account of even worse yields in bonds. It could in the end be that simple. But it sure would be nice to read Graham's clear description of the second and third order arguments. An understanding of those is, I think, what makes an intelligent investor really confident in his or her positioning in an uncertain and changing world.

I both read the book (which is nowadays sold with Jason Zweig's commentary - you can also buy used copies of a 1986 publication of the 1973 edition without the Zweig commentary, which I would recommend - I really dislike how it is inserted at the end of each chapter, rather than at the end) and listened to a decent (though abridged) audiobook reading which is available on Audible (which you can get a free trial for with 2 audiobooks through this link).

I think the Zweig notes could provide some value to a reader, but not in the disruptive way they are inserted into the text. If it were notes by not only Buffett but some other real practitioner, I would of course feel differently.

Edit: It looks like there is now an unabridged audiobook as well, though it appears to also include readings of the Zweig notes..

 

More Peter Atwater

Peter Atwater on Bloomberg, April 22, 2016.

Peter Atwater on Bloomberg, April 22, 2016.

Recent appearance by Peter Atwater on TV (Bloomberg, April 22, 2016). Atwater emphasizes the divergences between elite mood (as expressed by the stock market) and the mood for the general population, as reflected anecdotally, politically (through the popularity of Trump and Sanders) and through various polls of consumer confidence. Atwater (which I really appreciate him always doing) makes some interesting and easily falsifiable specific predictions (that are interesting because as usual, there is a high chance of being wrong) - no brokered Republican convention, possibly brokered Democratic convention, divergence in social mood cannot last. He also (to me) correctly states that Trump is the most bipartisan candidate, due to his emotional, authoritarian appeal in a time of low social mood.

Review: Moods and Markets (2012)

Former securitization banker Peter Atwater's Moods and Markets, written in 2012, has the subtitle "A New Way to Invest in Good Times and Bad," but I see Atwater's concepts as more of a supplement to a more rigorous investment process.

Atwater's core idea is that people think in terms of a "Horizon Preference" stemming from "me, here, now" and simple to "us, everywhere, forever" and complex. In times of "low social mood," the focus is on immediate and selfish survival, whereas during times of "high social mood," people broaden their focus to global ideas of sharing and interconnectedness. The state of being at any given time runs somewhere in the middle of this spectrum.

Another way to state this spectrum is a spectrum of risk preferences. Confidence is the way Atwater refers to this, which I think he means is embedded in a deeper societal or cultural level than investment risk preferences, which mirrors an underlying confidence level. In Atwater's view, because confidence or social mood runs deeper, it causes what happens in the world or in markets, rather than the opposite. Robert Schiller has said similar things, too.

Atwater states that things happening in the world express the state of a society's place along this horizon preference, and an awareness of this place can help investors make investment decisions. Atwater's big focus is on extreme clusters or peaks in "us, everywhere, forever" behaviors or "me, here, now" behaviors, which mark a peak or trough in risk preferences and thus the relative nearness of at least a local turning point.

Peaks involve expressions of extreme confidence, such as mergers, acquisitions, grand architecture, and global connection, while troughs involve acts of sacrifice and narrowing, such as bankruptcies and terrorism or other acts of violence.

Atwater draws on both qualitative sources, such as magazine covers and statements and actions by public figures and corporations, and quantitative sources, such as consumer and industry confidence surveys.

In its most naive form, this form of analysis might be used as a form of technical analysis, where speculators try to "fade" big peaks in social mood.

More interestingly, Atwater talks about how social mood informs both accounting standards and the changing attitude of company management in disclosing information to shareholders and regulators. When confidence rises, management becomes uses laxer standards, and the quality of earnings decreases, as not only are earnings good with flush times, but the measuring stick used to measure those increased earnings is more generous.

So I think social mood may play a role for investors, rather than only speculators, in serving as a kind of reality check. Are the assumptions in a valuation model reflecting "us everywhere forever" thinking and thus far too generous, one might ask while doing the necessary analytical work. This would obviously have been a good thing to think about in terms of the confident extrapolations involved in a certain platform company blowup that snagged sophisticated institutional investors.

Social mood also does seem like a useful concept in today's markets, which perhaps due to increasingly interconnected flows, can seem dominated by "risk-on" and "risk-off" sentiment, with seemingly unrelated assets moving in lockstep fashion. Stock investors own partial ownership shares of companies, but they also own derivatives that are driven by mood. Being conscious of the fact that during good times, the way society looks at these derivatives is influenced by endless extrapolation, and that during bad times, society is looking at them with a reptile brain that literally cannot think clearly is a great reminder.

When times are good, it seems logical for everyone to think with a long time horizon and seek growth and value stocks at P/S multiples and assume perpetual cheap access to capital and long growth platforms. When times are not good, people can only think fearfully, and return to things like tangible book value.

Social mood as a concept can seem kooky, not the least because of the association with people like Robert Prechter and his associates, who Atwater does mention and sometimes quote in Moods and Markets. Pretchter is disreputable, and I think rightly so (his book Conquer the Crash, which I skimmed at my local library, although interesting in places, recommends that individual investors do destructive things like try to short stocks). Atwater, however, pretty much completely avoids the nonsensical Elliott Wave principles associated with Prechter. And if you look at articles Atwater has written, he has made specific calls that were wrong.

And as much as I do think the core concepts of the book are a good tool to have, I was a bit disappointed with the book, perhaps because Atwater has explained the in-the-end simple concepts in his later writings elsewhere rather thoroughly. It's quite expensive, and not only is it rather short, it noticeably lacks discussion of topics that I feel would be important corollaries - such as why there tends to be a lag between social mood and markets, or what mechanisms might explain why magazine covers sometimes seem to "top tick" or "bottom tick" big turning points in social mood, apart from simply the general idea that magazine covers tend to display stories that have gotten big and unavoidable, and have thus already been priced into markets.

But in the end, I do think social mood may play a part in an investing toolkit, at least on the margin. Although this method analysis can be fuzzy and ironically but logically, itself prone to bias (there is no avoiding it), it is not so different in its qualities from historical or anthropological research on past societies that can be more rigorous than less and come up with interesting conclusions.

The trouble is that you have to do it with the current world, bombarded with a deluge of conflicting data.

Edit: A great addendum or update is Atwater's recent talk at a CFA Society Virginia event on April 6, 2016. He updates his core concepts, which have been refined a bit in the intervening years, and also provides a long list of examples, hitting all the hot topics of the day, from Bill Ackman to Bernie Sanders and Donald Trump. 

Why I Am Long Gold

  Shiny yellow rocks.

 

Shiny yellow rocks.

I am speculatively long gold in small size.

The following are factors, some related, that may contribute in some way to the pricing of gold:

  1. The costs of holding gold compared to holding other financial assets, notably the currency the gold is denominated in;
  2. The benefits of holding gold (ability to evade currency controls and leave borders);
  3. Excess liquidity (when people have a lot of excess cash and nothing to do with it, more people than otherwise will buy gold);
  4. Inflation (changes in gold's price indicate changes in inflation expectations, because of gold's historical record of maintaining purchasing power) ;
  5. Risk preferences;
  6. Gold's changing role in financial systems;
  7. Fear, uncertainty and ideology;
  8. Raw animal spirits. 

This is a wildly speculative pure pricing game. Gold has no real productive value, although gold mining companies can be valued like other commodity companies. There are also ways to obtain gold exposure in better or worse ways, including NAV discounts, through various structures. And as we've seen with pricing dynamics for oil and other commodities, the marginal cost of production, however defined, is also not a real limiting factor for how high or low pricing can swing.

The pricing game, like all pricing games, is forward-looking, with changes in price reflecting perceived future changes in the determinants of gold pricing.

I like gold right now because:

  1. Negative interest rates, and more importantly the expectation of the possibility of negative interest rates, makes the storage costs of gold less onerous in perception compared to the costs (formerly benefits) of holding cash or fixed-income securities. In other words, the strategic position of gold compared to other assets in terms of dominance, has changed.
  2. Negative interest rates may be inflationary, as may have been the case when Switzerland previously had negative interest rates in the 1970s (albeit in the context of global inflation).
  3. The correct bear thesis (government deficits did not cause inflation, rather quantitative easing was deflationary), as called in jcp21's Value Investors Club short gold thesis near 2012's gold price peak, has occurred. It is thus priced in, and expectation changes to this regime that cause it to be less true should have a greater impact on gold's price compared to changes in expectations that support that bear thesis.
  4. There is asymmetry. Many people smarter than me have models for valuing gold, but in the end, there is no real reason gold can't go above or below any price. If you are long with non-recourse leverage, one could potentially doubly reap the benefits of a bubble process that pushes gold's price above what would be considered imaginable before the bubble process occurred.
  5. There is growing uncertainty about future policy direction in the US. Trump is unpredictable, and "adds beta" to US politics.
  6. There is price momentum. The recent upwards trend in price is breaking the downwards trend in price of the last few years, which in itself is overshadowed by gold's upwards trend in nominal price over the long term (which is really not too different from a flatline in real terms, of course). Supposedly, some lines and indicators have done some things recently, which some people think is bullish.
  7. This price momentum matches a disbelief about gold's continuing existence as a relevant financial instrument caused by gold's price collapse starting in 2012. This may partially be because gold appears to have moved further to the fringes of the financial system compared to the past. That may actually be good for gold, as there is thus more room for changes in speculative expectations to play out in the price of gold.
  8. With a speculative trading sardine such as gold, you do not have to be right to make money, as was the case with biv930, who in December 2008, wrote a long gold miners thesis based on expectations of inflation caused by the US debt burden. This was an incorrect theory, but due to the various determinants of gold's pricing, biv390 was, though intellectually wrong, still able to reap the benefits of a big price increase in gold which corresponded to a price increase in the gold miners index (as was carbone959, who suggested shorting a levered inverse short gold ETF in May 2009, and mpk391, who in April 2009 suggested buying warrants for a gold miner, both because of tail inflation and disaster risk).
  9. Gold is the ultimate "me here now" financial instrument (it is a thing that you can hide away like your own "precious"), and social mood is low, evidenced by the popularity of a presidential candidate who reaps the benefits of low social mood by saying "we need strength" and "I'll protect everyone." The oft-trotted out Buffett quote about gold only being good for fondling appears is premised on an "us everywhere forever" mindset of someone like Buffett, who was surprised by Trump and has long said that "if Hillary runs, she'll win." Whether or not Hillary wins, the perception that this is no longer axiomatically true shows the perceptual shift from the world where Buffett's logical thinking is the dominant paradigm for potential market participants thinking about gold.

I am long a small amount of gold until such time as a coherent bullish narrative forms and an attendant partial or full "naturally occurring Ponzi process" begins to play out, upon which I hope to exit some time before the process busts. This could occur fairly fast on a small scale (and perhaps it has already occurred, with this post top-ticking it as the last marginal buyer), or it could require a change in perception in the medium term.

This small speculation should be nicely uncorrelated with my business-like investing positions.

Thanks to everyone on Twitter and elsewhere whose ideas I have stolen for the above.

Ripoffs

Ordinary people in the US have to watch out for the following. They will often try to screw you (often ironically in the course of providing end services of decent quality).

  1. Hospitals. They may use out-of-network providers, and not tell you, or even tell you the provider is in-network if you ask about it.
  2. Health insurance companies. They will bill you for the wrong rates. Higher of course. And not fix it until you point it out through an exhaustive review of your bills.
  3. Cellular carriers. They will also bill you incorrectly, and add fees for services you did not request.
  4. Car dealerships. They will throw all the crap they can at you to bloat the price you pay, which is possible because the pricing is opaque and complicated. The Costco Auto Program and Truecar barely improve this process. You aren't buying a car form Costco or Truecar. They just refer you to the wolves.
  5. Many 401(1)k programs. They can sadly be a scheme to enrich executives.
  6. Colleges and high schools. Administrators will encourage students to study useless subjects, as those are the subjects they have degrees in. That's why they are college administrators.
  7. State and federal government agencies. Many people do not get the basic services their tax dollars are paying for, at least without a litigious and exhausting process of administrative appeal. Just to get what government websites say should be instantaneous. You sometimes aren't even allowed to make an appointment to speak with someone.
  8. Master Wizards of all kinds. The people who end up getting screwed by them are invariably those who don't get that they are Master Wizards, and actually believe in the substance of what they say.
  9. Buffett's companies. (Already covered a bit in #4 and #9 above.) Coke, Clayton Homes, Wells Fargo. See's Candies, too, though I don't see people eating boxes of these every day, as is the case with Coke. Buffett's definition of a wonderful company could be seen as a company that has a sticky way to screw ordinary people.

What don't ordinary people have to watch out for? Who are some that might be given the benefit of the doubt, based on their behavior to date?

  1. Apple and Amazon. The other large technology companies, less so.
  2. Costco and Wal-Mart, mostly.
  3. Community or religious groups that can be caring and help people in need.
  4. The many generous people in everyone's lives, not just friends and family, but the strangers that end up being kind. Sometimes even online.

Value and Values

  From Mr. Show.

 

From Mr. Show.

More money equals better than.
— Worthington's Law

The US, where I now live, is a place of constantly clashing values. People value time, money, businesses, products, financial assets, life decisions, behaviors, government policies, natural resources, and life itself wildly differently.

These differences can get heated, and some people can see this as an existential struggle with people who are stupid, or evil or just totally wrong.

I get the disagreeing. I do have opinions, beliefs and convictions, and they are not all the polite consensus opinions. When you have conviction in something, either due to overwhelmingly researched data, or more likely personal experience of revelation, it's fun to bash the other side. It's a bonding ritual with people from your own side.

And some things in this world do have a right or wrong answer. For example, all financial assets (such as but not limited to the minority passive ownership stakes in companies called stocks) have one intrinsic value at any given time. It's simply the case that no one knows what it is, exactly.

As Dale Carnegie said, people like people who are like them and listen to them and agree with them. The thing is, in a diverse society and world, many people are going to disagree on issues very important to them. I don't agree with a lot of what I read and hear, even from people who I deeply respect and learn worldview-building blocks of life from. That's ok - it doesn't mean I stop listening.

Instead, the way it's happened to be is that I pick up pieces of insight from every corner of my life and learning, and somehow that becomes what I think and feel about the world. It's confusing, as there are so many conflicts, and I know so little about what works, not having yet reached any point where I would feel confident advising anyone else about anything, being so primitive on the path of discovery myself.

But it's a path. To continue to hold beliefs strongly and yet continue to not only coexist with, but learn from people who have other beliefs - that's the big challenge.

(I haven't posted a lot on here because there is some big change brewing in my life. Bigger than the not insubstantial change that's already happened over the last year, even. Maybe some day I'll write about it specifically on here - that's what you're supposed to do with blogs, inject your personality.

But I don't know about that. This blog isn't going to be unfiltered no matter what. I don't want to talk about things on which people may rightfully and bitterly disagree - politics and religion amongst them, of course - in the normative sense of values. Of course, there's still a lot to be said in the positive sense, hopefully of some value.

I think that's more interesting. And I think that you learn more by hopefully not driving people off by going to the divisive issues first. Even if that's what you were interested in. I can tell from the nooks and crannies in the thoughts of many people I like and read online that they would violently disagree on many core values. But I get to learn from all of them at once. Sometimes in real time, as on Twitter.

In the meantime, everything that was in motion continues - saving money, investing, trying to learn and find a way in the world. There have been setbacks - many things in life don't go my way, as has been the case in the past, too, and I'm sure more wealth yet may be (hopefully only temporarily) incinerated in the financial markets, as has happened a lot recently. But the plan continues, and I feel truly blessed every day to have the resources to execute it.)

Material Happiness

I've been having some interesting conversations (and truthfully, monologues, too) on Twitter about global convergence, or the idea that things for many people worldwide are going to get more similar as time goes on.

They're certainly different enough right now. Things in the US (and some other developed countries) are just so nice, as many problems as there are.

Just another middle-brow home palace in the US.

Just another middle-brow home palace in the US.

Just look at the insane material bounty in the lives of ordinary working stiffs, as well as the amazing US consumer ecosystem in general (you can even make a living gaming the breadcrumbs of the system by churning credit cards - think about how incredible that is in the global context).

And things are not as nice in the rest of the world.

A Chinese person well-off enough to own a laptop computer and a phablet.

A Chinese person well-off enough to own a laptop computer and a phablet.

This is what many relatively well-off people live like in the rest of the world!

This can't last forever. The barbarians didn't stay north of the Rubicon forever. 

And the poor portion of the rest of the world will work, innovate, kill, scam, terrorize, war, beg, save, manipulate, defraud, migrate, copy, pirate, pray, seize, and otherwise do whatever is necessary to fill this readily apparent gap.

It's inevitable.

It's uncertain, of course, whether the aggregate level of material bounty per person rising will necessarily lead to some people dropping in absolute as well as relative terms.

Perhaps it might.

But that's ok. After all, you don't need much to be happy. I just installed some cheap black-out drapes, which should block out almost all light (and some sound and cold, too) from my bedroom, making the sleep and thus quality of life of my wife and I a lot better, on a few windows at home. I should have done it in every place I've lived in decades ago. The cost was a mere few hours of minimum-wage work for anyone in this country, and the benefits are endless.

It's no communion with God nor love for a friend, spouse or a child, but there is such a thing as material happiness.

My 2015 Investment Returns

My investing in public securities returned a dollar-weighted -10.4% annualized in 2015. This was a big failure any way you look at it.

The Magic Formula sub-portfolio, which is part of the composite return above, returned +10.1% annualized in 2015, showing that my discretionary choices were even worse than they appear.

For reference, the total return including dividends in 2015 of the instruments I would invest in if I passively indexed would be:

  • Vanguard Total Stock Market ETF (VTI): +0.4%
  • Vanguard Total International Stock ETF (VXUS): -4.2%
  • Vanguard Total Bond Market ETF (BND):  +0.6%

The SPDR S&P 500 Index, the biggest ETF for the S&P 500, which many people like to use as their main benchmark, had a total return in 2015 of +1.3%.

Inflation in 2015, defined as the latest-available 12-month change in US BLS CPI (so actually, inflation from November 2014 to November 2015) was 0.50%.

So my failure was complete.

I don't think underperforming benchmarks by itself is investment failure. I'm an individual investor without an institutional imperative. But I do think losing money, and a lot of it, is failure, pure and simple. No excuses here. My spouse and I invest our hard-earned money not for the hell of it, but to protect and grow capital. I failed miserably in this objective in 2015.

I learned a lot in 2015, though I still know very little. I am sure that by the end of 2016, I will be as baffled that I dared to actively invest in 2016, knowing so little, and having so little skill, as I feel now, and as I really did at the end of 2014 as well. Only of course, that feeling then was masked by making money that year.

I invested in more situations and types of securities in 2015 than I even knew existed at the beginning of the year. Sadly, many of them didn't turn out well, so though I learned, much of it was the hard way. That is bad, not good.

The failures were due to both bad judgment in security analysis, such as inexperience in valuing risks, and bad investing execution, such as improper position sizing.

But actually, the lion's share of the losses came from the same securities that drove my fantastic returns in 2014.

So the real test will be if any of the losses are permanent. Even with the larger capital base of 2015, the losses of 2015 were but a fraction of the gains of 2014. But it often happens that naive individual investors lose more when the tide goes out than they made all along swimming naked.

I will work to make sure that I don't suffer this tragedy in 2016.

Review: A Charlie Brown Christmas (1965)

A Charlie Brown Christmas is dark and painful. After all, Peanuts as a whole was, too, at least earlier on. Charlie Brown complains to everyone about his seasonal depression, not after Christmas is over, but even before it has began. People mock and criticize each other, not just in a gentle friendly ribbing sense, but in a way that's hurtful and revealing.

The characters are children, but they feel world weary. The sense of despair is like that of a lot of people you might know who once were hopeful, but are not caustically bitter. The bitterness is worse because it's not due to their nature, but because of what happened to them in life.

And it's not just personal. Everyone from Lucy to Snoopy to Sally is self-interested and transactional and wants cash, real-estate, or just generally to "get their share." It's small-town, homogenous Midwestern America (I haven't read Peanuts in a long time, but Lucy mentioned an "Eastern Syndicate"), yet people are consumed with the spirit of competitive capitalism.

It's interesting watching the ending today, too. Basically, everyone was being mean to Charlie Brown (and he had it coming, too, just like a lot of "nice guys" in life who really aren't that nice), but it ended when Linus reminded everyone that Christmas is about the birth of Jesus as described in the Bible, rather than the more commercial detritus that had surrounded the holiday.

It was "already" 1965, so there may already have been some cultural rifts then. But it was nothing like that, where despite many factions in society being overtly Christian, the United States itself is now explicitly culturally pluralistic, rather than unified. The world is in fact commercialized. Things are vague on purpose, because there is dominant theology in the nation. Mainstream popular culture today wouldn't purposely speak of the birth of Jesus being the only real meaning of Christmas (neither would it speak of the interesting pagan traditions of Christmas in explicitly pagan terms, of course).

What is uplifting about A Charlie Brown Christmas is the feeling that as cruel and indifferent as these kids are, they're at least headed in the right direction. It's almost as if they start out so old, they can only get younger.

Investing Lessons from Star Wars: The Force Awakens (Don't Read This If You Haven't Watched The Movie Yet)

starwarsforceawakens

Sometimes it's good to copy the past. Star Wars: The Force Awakens, which I just saw and liked very much, was a pastiche of the original Star Wars trilogy. It's a sequel set in the same world and with continuity from those films, and yet it also clones and recreates many of those same scenes, as a reboot would. The stormtrooper raid on a desert planet. The ice planet. The lush, jungle planet. The confrontation on a hazardous elevated platform. The trench run to destroy the superweapon. Sounds derivative, but it worked.

But sometimes it's bad to imitate the past. You want to have better ideas than building a big planet-busting gun housed in a small moon three times. But I didn't think it was weird that was what happened. That's just the nature of the villains here. The way they think always culminates in these big superweapons that are inevitably destroyed. Huge capital sinks that don't have a real moat.

So it's both good and bad to copy the past. Just like in investing. Paradigms from the path work and you can be a genius in applying them wisely. But it can be pretty dumb to try the same thing when conditions are different, too.

There are also some interesting analogies to make between the light side and the dark side and investing and speculating. After all, some speculators do become quite powerful, but speculation more often than not does end up destroying you. And speculating is a zero-sum game, just like the competitive quest for power among dark side users. Whereas with value investing, you might become celibate like a Jedi if you end up being super-frugal and money-oriented like a true value investor.

By the way, I thought there was also a parallel between what happened to Luke Skywalker and what happened to George Lucas himself. Luke Skywalker was so ashamed of how he did not successfully mentor Kylo Ren that he exiled himself away. George Lucas similarly exiled himself away from Star Wars because of the Star Wars prequel trilogy.

December 2015 Housekeeping Update

I just made live an early draft of a page on my toolkit of mental models. That, along with my list of books, will be updated on those static pages as I continue to learn and read. I won't write an update on the blog every time I update them, but maybe I will if the updates are really big, so that those of you who subscribe to this blog by RSS can keep up to date too.

It will be interesting posting my year end investment results update soon, too, as I promised to do. I didn't do very well this year, but I avoided the big well-known meltdowns so far. That's about my only investing achievement this year. There's quite a few trading days yet for public markets this year, so maybe I'll yet blow up in terms of short-term performance.

Life has been continuing its march since I moved from mainland China to Los Angeles. I'm grateful for you reading my blog and for your generous support so far (I get a small commission any time you buy things through my embedded Amazon links like this one - or even do things like start free Amazon Prime or Audible trials - like this one that gives you two free audiobooks, and you don't pay any more than if you didn't). I've learned and even been able to talk to so many smart people through this blog (and through my associated Twitter account), and I'm very thankful for it all.

Going forward, the update schedule for this site continues to be "whenever I feel like it," but in practice this has meant more than once a month but perhaps less than once a week. That'll probably be the case going forward. Follow me on Twitter if you want to read me more than that.

Clever Girl - 7 Investing Lessons from Jurassic Park (1993)

Velociraptors in Jurassic Park.

Velociraptors in Jurassic Park.

After my wife and I went on the excellent Jurassic Park ride at the Universal Studios theme park in Hollywood, we both decided to watch Jurassic Park for the first time. And as often happens when movies percolate in my head after I watch them, I thought about a few investing lessons from the movie, although it is ostensibly about dinosaurs rather than money.

I actually didn't like the movie that much, but not for the obvious reason, dated computer graphics (in fact, the movie looked great, due to I think the reliance on live action animatronics rather than CGI for the majority of scenes). Instead, the movie left the most interest speculative plot points hanging, which was extremely unsatisfying. I wanted to know more about the competitor corporation bribing traitorous IT contractor Dennis Nedry, played by Wayne Knight (Newman in Seinfeld), or the tendency of the herbivorous dinosaurs to get sick from the the modern South American plants they eat. But these interesting points are brought up, only to be completely abandoned.

But despite the confusion, I thought the movie, which after all is about an extended due diligence audit conducted on management by outside passive minority investors, had some great lessons investing, from the obvious and preachy to the slightly more subtle.

  1. Complexity causes risk. The movie bangs you on the head with this moral, but it's a good one. John Hammond wasn't at all unaware of the risks of having carnivorous dinosaurs on an amusement park. A lot had to go wrong for the velociraptors to get out of their pens. But all that happened. The same of course is true for investment products with complicated causalities and structures.
  2. Blood ties trump legal and fiduciary obligations. John Hammond wasn't that sad when his most loyal employees John Arnold (played by Samuel Jackson) and Robert Muldoon failed to appear to be evacuated from the island due to being eaten by dinosaurs. His primary goal was getting his grandchildren out of there. This fact must be remembered when investing in family companies, especially in emerging markets. Hell, even investors in Berkshire Hathaway should remember this fact. It's not like Howard Buffett was chosen as the next chairman simply due to raw merit.
  3. Personal quirks and characteristics, rather than raw financial incentives, can be the decisive factor in determining people's stances on issues. Ian Malcolm (played by Jeff Goldblum) was inclined to not endorse the park as an expert, due to his professional specialization in chaos theory. The same is true regarding any expert or guru an investor may read, watch or listen to.
  4. Those not like you can be smarter than you think. The velociraptors were smart enough to overcome wire fences, concrete moats, and even open doors with their claws. Similar, sometimes the people on the other side of an investment or trade are smarter than you think. Perhaps something that you think is undervalued or overvalued really isn't. You are just the dummy at the table waiting to be ripped apart by velociraptors. Metaphorically.
  5. Technological automation has its limits. In Jurassic Park, it took the combination of a freak storm, a traitorous contractor, and an untimely experimental tour for blind automation to lead to pain and death. But over time, confluences of unlikely events will happen.
  6. Pushing a good strategy too far can lead to disaster. Another big plothole or unanswered question in the movie to me was why the park didn't simply only have herbivore dinosaurs, or at least open profitably with only herbivores first. Literally all the risk incurred would have been nipped in the bud, and it's not like the park would have been outcompeted by a rival park that did have the carnivore dinosaurs. Perhaps it would have been slightly less glamorous, and thus make a little less money. The obvious parallel in investing would be to using leverage and otherwise introducing the risk of ruin.
  7.  It can be dangerous to try to recreate the past. Dinosaurs ended up killing people. You might get killed if you naively try to implement a strategy from Security Analysis or You Can Be A Stock Market Genius without thinking it through first.

Why Donald Trump Is Like Apple

Donald Trump using Twitter on his Samsung Galaxy.

Donald Trump using Twitter on his Samsung Galaxy.

Although Tim Cook couldn't be any more progressive and Donald Trump uses a Samsung Galaxy, Donald Trump and Apple are alike.

Apple sells computing devices that cannot be upgraded or user serviced, and run proprietary software and services. Apple is uncompromising, never offering users exactly what they want (bigger batteries, a Retina Macbook Air), but rather Apple's vision of what they should want (thinness above all else, a Macbook with only one port). Donald Trump is running for president with an idiosyncratic and controversial approach that is seemingly completely whimsical, insisting on his personal infallibility and never backing down. What he says is often outrageous to many, because it is more or less completely unvetted.

You don't need to know anything mechanical to use Apple products, and in fact you can't apply any mechanical knowledge if you have it. You can't add memory or storage to almost all Apple products. Donald Trump's public speeches are a fourth grade level.

Both Apple and Trump offer simple integrated solutions to end consumers in markets where there is modular competition. And end consumers that are individual ordinary people, as is the case in both consumer electronics and electoral politics, simply hate modular products.

To be sure, there are people who love modular products. They tend to be those who like the mechanics of the product itself, rather than the benefits or perceived benefits that the product conveys. For example, how could it be that proponents of Bitcoin have consistently misjudged the speed by which Bitcoin would gain mass appeal? They are so fascinated by the elegance of the blockchain that they don't realize how difficult it is to comprehend and use even simple implementations of Bitcoin, even now. Many of the same people simply can't see why modular PCs have lost out to Macs. They enjoy thinking about the intricacies of PSUs and graphics cards, and don't see that such technical, mechanical discussions are repulsive to the wider population.

The same is true of electoral politics. Those who are more involved or knowledgable in the day-to-day mechanics, such as professional political staff, journalists, and even investors, like thinking about the details of policy. Ordinary people don't. They want the benefits of good policy, certainly, but they don't like having to think about what positions a certain candidate is strong on or weak on, or what that even means.

And many modern US electoral politicians are modular in that they adopt or cast away politics stances based on the current winds. It is obviously true of Hillary Clinton, and it transparently true in the case of the last two Republican general election candidates, John McCain and Mitt Romney. Of course, all of these candidates lost, despite being quite strong on analytical paper. Their complexity turned people away.

Some might howl in protest that modularity is often a real advantage. For example, at Chipotle, customers choose the ingredients for their burrito piece by piece. But that isn't actual modularity. The choices are inconsequential. There is no real stress caused by weighing tradeoffs. The relief of that stress, which is really caused by information asymmetry, is why integrated solutions are better than modular solutions in cases where the end consumers are ordinary people.

I don't think it's coincidental that both Apple and Trump seem to be persistently underrated in comparison to other entities operating in the same space. Apple is cheap compared to peers given its revenue growth (of course this prices in the logic that this growth is fickle and could disappear and even reverse). Trump is cheap compared to other major Republican candidates on political futures markets (incidentally, I really liked this contract on PredictIt that pays out if Trump wins any Republican primaries - I think the market didn't fully understand conditional probability - and purchased it at a lower price), despite his sustained strength in most national polls.

That's because the rating is done by subject matter experts. They are experts because they are knowledgable, and thus like the complexity of modular solutions. There is a bias where they don't perceive the implications of their knowledge. They are too smart.

I'm not saying that Apple or Donald Trump are great and that Apple is an unbeatable business or stock and that Donald Trump is going to win the presidency. I've also noticed the opposite contrarian error where people can see no wrong. For example, Apple products are often too complicated and induce too many choices - and Apple experts, in an interesting bizarro microcosm, will find ways to wrongly hand wave these away. And of course Trump has often made big mistakes, too. But I do think that it is structural and so perhaps persistent that experts who like complexity will underrate solutions that reduce complexity.

Thankfulness Is the Opposite of Jealousy

I was never really thankful before things turned bad. After many easy years, I failed again and again, and began to owe a lot of debt, too. Then I somehow found myself living on a local wage in an authoritarian developing country. Life got harder.

I then realized how easy I had it before. I had so little real struggle before. And I enjoyed so many privileges by virtue of where I had come from and the resources that were at my disposal.

Any jealousy I had up to that point - and I had a lot, due to my own personal failings - disappeared (though of course it would pop up now and again later). I started to appreciate the joy of survival and the spiritual and physical blessings I was surrounded with and given in this world. Everyone had given me so much.

And I've never been more thankful than I am now.

Every day I am able to read, learn from, and sometimes even talk to brilliant investors from more backgrounds than I could imagine - professional long-short equity, deep value, special situations, credit, macro and more. People are patient and giving. I haven't even been selected as a professional colleague by anyone. I'm just someone who wants to learn from people who are generous enough to share, and so many do.

I have access to fair financial institutions that charge low fees for access to financial instruments across more markets and regions than I know what to do with. There is relative peace and safety so that we as a society can spend time on things like investing with a far future orientation. When people talk about the minimum time frame of a long-term investor being five years, or a decade, or whatever, that speaks volumes about the ability of our society to give people enough peace of mind to even consider thinking about such a far future!

I need to focus every day on remaining thankful. It's very easy to forget all the nice things you have. It takes less than a single generation.

Things can get frustrating, and things have been frustrating for me and people I care about in the past. But enough is good that I always know that I don't deserve it all, and should be thankful for what I have.

The Subjectivity of Us - Review: Irrational Exuberance by Robert Shiller, Third Edition (2015)

Robert Shiller happened to release the first two editions of Irrational Exuberance at somewhat opportune times - the first in 2000 before the dot-com bubble had peaked, and the second in 2005, somewhat earlier than the Great Recession. Perhaps that is meaningful, at least in subconsciously influencing him to release this third edition, written in 2014 and released in early 2015, at this time and me to read it now. Shiller doesn't call for an impending crash, but the presently high valuations in all asset classes inform the entire book.

I think Irrational Exuberance is a bit like The Intelligent Investor in that although it is very much informed by the current set of circumstances, it sets out some evergreen and useful arguments and principles. And like The Intelligent InvestorIrrational Exuberance does not only contain the obvious yet important bits that everyone knows the book for, but is dense and full of bits of data and observations that should grow only more prescient and rewarding as human and market behavior repeats due to the truth of the principles referenced. 

There is of course also the link of Shiller's CAPE ratio building on what Graham had written about many years earlier regarding earnings over a business cycle, as well as the book being written not only as description of phenomenon but also with somewhat of a prescriptive eye for individuals living in society.

I quite liked that rather than being simply a linear historical overview, Irrational Exuberance is organized by explanatory theme. After a broad quantitative and descriptive historical overview of stocks, bonds, and real estate, Shiller covers what he calls the structural factors behind irrational exuberance, the cultural factors, the psychological factors, and attempts to explain this phenomena away, as well as a few policy and decision-making recommendations at the end.

By structural factors, Shiller refers to a wide array of factors in market mechanics, feedback mechanisms, technological changes, government policy and sociology. I particularly enjoyed Shiller's discussion of the increasing materialism of societal values (as measured by survey data, Shiller's preferred metric and methodology, although he also uses a variety of other data sources, from keyword frequency in books and newspapers to market valuations themselves), and the rise of outright casino gambling along with the rise in interest in the stock market. Broader currents feed into enthusiasm about markets and the rise of participation in markets.

As an aside, I find it interesting that some people I respect think so highly of Robert Prechter, because I think that many of the best ideas expressed in Conquer the Crash (which I may or may not review here some time - I haven't read any of his other books) are already in Irrational Exuberance, and presented and analyzed in a significantly more rigorous and less promotional fashion. For example, it's clear that Shiller also believes that mood drives markets. Shiller also analyzes the financialization of single-family housing, something that was only thought of a place to live, not a speculative financial asset, until fairly recently.

By cultural factors, Shiller refers to the way in which the media and ideas in society interact, and by psychological factors, Shiller refers to the human psychological models and handicaps that many are aware of from reading Robert Cialdini's Influence, Charlie Munger's writings, Kahneman, and the like. 

The unifying thread of all Shiller's analysis, to me, was the focus on human subjectivity. It is hard to know what truths are universal from any vantage point in time, as there is always a confluence of powerful factors that usually lead to people simply going with whatever the notions of the time are. A memorable example to me is what Schiller writes about the seemingly perpetually recurring theme during periods of irrational exuberance for academics and others to posit that high valuations should now be the norm, because people finally have woken up to the superior long-term return of stocks. Of course, people "forget" this too, and the interesting thing is this forgetting is itself forgotten when there is optimism about stocks.

I think this fact, that forgetting is forgotten, explains the error of many people who try to determine whether current conditions are a speculative bubble by looking at "contrarian indicators" and trying to call "the top," or alternatively say "all clear." Shiller's survey data and analysis shows that even during periods of irrational exuberance, such as during the height of the dot-com bubble, it was not as if everyone was completely euphoric about stocks and convinced they would only go higher. There was uncertainty and unease about stocks, and many people, sometimes most people, when looking at certain groupings, such as investment professionals, thought they were overvalued, and recognized stocks were in a speculative bubble. But due to the structural, cultural and psychological factors Shiller writes about, the bubble could every time only continue to its logical conclusion.

I think that many will also find it rewarding to read about the plausible and just-so explanations of every past bullish era. You might see many of them today, especially from certain quarters on Twitter, forums and in the media, from expectations that industry consolidation will continue to increase, leading to more rational competition in the future, to projections of the beneficial wonders of technology, to multiples of reasons for higher returns on investment going forward compared to the past.

It's narratives, rather than rigorous data and analysis, that drive human beings. And these narratives happen over and over again, even as the audiences are both enthralled by the unique nature of them happening each time and also watching the same market with a thousand faces rise, fall, and rise again. Villains won't stop confessing their plans to James Bond in monologues right before he escapes.  Children must learn the tragedies and lessons of life the hard way despite the experience of their parents.

Because sadly, most parents don't really learn the lessons. And most investors don't, either. People live for many decades, and it's often the same people that get caught up in multiple bubbles. 

And what I learned most from this book was recognizing many of these patterns, rationalizations, and factors in some of my own thinking. I have been caught up in irrational exuberance in the past (though not in financial markets, as I was not a participant in past cycles), and perhaps am caught in irrational exuberance now.

After all, my spouse and I do own a lot of stocks. It will be interesting to see how the real world writes its epilogue to this edition.

Somewhat Perplexed - A Few Thoughts on John Burbank of Passport Capital

John Burbank of Passport Capital on Real Vision.

John Burbank of Passport Capital on Real Vision.

John Burbank is well-known because at least of a few weeks ago, his hedge fund, Passport Capital, was one of the best-performing funds YTD in 2015, when many other long-short and macro investors haven't done so well. He has performed better and differently, so there are things to learn from him.

But I saw a few videos of John Burbank and feel a bit perplexed. To me the ideas he espoused are interesting, but not so self-evidently true I am necessarily going to incorporate them into my thinking. (Of course if this October had ended differently I might subconsciously be saying something different!)

The three videos I watched were the 1st (dated September 22, 2015) and 2nd (dated September 29, 2015) videos of him talking on Real Vision, as well as an April 14, 2015 talk he gave at UC Berkeley's Hass School of Business.

A few thoughts below:

  1. Burbank said that of the several disciplines of investing, Americans focus on bottom-up fundamental analysis because they trust that, as in the past, the macro will work out. The funny thing to me is that whether this faith is justified or not really is a backwards-looking measure. If you don't get insurance and never needed it, you turn out quite happy.
  2. He seems quite enamored with the San Francisco venture capitalist ethos. This may be good or bad. He says that places where human capital cluster, most notably San Francisco, are going to be centers of innovation and should be invested in. I think he implied that San Francisco real estate's pricing was somewhat rational in response to this dynamic. I think he also thinks that paying very high prices for innovative businesses is justified, because the way the world fundamentally works is favoring them. There is a lot of evidence showing that we are moving to more of a winner-take-all-system (returns on capital for the best businesses have risen and you can see clear network effects in consumer technology markets), but this sounds a bit utopian to me, which I am always suspicious of.
  3. He said that the "GDP trade," that is, planning on profiting from the growth of GDP (both in the US and in emerging markets, where he previously managed money), is over now. Instead, he suggests the innovation trade of investing in clusters of human capital.
  4. Predicting what markets have not seen is quite important to Burbank. He has obviously done a great job at it, but I am not sure it is really replicable for those playing along at home, like me.

In the end, Burbank's ideas weren't too life-changing to me. Perhaps it is because they sound a bit similar to what many venture capitalists say on Twitter - the public markets don't reward innovation enough, businesses are too defensive, the network effects of the best places and businesses are unbelievably strong, and the like. I think these are all likely to be true to some extent, but I think I already more or less knew all that.

A Bit More Alex Gurevich - The Real Vision Interviews

Gurevich using a visual aid to explain concurrent necessity. (You can see the slick interface of Real Vision, too) 

Gurevich using a visual aid to explain concurrent necessity. (You can see the slick interface of Real Vision, too) 

I recently reviewed Alex Gurevich's book The Next Perfect Trade: A Magic Sword of Necessity.

I was also able to watch two videos of Gurevich on Real Vision, a very well-done subscription investing television service (I was able to get a short free trial).

It takes longer to watch videos than to read books, but the videos were additive to rather than repetitive of The Next Perfect Trade: A Magic Sword of Necessity and so worth watching (To me, that also shows that Gurevich is someone worth following. I get bored easily, and am not a "fan" of any public figure, except to the extent that I can continually learn new and different things from their words and actions).

The first, from February 6, 2015, was an explicit back-and-forth interview by Real Vision founder Raoul Pal (a former macro hedge fund manager - I have no idea how successful). The other, from September 8, 2015, after The Next Perfect Trade had been released, appears to be a "think piece," that is to say an edited interview with Gurevich only on screen.

I won't summarize the videos, but they made me consider a few points I thought were interesting. Perhaps restating them here will help me understand them.

  • Strategic and analytic thinking are not the same thing. This should be basic to anyone who is actually managing their own money (or who has competed in competitive games - Gurevich was a poker semi-pro), but perhaps it is not. Trying to have the best information or the most precision perhaps aids in, but is not the same thing at all from profitable thinking. And more importantly, you do not have to have the one correct view to be profitable. (This is what deterred me from examining public markets earlier in life - I knew I was not nearly the smartest.)
  • Gurevich's way of thinking about the world, which as he states it, is economically agnostic and focuses on making money through exploiting dislocations in the relationships between asset classes, appears to be street smart. It does not rely on winning the losing game of having the absolute best views on the world (he admits that he isn't a great stockpicker, but a mere educated layperson at best). I don't know what causes some people to be street smart and others naive (I myself can only feel a little less of a rube now than say, a decade ago), but it is quickly apparent (for example, Buffett is the epitome of street smart). Perhaps Gurevich's background, as he described in The Next Perfect Tradeof previously being a Soviet refugee who had to sell trinkets in street markets in Italy for a few months to survive, is a factor here.
  • An obvious but crucial point is that you must both make money when you are right, and avoid losing money when you are wrong. Simple but profound. The example Gurevich gave of not making money when you are right is options. I think another strong example that Gurevich hinted at in the case of China especially is misunderstood political risk - that is the risk that political idiosyncracies can suspend the usual web of macroeconomic relationships long enough for you to lose money.
  • That also ties a bit into the poker lesson Gurevich brought up, which was rather different from the usual poker saws people talk about in investing. He said that poker taught him to think about the different general modalities in play at any one time. For example, playing against a rich New Yorker tourist would be a different modality than playing against another pro player. That is a bit similarity to "reading the air" of the general conditions of the markets, whether they are risk on or risk off. Sometimes markets have a lot of "juice," that is to say, a lot of dislocations.
  • You do not have to be perfectly positioned before a crisis to have ways of making money off it. If you simply survive in decent shape, there will be intelligent things to do afterwards. New concurrencies and reflexive relationships will develop in the new post-crisis regime.
  • I liked the conceit of recourse trades as opposed to non-recourse trades, when talking about losing trades. The framing is - when the market borrows money from you, can you get it back? Perhaps this is a good psychological frame that would allow people to take needed losses.
  • Depending on the nature of the trade, Gurevich likes to have a price target or a time horizon, but not both. This seems like a good practical form of risk control.

I learned a bit more from the February video. Watching it was more like listening to an early demo tape as opposed to a late one - different enough in the form in which some concepts were conveyed to be quite interesting. The later video had more discussion of current events and situations, which some may feel to be more relevant.

Lessons from My Alumni Magazine

It's interesting to read alumni obituaries in the back of the university alumni magazine I get. They tend to be more interesting than the updates from the people still living. Because when you're dead, the book is closed. Everyone alive seems to have led a smooth life in the updates they give.

But in the obituaries, along with the high notes of people's lives, you also see the more interesting bits (even though only those who have come out better probably have their estates or friends publish their deaths in the alumni magazine).

But no matter if there is sampling bias, it's interesting to see what matters to people's lives in the end. It's different for everyone. Career, interests, religion, family, friends, communities. The order is different for different people, even in the sanitized version in the alumni magazine.

People value different things in life. And they have different degrees of success doing what they want to do with themselves, their families, and their impact on the world among their chosen paths.

For many people, this obituary will be the sum total of their influence on the written record. You won't find their names on Wikipedia. But they're ok with that - they leave behind people who loved them.

It will be interesting to see what happens once we get into the age where alumni who die come from less homogeneous prep school backgrounds. It's cute to see in 2015 language that would have been current 80 years ago, speaking of how so-and-so "prepared" at such-and-such elite prep school. The class secretaries who prepare this stuff are of that past world, after all. I suspect you'll see a lot more rockiness. Especially with my class, the admissions officers wanted a lot more diversity, and they got it, in some ways more than others. But along with diversity comes trouble. Paths won't be as smooth.

But perhaps they never were.