Good reads from around the Web.
I couldn’t agree more with an article I read this week on BeyondProxy talking about how the world is chaotic, so you might as well deal with it.
Stability in markets begets instability. Always has and always will.
This is one reason I think financial regulation has its limits, incidentally, and why savers and consumers should sometimes take one on the chin for the common good. That way we’re all encouraged to be more prudent and self-reliant, rather than everyone being cushioned, compensated, and bailed-out to the point of abdication.
The more people believe that something can’t fail, the more of it they will take on, eventually including leveraging up to get more – if not explicitly through debt then through some shadow agent or the dumping of diversification or in some other way getting too much of the good thing.
Nothing can be pushed beyond its limit, not even supposedly risk-free assets.
Consider the negative yields on the average German government bond. One of the safest assets in the world is now guaranteeing a loss to its holders, and stoking the potential for myriad different outcomes (which is what ‘risk’ really means) that are not all pleasant (though some are – because risk doesn’t mean that only bad things can happen).
I’ve no more idea than anyone else how or when this slow death of yield ends.
But I suspect it will be with a bang, not a whimper.
Learning to fear stability
BeyondProxy author Michael McGaughy writes:
Twenty-five years ago as a young analyst I loved analyzing companies that had steadily increasing sales, constant profit margins and growing profits. This made my financial projections easy.
However experience has taught me not to trust steady returns and stability.
The business world is competitive and anything but stable. I now believe that ‘stable’, ‘no risk’, and ‘guaranteed return’ are some of the most frightening words in business and investment.
Consider the following:
- Bernie Madoff’s funds got big by seemingly delivering steady monthly returns in both up and down markets. As we know now, it was all a fraud.
- Before it went bankrupt, Enron was well-liked by sell-side analysts and investors for meeting analyst estimates. It steadily met expectations and was considered a stable and safe company. But it was mostly smoke and mirrors before it became America’s largest bankruptcy.
- The desire for, and fallacy of, steady growth is nothing new. Adam Smith (aka George Goodman) wrote about the illusion of steady growth in his 1972 book SuperMoney. “Everywhere you looked, there was a company with a neat stepladder of growing earnings. Some kept the stepladder right up to the day they filed for bankruptcy”
- In his commentary on Dell being fined by the SEC for fraudulent accounting designed to smooth earnings, author and Darden School of Business professor Edward Hess notes that, “companies that grow for more than four consecutive years without resorting to earnings games are the exception, not the rule”
McGaughy goes on to to sing the praises of instability for giving us all the wonderful change we see in the world – at the price of the occasional wobble.
Remember every investment can fail you. Don’t put all your eggs in one basket – and ideally have a few chickens about the place, too!
Beyond that, I say embrace the world like a buccaneer, not as a sailor who thinks the world is flat.
There be dragons!
From the blogs
Making good use of the things that we find…
- An interview with passive guru Rick Ferri [Podcast] – The Big Picture
- Why individual investors do so poorly – Charles Sizemore
- So, not really that passive – Pragmatic Capitalism
- A deep dive into Smart Beta allocation [Bit nerdy] – Capital Spectator
- A step-by-step guide to investment analysis [PDFs] – ShareScope
- 12 things learned from Stanley Druckenmiller about investing – 25iq
- Howard Marks interviews Joel Greenblatt [Video] – YouTube
- Investing in Woodford’s Patient Capital trust – Richard Beddard
- How to think like a trader – The Kirk Report
- Uh oh! US Equity investors are optimistic again – The Reformed Broker
- How to avoid being a forced seller in a market panic – The Aleph blog
- Early retirement doesn’t mean no work (hopefully!) – Mr Money Mustache
- Equities in retirement portfolios – Retirement Researcher
- Forecasting versus explaining [On economics] – Stumbling and Mumbling
Product of the week: Barclays current account customers will be offered up to £144 a year through a new cashback scheme from Monday, but The Telegraph says there are better offers elsewhere, not least a decent interest rate with Santander’s 1-2-3 account.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- A solution for the passive bond investor [Search result] – FT
- Swedroe: The case for indexing – MutualFunds.com
- The balanced 60/40 fund is a classic – NY Times
- The best investors just love investing – Forbes
- The case for active management weakens [Search result] – FT
- Swedroe: The mystery of hedge fund survival – ETF.com
- Why Goldman Sachs downgraded the miners – Interactive Investor
- Should you be reading Ben Bernanke’s blog? – Bloomberg
Other stuff worth reading
- Even a Telegraph writer thinks extending right-to-buy wrong – Telegraph
- Don’t expect a repeat of buy-to-let’s stellar gains – ThisIsMoney
- Chart showing there are effectively 12 rates of income tax – Telegraph
- Fighting the bubble in bubbles – Bloomberg
- Understanding the help-to-buy schemes – Guardian
- How couples can resolve fights over money – WSJ
- Housel: It’s all so obvious (in hindsight) – Motley Fool US
Book of the week: I didn’t notice that Robert Shiller of CAPE and Nobel prize winning fame has a new version of Irrational Exuberance out. A must-read for bubble watchers, the new edition has been updated to take into account the financial crisis and what Shiller sees as its speculative aftermath.
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- Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]