Link to: Paul Volcker on Charlie Rose
Friday, May 31, 2013
Thanks to Andrew for passing this along.
Thursday, May 30, 2013
“Effective negative equity” is central to my “structurally broken housing market in need of years of de-leveraging before a “durable” bottom can occur”, theme. I have been pounding the table over “Effective” negative equity for years and finally it’s mainstream. Chances are this one report will be blown over. But like with ”shadow inventory” — when this thesis grabs hold — ultimately everybody will be talking about it, it will raise uncertainty, and economists will have no choice to respect the “math”. And the math requires housing sector estimates have to be ratcheted down. This literally changes everything with respect to housing ‘demand and ‘supply’ fundamentals.
Housing is going through a demand spurt no doubt. The smart money was the institutions who began to buy two and three years ago. On Twist — and a plethora of media coverage on Wall St buying bulk housing pools and participating in County courthouse foreclosure actions at year-end 2011 – everybody become a distressed house flipper or rental professional.
I think there is a good chance the housing market is about to experience mid-year volatility never seen before mostly propagated by malinvestment from P/E funds using cheap money to buy up all the distressed housing and turn them into rentals. There is no ”housing shortage” problem in the country with respect to “places to live”. When including SF construction, MF construction, lack of demolition, the past 5 years of foreclosures of vacant house, rentals and 2nd houses, and lackluster household formation I argue there is plenty of houses out there in which to live. There is simply a transitory dislocation with respect to houses in the “for sale” bucket. Builders are being opportunistic and capitalizing on this right now. But if I am right and the ”housing shortage” problem is only a allocation mirage then forward estimates are wildly aggressive. And obviously, if this is still a free market and demand is strong enough this supply will find a way to market.
So far, I’ve tried Feedly, Netvibes, NewsBlur, and Feed Wrangler…..and my favorite so far is NewsBlur, which is the one I think I’ll probably stick with once Google Reader goes away on July 1st. But if anyone has any other alternative that they like better, send me an email: email@example.com
I'll try and do a complete and updated post when it gets closer to July 1st, but until then, I'll update this post when new possibilities get passed along to me.
Thanks to Greg for mentioning Digg: http://www.digg.com/reader
AOL is building one as well: http://reader.aol.com/
I don’t agree with everything in this article. While I do agree that the nature part of ‘nature + nurture’ does need some minimum level, I think nurture is much more important than I think this article implies, and am more in line with most of what Gladwell has said. Gladwell’s definition of talent, from an interview he gave a few years ago, is: “Talent is the desire to practice. Right? It is that you love something so much that you are willing to make an enormous sacrifice and an enormous commitment to that, whatever it is -- task, game, sport, what have you.” I think achieving expertise is an extremely difficult thing to do, which is why it is so rare, but it is that love that leads to the drive to make the sacrifices needed to ‘practice’ deeply to achieve expertise that is what is important. And, in my opinion, that love and drive is triggered more by one’s environment, upbringing, and luck than it is by anything one is originally born and wired with.
New Yorker writer Malcolm Gladwell didn’t invent the rule, but he did popularize it through his best-selling book Outliers. The principle actually dates to a 1993 study, though in that paper the authors called it the 10-year rule.
In 1973, the Washington Post Company couldn’t have been a more widely revered media company. The Watergate scandal, which Bob Woodward and Carl Bernstein begun reporting on in mid-1972, came to a spectacular end with President Nixon’s resignation in August 1974. But the reverence of the publication didn’t match the company’s popularity on Wall Street. The Post—along with many other stocks at that time—was trading at historic lows.
Regular readers are familiar by now with Horizon Kinetics’ focus on qualitative attributes that may be predictive of outperformance. Consistent with the Firm’s long-term value investing philosophy, identification of these traits has been central to our research and investing process since the inception of the Firm. Fundamental research is generally required to identify these characteristics. This is a time-intensive process, which contrasts with the quantitative screens that can be used to identify groups of stocks with similar price to earnings ratios or sector classifications. However, the long-term performance of companies described by these predictive attributes suggests that the effort is worthwhile. Recent commentaries have highlighted owner-operators, dormant assets, spin-offs, bits & pieces, and scalability. This month’s discussion will center around long product lifecycles.
Wednesday, May 29, 2013
From Peter Bevelin’s Seeking Wisdom: From Darwin to Munger:
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records. If a company has a lousy track record, but a very bright future, we will miss the opportunity...
I do not understand why any buyer of a business looks at a bunch of projections put together by a seller or his agent. You can almost say that it's naive to think that those projections have any utility whatsoever. We're just not interested.
If we don't have some idea ourselves of what the future is, to sit there and listen to some other guy who's trying to sell us the business or get a commission on it tell us what the future's going to be—like I say, it's very naive.
Related previous post: Alice Schroeder on Warren Buffett’s filtering process
Found via the Corner of Berkshire & Fairfax.
He was also on the show Q&A: HERE
Tuesday, May 28, 2013
It will come as no surprise that market conditions remain of great concern here. As always, but particularly now, it’s important to stress that our defensiveness is a reflection of prevailing, observable evidence and the alignment of our investment views with the average outcome of such evidence across similar instances over the course of history. The consistency of negative outcomes also worsens the expected return/risk ratio presently. A defensive stance here does not require any particular forecast about recession, profit margins, bubble/crash dynamics, QE, European banking strains, or any of the numerous risks in the economic and financial backdrop. All of these factors are worthy of discussion in their own right. Still, our approach is always to align our investment stance with the average return/risk profile that is associated with a given set of market conditions, placing heavy weight on valuations, market action (e.g. trend-following factors, market internals, measures of overextension, price/volume behavior), as well as monetary factors, sentiment, economic measures and other considerations. See Aligning Market Exposure with the Expected Return/Risk Profile for a review of this general approach.
Monday, May 27, 2013
“Trial and error has one overriding value people fail to understand: it is not really random, rather, thanks to optionality, it requires some rationality. One needs to be intelligent in recognizing the favorable outcome and knowing what to discard.
And one needs to be rational in not making trial and error completely random. If you are looking for your misplaced wallet in your living room, in a trial and error mode, you exercise rationality by not looking in the same place twice. In many pursuits, every trial, every failure provides additional information, each more valuable than the previous one—if you know what does not work, or where the wallet is not located. With every trial one gets closer to something, assuming an environment in which one knows exactly what one is looking for. We can, from the trial that fails to deliver, figure out progressively where to go.”
-Nassim Taleb, Antifragile
I wrote several years ago that Japan is a bug in search of a windshield. And in January I wrote that 2013 is the Year of the Windshield. The recent volatility in Japanese markets is breathtaking but characteristic of what one should come to expect from a country that is on the brink of fiscal and economic disaster. I don't mean to be trite, from a global perspective; Japan is not Greece: Japan is the third-largest economy in the world. Its biggest banks are on a par with those of the US. It is a global power in trade and trade finance. Its currency has reserve status. It has two of the world’s six largest corporations and 71 of the largest 500, surpassed only by the US and comfortably ahead of China, with 46. Even with the rest of Asia's big companies combined with China's, the total barely surpasses Japan's (CNN). In short, when Japan embarks on a very risky fiscal and monetary strategy, it delivers a serious impact on the rest of the world. And doubly so because global growth is now driven by Asia.
Japan has fired the first real shot in what future historians will record as the most significant global currency war since the 1930s and the first in a world dominated by true fiat money.
At the risk of glossing over details, I am going to try and summarize the problems of Japan in a single letter. First, a summary of the summary: Japan has painted itself into the mother all corners. There will be no clean or easy exit. There is going to be massive economic pain as they the Japanese try and find a way out of their problems, and sadly, the pain will not be confined to Japan. This will be the true test of the theories of neo-Keynesianism writ large. Japan is going to print and monetize and spend more than almost any observer can currently imagine. You like what Paul Krugman prescribes? You think he makes sense? You (we all!) are going to be participants in a real-world experiment on how that works out.
For decades, people have been getting rid of cockroaches by setting out bait mixed with poison. But in the late 1980s, in an apartment test kitchen in Florida, something went very wrong.
A killer product stopped working. Cockroach populations there kept rising. Mystified researchers tested and discarded theory after theory until they finally hit on the explanation: In a remarkably rapid display of evolution at work, many of the cockroaches had lost their sweet tooth, rejecting the corn syrup meant to attract them.
In as little as five years, the sugar-rejecting trait had become so widespread that the bait had been rendered useless.
"Cockroaches are highly adaptive, and they're doing pretty well in the arms race with us," said North Carolina State University entomologist Jules Silverman, discoverer of the glucose aversion in that Florida kitchen during a bait test.
The findings illustrate the evolutionary prowess that has helped make cockroaches so hard to stamp out that it is jokingly suggested they could survive nuclear war.
Saturday, May 25, 2013
“The atoms of our bodies are traceable to stars that manufactured them in their cores and exploded these enriched ingredients across our galaxy, billions of years ago. For this reason, we are biologically connected to every other living thing in the world. We are chemically connected to all molecules on Earth. And we are atomically connected to all atoms in the universe. We are not figuratively, but literally stardust.” –Neil deGrasse Tyson
Related previous post: The Most Astounding Fact About the Universe
Friday, May 24, 2013
From Expeditors International of Washington’s latest 8-K (after they had also quoted from Ben Stein’s book How To Really Ruin Your Financial Life and Portfolio):
Currency speculators seem to be very much like your neighbor who makes frequent trips to Las Vegas. One soon learns that the correct inquiry of your neighbor upon his or her return is not 'How much did you win?' If they won, they tell you about it. If they lose, you might see a “For Sale” sign on the BMW in the driveway…and in extreme cases…a realtor's sign in front of the house, soon to be followed by a large moving van blocking your drive way. As we all know, everyone wins in Las Vegas…and it's the winning most people talk about. Unfortunately (or fortunately if you are a casino owner), everyone who gambles in Las Vegas also loses in Las Vegas…and the existence of all those marvelous edifices in the desert are ample proof that what's lost in Las Vegas stays in Las Vegas….and obviously your neighbor and other visitors lose more than they win. Most gamblers/speculators in either Las Vegas or in the currency markets who win big are more lucky than they are good in most instances. Granted the odds may be better if you are speculating on currencies in some manner…as you have the option to bet on governments to do something stupid…but that said, and to Stein's complexity point, there are enough times when governments do something smart when you are expecting them to do something stupid (or they can even do something less stupid than the other governments impacting the currency markets) that you can really get burned without even lighting the fire yourself. Big financial institutions do a lot of currency speculation. But with them, if they win, like your gambling next door neighbor, they tell everyone about it. If they lose, they don't talk about it…and if they lose a lot, unlike your gambling neighbor who just had to move, their own governments (We the People in other words), who they might well have even bet against, bail them out. Nice work if you can get it…and can still look yourself in the mirror in the morning.
If one were to equate our philosophy on currency exposure to personalities in Las Vegas, we'd be the person who feels a hankering for an after-dinner drink and so throws a couple of coins in a nickel slot and stands around in the casino on the way back to their hotel room just long enough to get a couple of free drinks, the cost of which, had they been paid for, would have been much more than anything put in the slot machine. Better to get a few free drinks while losing a little money…with the possibility of winning a little on occasion, than getting a lot of free drinks that the big wagers get, while losing your spouse's car and maybe your house in the hopes you'll find out that you have become more lucky than good.
Found via Jon Shayne. This is from Washington Irving’s The Crayon Papers, and there is a lot of investing wisdom packed into this single paragraph. It is from an introduction to the section he wrote on The Great Mississippi Bubble.
When a man of business, therefore, hears on every side rumors of fortunes suddenly acquired; when he finds banks liberal, and brokers busy; when he sees adventurers flush of paper capital, and full of scheme and enterprise; when he perceives a greater disposition to buy than to sell; when trade overflows its accustomed channels and deluges the country; when he hears of new regions of commercial adventure; of distant marts and distant mines, swallowing merchandise and disgorging gold; when he finds joint-stock companies of all kinds forming; railroads, canals, and locomotive engines, springing up on every side; when idlers suddenly become men of business, and dash into the game of commerce as they would into the hazards of the faro table; when he beholds the streets glittering with new equipages, palaces conjured up by the magic of speculation; tradesmen flushed with sudden success, and vying with each other in ostentatious expense; in a word, when he hears the whole community joining in the theme of "unexampled prosperity," let him look upon the whole as a "weather-breeder," and prepare for the impending storm.
It isn’t just individual funds that veer away from cash. The industry as a whole is also very keen to encourage us all to be fully invested at all times. It isn’t good for them for us to be sitting around with our money in savings accounts losing money to inflation, as opposed to being in investment funds and losing money on fees. Hence the regular press releases pointing out the difficulty of timing the market and the hideous long-term results of being out of the market on the two, four, five or perhaps 10 best days of the year. The propaganda works; almost all investors avoid holding cash.
From the book Hedge Fund Market Wizards:
“As a general observation, markets tend to overdiscount the uncertainty related to identified risks. Conversely, markets tend to underdiscount risks that have not yet been expressly identified. Whenever the market is pointing at something and saying this is a risk to be concerned about, in my experience, most of the time, the risk ends up being not as bad as the market anticipated.”
James East of Mercertus Capital on His Investment Approach
“Now, as a skeptical empiricist, I do not consider that resisting new technology is necessarily irrational: waiting for time to operate its testing might be a valid approach if one holds that we have an incomplete picture of things. This is what naturalistic risk management is about. However, it is downright irrational if one holds on to an old technology that is not naturalistic at all yet visibly harmful, or when the switch to a new technology (like the wheel on the suitcase) is obviously free of possible side effects that did not exist with the previous one. And resisting removal is downright incompetent and criminal (as I keep saying, removal of something non-natural does not carry long-term side effects; it is typically iatrogenics-free).” –Nassim Taleb, Antifragile
Thursday, May 23, 2013
When Mailbox sold itself to Dropbox for a reported $100 million or so this March, the month-old iPhone app wasn’t even available to the public. People could download the email organizer, but using it required joining a mailing list that stretched to nearly 800,000 names at one point.
Found via Abnormal Returns. The Warren Buffett quote that comes to mind: "We don't have to be smarter than the rest. We have to be more disciplined than the rest."
I know a girl who, despite a flimsy record of personal achievement, has made a living out of being optimistic. People are so desperate to hear feel-good messages they pay her money to be told, “You’re special and you can do it!” Of course, this girl isn’t alone. The entire self improvement industry and what appears to be half of my Facebook newsfeed consist of similar proclamations of “follow your dreams!”
Wednesday, May 22, 2013
Great summary of how Apple’s tax set-up works.
This an excerpt from the book Hedge Fund Market Wizards. The bold font is Jack Schwager’s remarks and the non-bold font is Jamie Mai’s comments. This isn’t exactly how it appeared in the book, as certain paragraph breaks and italics were omitted as I highlighted things in batches on my Kindle. I thought it was an interesting trade that is probably still relevant today if one wanted some cheap upside exposure to the market without having to risk too much capital, though you probably need a significant amount of capital under management in order to have access to this kind of trade.
We have a trade on now that I really like. I don’t know if you read Jeremy Grantham of GMO. He is a widely respected value investor who looks across all asset classes and writes commentaries and editorials about what he is seeing. For some time now, he has been arguing that high-quality, consumer oriented franchises, particularly those that have great international brands, are cheap relative to the rest of the S&P based on both dividend yield and enterprise value to cash flow. In my view, he has laid out a fairly compelling argument that places relative valuations in the context of a cycle, wherein the low-quality names tend to outperform early in the cycle, and the high-quality names tend to outperform toward the end of the cycle. There is an index called the XLP, which is an index of U.S. consumer staple companies such as Procter & Gamble, Coca-Cola, and Johnson & Johnson. If Grantham is right, at some point we should see a revaluation of the stocks in this index.
I assume that in the current cycle since the 2009 low, the XLP has gone up less than the S&P?
It has gone up a lot less. Initially, we considered buying options on the XLP, which were relatively inexpensive. But Ben came up with a much better way to structure the same trade idea based on the XLP’s low beta of 0.5 versus the S&P500.
One observation that we found particularly striking was that despite the XLP’s low beta, since the start of the index at the end of 1998, the net percentage changes in the XLP and the S&P over the entire period were almost identical. The XLP was up less in the bull markets and down less in the bear markets, but for the period as a whole, the net change was about the same. Seeing that both indexes had approximately the same net change over a long period—a period that included both the Internet boom and bust and the credit boom and bust—makes the notion that the XLP has a beta of 0.5 versus the S&P seem counterintuitive if applied to longer periods. In addition, we thought that cash flow and dividend valuations implied the potential for a 25 percent revaluation of the XLP versus the S&P. We went to an exotic option dealer and asked them to price an outperformance option that would be based on the performance of the XLP versus the S&P. What is the single measure that the dealer is going to use to price the odds that the XLP will outperform the S&P?
Right. So with the beta equal to only 0.5, the model price for an outperformance option was very cheap. Translated into English, those inputs are saying that the XLP and S&P are likely to move in the same direction; however, the XLP will move only half as much as the S&P.
But if we had a down market, then the lower beta would imply a higher probability of outperforming—namely, it would imply that the XLP would go down less than the S&P.
That’s a great point, and it is the reason why, to get the option cheaply, we had to strike the option at the current spot price. So there was a dual condition for the option to pay off: The XLP had to outperform the S&P and the S&P had to be unchanged to higher. This was essentially a conditional long beta position. It was conditional on the XLP outperforming the S&P, and it was long beta because it could only pay off in an up market.
What made you think the timing for the trade was right?
We didn’t have any conviction that the market was going higher. We almost always want to have some long beta exposure, however, and by making the option conditional on the XLP outperforming the S&P, we were able to get beta exposure to the market extremely cheaply. When you own options, you’re always fighting against the time decay. Figuring out how to make the option premium cheaper is one way of mitigating that decay.
So the basic premise is that beta is measured based on daily relative price changes, which can be a very poor indicator of long-term relative price changes.
Right, a fact that is obvious if you look at a long-term chart comparison of the XLP versus the S&P. Volatility is a terrible proxy for measuring potential price change over longer intervals of time. For example, if an asset price changes by a constant percentage each day, its volatility will be zero. One of our strategies is called cheap sigma and is predicated on the idea that markets sometimes trend and that volatility will dramatically understate the potential price move of markets that trend.
Tuesday, May 21, 2013
Kyle Bass hopes he is wrong, and so may everyone else, as the danger predicted by the founder of Dallas-based Hayman Capital is nothing less than a full blown financial crisis in the world’s third-largest economy, Japan.
Monday, May 20, 2013
Thanks to Serge for passing this along.
Related previous post: The Manhattan Project to End Fad Diets – By Tim Ferriss
Quote from Johann Peter Rupert on Compagnie Financière Richemont’s May 16th Earnings Call, in regards to investing in their own people and brands versus going out an acquiring new ones:
“A return on investment is so much higher by backing our own colleagues. I mean, it's multiple than buying another thing. And we have a saying at home that you only find out when you climb over that the reason why it's greener is because of all the cow dung that's hidden in the grass. And as soon as you start stepping in all of this stuff, then you wonder why did I climb across the fence? So whenever we buy something, we find that, we'd never thought of this, but it's there. And then it takes the most valuable component of these 3 guys on the right. It takes their time and you start wasting time on things that are not going to return -- give you the same returns, as if you spend more time on Cartier, Van Cleef and Piaget.”
I predicted in Endgame that the latter half of this decade would see the most serious currency wars since the end of WWII. The opening shots have been fired. This will not be just a continuation of the currency skirmishes we have seen in recent decades. No, the real artillery is being brought to the front. And as in any war, it is best not to have your valuable personal possessions anywhere near the field of conflict. But which way to run? Who are the good guys to run to? Are there any good guys at all? Maybe the better question to ask is, who will win? Will there be any winners? Do you really want to look like Rocky Balboa after his first winning fight?
Even in the event that quantitative easing is sufficient to override hostile market conditions in the near-term, it is worth noting that long-term outcomes are likely to be unaffected. We presently estimate a prospective 10-year total return on the S&P 500 Index of just 2.9% annually (nominal). See Investment, Speculation, Valuation and Tinker Bell for the general methodology here, which has a correlation of nearly 90% with subsequent 10-year market returns – about twice the correlation and nearly four times the explanatory power as the “Fed Model” and naïve estimates of the “equity risk premium” based on forward operating earnings.
Friday, May 17, 2013
Former Fed Chairman Paul Volcker warned of the risks of an asset bubble forming given the incredible amount of liquidity the Bernanke Fed has injected into the market, even though he said banks are substantially stronger than before the crisis on Wednesday. Volcker also indicated that in the U.S. government makes up about 35% of GDP and that the financing of the residential mortgage market by the state has led to a dysfunctional financial system.
Thursday, May 16, 2013
Anointed the next Steve Jobs by some admirers, Twitter inventor and Square CEO Jack Dorsey is one of the few people who can get the Silicon Valley press corps to roll out of bed early to hear what he has to say. Unlike Jobs, Dorsey spoke from a table at Blue Bottle Coffee near Square’s San Francisco headquarters, not the stage of the convention center down the street. Also unlike Jobs, he didn’t announce a product that at first glance seemed ready to detonate our digital lives and rearrange the pieces in a fundamentally new way.
“Survivorship bias can become especially pernicious when you become a member of the “winning” team. Even if your success stems from pure coincidence, you’ll discover similarities with other winners and be tempted to mark these as “success factors.” However, if you ever visit the graveyard of failed individuals and companies, you will realize that its tenants possessed many of the same traits that characterize your success.” –Rolf Dobelli, The Art of Thinking Clearly
From Security Analysis, 1940 edition:
Our appreciation of the importance of selecting a “good industry” must be tempered by a realization that this is by no means so easy as it sounds. Somewhat the same difficulty is met with in endeavoring to select an unusually capable management. Objective tests of managerial ability are few and far from scientific. In most cases the investor must rely upon a reputation which may or may not be deserved. The most convincing proof of capable management lies in a superior comparative record over a period of time. But this brings us back to the quantitative data.
There is a strong tendency in the stock market to value the management factor twice in its calculations. Stock prices reflect the large earnings which the good management has produced, plus a substantial increment for “good management” considered separately. This amounts to “counting the same trick twice,” and it proves a frequent cause of overvaluation.
Wednesday, May 15, 2013
Picture below....no further comment needed:
Found via RDFRS. The scientific discovery made by Dr. Shimomura is a reminder of the kind of happy accident or serendipity that is often the source of major breakthroughs.
LOS ALAMOS, N.M. — Sixty-eight years ago, Osamu Shimomura was a 16-year-old high school student working in a factory seven and a half miles from Nagasaki, Japan. Sitting down to work, a light flashed, briefly blinding him, and the pressure wave from an explosion came rolling through.
Tuesday, May 14, 2013
Found via Broyhill Asset Management.
“Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw there from. Whenever calculus is brought in, or higher algebra, you could take it as a warning that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.”
Monday, May 13, 2013
Via Market Folly. This was interesting: "James Montier said that GMO’s 7 year asset allocation model for US stocks is now predicting negative returns. GMO are now 50% in cash."
It is graduation time, and this morning finds me swimming in a sea of fresh young faces as a young friend graduates, along with a thousand classmates. But to what? I concluded my final formal education efforts in late 1974, in the midst of a stagflationary recession, so it was not the best of times to be looking for work. It turned out that I had a far different future ahead of me than I envisioned then. But I would trade places with any of those kids who graduated today, as my vision of the next 40 years is actually very optimistic. With all the advances in healthcare, technology, and communications that have come and will come, they will get to embrace a world full of opportunity; and yet, this generation is starting out with more than just a minor economic handicap.
In these days of frivolous entertainments and frayed attention spans, the people who become famous are not necessarily the brightest stars. One of the biggest hits on YouTube, after all, is a video of a French bulldog who can’t roll over. But in amongst all the skateboarding cats and laughing babies, a new animated video, featuring the words of a dead theoretical physicist, has gone viral. In the film, created from an original documentary made for the BBC back in the early Eighties, the late Nobel Prize-winning professor, Richard Feynman, can be heard extolling the wonders of science contained within a simple flower.
There is “beauty”, he says, not only in the flower’s appearance but also in an appreciation of its inner workings, and how it has evolved the right colours to attract insects to pollinate it. Those observations, he continues, raise further questions about the insects themselves and their perception of the world. “The science,” he concludes, “only adds to the excitement and mystery and awe of the flower.” This interview was first recorded by the BBC producer Christopher Sykes, back in 1981 for an episode of Horizon called “The Pleasure of Finding Things Out”. When it was broadcast the following year the programme was a surprise hit, with the audience beguiled by the silver-haired professor chatting to them about his life and his philosophy of science.
Now, thanks to the web, Richard Feynman’s unique talents – not just as a brilliant physicist, but as an inspiring communicator – are being rediscovered by a whole new audience. As well as the flower video, which, to date, has been watched nearly a quarter of a million times, YouTube is full of other clips paying homage to Feynman’s ground-breaking theories, pithy quips and eventful personal life.
Related link: The Life of Richard Feynman
Sunday, May 12, 2013
“For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.”
I’ve often noted that even a run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance. I doubt that the present instance will be different. Indeed, cyclical bear market declines that occur in the context of secular bear markets average a market loss of about 39%, wiping out about 80% of the prior bull market advance. We presently estimate a nominal total return for the S&P 500 of just 3.2% annually over the coming decade. It is not pessimism, but optimism – and optimism born of a century of evidence – that we expect stocks to provide more favorable opportunities for investment over the completion of this cycle. It is that carefully-studied optimism that leads us to reject the notion that investors are forced to crawl to the ground and “lock in” low prospective long-term returns, while ignoring severe intermediate-term risks to capital.
I’ll note in passing that the Shiller P/E reached 24 last week (S&P 500 divided by the 10-year average of inflation-adjusted earnings). Secular bear market lows have typically taken the Shiller P/E below 8 before durable secular bull market advances have taken hold. Valuations are a long way off from that, though I would expect at least one or two more complete bull-bear cycles to emerge before the market achieves valuations that would support a durable secular uptrend. There will be plenty of significant opportunities to periodically accept market exposure even if a secular bull market is nowhere in sight.
The perception that investors are “forced” to hold stocks is driven by a growing inattention to risk. But Investors are not simply choosing between a 3.2% prospective 10-year return in stocks versus a zero return on cash. They are also choosing between an exposure to 30-50% interim losses in stocks versus an exposure to zero loss in cash. They aren’t focused on the “risk” aspect of the tradeoff, because they believe that they will somehow be able to exit stocks before the tens of millions of other investors who hold identical expectations.