Category Archives: Investing

Has the Dow Left You Dazed and Confused?

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Let’s set aside the fact that the Dow Jones Industrial Average is a flawed measure of the overall stock market.  The media, your parents, and their parents have all accepted the Dow as the standard.  Besides, over time the Dow does move in line with the overall market.  So instead of arguing semantics, let’s talk about the headline: a 4-digit drop in the Dow today along with a 600+ point drop on Friday. While the average person associates the Dow with the overall market, we should also recognize that the media loves the Dow because of the potential for attention grabbing headlines.  To paraphrase Wooderson in Dazed and Confused: That’s what I like about the Dow, the points get bigger, but the size of the returns stays the same. On average, the S&P 500 experiences a drawdown of 14% every year.  If we apply that average to the Dow, it would…

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Doing Good While (Hopefully) Doing Well

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Each year, BlackRock’s Chairman and CEO, Larry Fink, writes a letter to CEOs of “leading companies” in which BlackRock’s clients are shareholders.  Last year’s letter encouraged long-term thinking in the context of a world that is increasingly focused on short-term volatility.  This year’s letter strikes a similar tone, but goes a step further in mentioning environmental, social, and governance (ESG) matters as factors CEOs should be considering in their long-term strategies.  Socially responsible investing (SRI) is gaining traction among investors.  Is this just kumbaya investing or is it for serious investors, too?  Why would anyone do this?  On the other hand, why would anyone NOT do this? The Basics ESG and SRI are sometimes used interchangeably, but they are different.  SRI is the broad overarching investment thesis of the movement.  ESG filters this mandate through three lenses, environmental, social, and governance.  SRI is open to personal interpretation just like the…

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‘Bron, ‘Bama, and the January Effect

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  The NBA may as well cancel the rest of the season.  Why?  Alabama won the college football championship, of course!  This means LeBron James is sure to win a title of his own: This reminds me of the January effect in the markets.  The thinking is that if January is positive, the year as a whole will be positive and if January is a down month, it means negative returns for the year as a whole.  That’s totally ridiculous, of course.  The January effect ‘feels’ right because most months are positive and most years are positive.  Since January is the first month of the year, humans tend to add emphasis to it whether it is deserved or not.  Similarly, Alabama has had a great football program for the last decade and LeBron has been the best player in the NBA for about the same time (don’t @ me).  It…

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Tone Deaf on ETFs

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A couple of major announcements in the Exchange Traded Fund (ETF) world last week: State Street announced that they slashed the expense ratios on a ton of their ETFs and TD Ameritrade added a ton of ETFs to their ‘no-commission’ platform.  At first glance, this is great news.  Cheaper beta is available to more investors.  However, this is actually tone-deaf and a transparent money grab.  Hopefully, investors will show that they know better. Huh? State Street’s fee reductions are late in arriving.  Vanguard and iShares have been eating State Street’s lunch for years, in large part due to lower expenses.  Will investors flock to State Street now that it is the low-cost provider?  Perhaps the dumb ones will.  Investors who have money with Vanguard or iShares likely have huge gains.  Selling these positions to save a couple of basis points would be penny wise and pound foolish. While it is…

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Wrongness and a Strange Animal

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Investing is such a strange animal.  You can be wrong and still make money.  You can be right and still lose money. I have been wrong on high yield bonds for the last couple of years.  I didn’t like the energy component of the space.  Oil prices were falling due to the shale revolution and it looked like companies that had sold bonds to make ends meet were overextended.  I feared that just a couple of bankruptcies could spread to the entire high yield space, dragging everything down. That didn’t happen.  Despite some private equity funds over-reaching, the space mostly adapted to low oil prices by cutting costs and developing technology to get oil out of the ground more efficiently.  Investors continued to buy up high yield bonds in a chase for yield. I was wrong, but I’m happy to take the L on my record for this one.  Piling…

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Wrongness and a Strange Animal

Posted on in Due Diligence, Finance News, Investing | 0 comments

Investing is such a strange animal.  You can be wrong and still make money.  You can be right and still lose money. I have been wrong on high yield bonds for the last couple of years.  I didn’t like the energy component of the space.  Oil prices were falling due to the shale revolution and it looked like companies that had sold bonds to make ends meet were overextended.  I feared that just a couple of bankruptcies could spread to the entire high yield space, dragging everything down. That didn’t happen.  Despite some private equity funds over-reaching, the space mostly adapted to low oil prices by cutting costs and developing technology to get oil out of the ground more efficiently.  Investors continued to buy up high yield bonds in a chase for yield. I was wrong, but I’m happy to take the L on my record for this one.  Piling…

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No, the Secret Sauce

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“I thought you guys had some sort of insider’s edge and that’s how you get returns for your clients’ investments…?” My friend was grilling up burgers and dogs for his kid’s birthday party while picking my brain about investing.  He was surprised to find out how vanilla our investment philosophy is.  No secret sauce.  No insider tips.  I don’t know a guy who knows a guy.  Just control what you can control.  A sensible asset allocation and a financial plan puts you ahead of most people. He was right, though.  We do have a special investment technique. We say no. We say no to high-cost, low value-add money managers.  No to the absurd, overly-complicated, sketchy, and irrelevant.  It’s not always an easy no, though.  In some cases, we have to work to get to no. In 2012, we were pitched an energy LP.  It was a helluva pitch.  Polished presentation….

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Chasing Risk

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  I read the Howard Marks memo last weekend and you should, too, if you haven’t already.  The memo got me to revisit some of my investing viewpoints.  It’s easy to listen to the same investment philosophy on repeat.  My fear is that one day I’ll look up and find that everyone’s streaming their investment philosophy on their phones while I’m listening to a walkman.  So I read everything I can.  Howard Marks is one of the very best.  He’s usually a bit cerebral for me, but the latest memo is perfect.  I ran out of highlighter halfway through my first read. Right off the bat he lays out four conditions that he sees in the market: unusual uncertainties, low prospective returns, high asset prices, and rampant pro-risk behavior.  I don’t agree with him on the first two points, but asset prices do seem high.  I have a man-crush on…

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As Seen on TV Asset Allocation

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I want to saw a boat in half, then tape it back together and take it out on the water.  I didn’t know I wanted to do this until I saw a commercial that runs during Cleveland Indians games.  The spokesperson could be the dad on any sitcom, straight out of central casting.  This enthusiastic Everyman uses a miracle tape to fix everything from underwater leaks to boats that have been sawed in half.  I have absolutely zero need for this stuff, but I feel compelled to buy some.  Why?  For the same reason we have to talk certain clients out of an As Seen On TV Asset Allocation. Universal Theory of Infomercials My wife has a universal theory of infomercials.  She says the key to a good infomercial is to take something simple and make it look like rocket science.  Sure, your current knife can cut a tomato, but…

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Outsourcing to an Absentee Investment Committee

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They say there’s no such thing as a stupid question.  They are wrong.  Ask stupid questions, get stupid answers.  The Let Me Google That For You website is the perfect passive-aggressive answer to many stupid questions.  Rather than simply answering the question, LMGTFY provides a link that walks through the steps to google the answer.  For example, “How much does a polar bear weigh?”  Why do I bring this up?  As I have mentioned in other posts, sometimes all the due diligence you need can be found with a quick Google search.  Harry Markopolos says he’s uncovered some huge due diligence mistakes by the Boston Transit Authority (MBTA) and at least some of them would have been avoided with a quick internet search. Harry Markopolos If you’re unfamiliar with Harry Markopolos, he’s a modern day Cassandra.  Markopolos warned about the Bernie Madoff Ponzi scheme for years before it collapsed.  The authorities…

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