Good reads from around the Web.
I met my friend The Bear last week for one of our occassional wanders through London.
The Bear is not his real name – he is not a character from a Disney movie, or even a gangster from a Guy Ritchie one.
He is however invariably pessimistic about something – hence a bear in investing terms – and I do enjoy his entertaining rants.
Not just doom and gloom
I have other reasons to meet up with The Bear, besides getting myself a healthy dose of anti-euphoria.
For one thing he kindly hands over past issues of the cult US investing newsletter Grant’s Interest Rate Observer [1] – delivering a big batch that I carry about in a Tesco bag during our wanderings, before starting to work my way through them on the Tube before I’m even home.
More on that later.
The other reason I value talking to The Bear about investing is that while he can seem dogmatic in his views, he is not dogmatic in how he should respond to them.
For example he is apoplectic about what he sees as the rigged and ruinous nature of the UK property market (he swears a lot about everything) but that hasn’t stopped him owning shares in UK housebuilders, which he plans to dump before his predictions of a downturn come true.
And like his hero James Grant of the Interest Rate Observer fame, he is scornful about the utility of extended low interest rates and QE.
Yet The Bear has profited from owning shares in certain UK banks in the past few years, which he bought when they were cheap enough to withstand even his gloomy outlook.
I also like how he’ll make a dozen small bets, knowing he might lose all his money on half of them but with the chance of 2-5-10-fold returns on those that do prevail. (Bankruptcies, deeply discounted rights issues and the like).
That’s what the maths says makes sense, but very few stockpickers have the fortitude to carry it out.
Are we there yet?
I should say that I don’t actually know if The Bear has beaten the market, for all this sparky thinking and stock picking effort.
I discuss investing with him for intellectual stimulation and to challenge my own views, not for actionable advice.
(Indeed if I do ever achieve my aim of persuading him to write occasionally for Monevator, this will be the motivation.)
One thing that makes it difficult to judge any investor’s world view, let alone their performance, is timing and timescales.
For instance, I put it to The Bear that perhaps Grant’s subscriber list had shrunk, given that the publication has been warning of the dangers of a reckless Federal Reserve and the folly of selling your gold for several years now in which the US economy and market has actually recovered and gold has tumbled down the toilet.
A subscription to the fortnightly Grant’s Interest Rate Observer [2] costs $1,175 a year. Small change for a hedge fund perhaps, but not so trivial that you wouldn’t want to think the authors were occasionally getting something right?
My friend responded with the classic defense of the unrequited pessimist…
…namely: “It’s still too soon to tell. Wait until it’s over.”
Waiting for the Fat Lady
This sentiment is the ready retort of anyone whose downside bet has gone against them.
It was long my rallying cry against soaring London house prices, until I decided it’d be better to shut up than cry wolf for another decade. (Many others have since taken up the call).
It’s also what optimists think when they buy in the midst of bear markets, even if they quote Warren Buffett rather than reach for the mantras of more pessimistic folk.
“Wait until it’s over” is a strong defense, because you can’t argue with the logic – because you can rarely be sure it’s over.
It’s true that Grant’s and others who’ve warned of all kinds of toxic fallout from QE have – as my friend suggested – become almost laughing stocks when they appear on CNBC and the like nowadays.
My friend (and no doubt Grant too, for he is a formidable student of the markets) sees this as a sign that the last days of the current bull run may be upon us.
Equally, it’s easy to forget how terrified everyone was of QE when it began, even though investors and pundits today tend to cheer it whenever they see it and now fear tighter money instead.
I admit I expected [3] inflationary consequences, like most other onlookers.
But today? Inflation? On the contrary, we only recently saw some deflation.
The Bear would say you need to look at elevated asset prices and depressed yields to see where QE-stoked inflation has had an impact.
I’d retort that I don’t remember many of the doomsters saying “buy bonds and equities because of QE”.
In fact, quite the opposite.
“Buy gold because the dollar will soon be worthless” was more their sentiment at the time.
You told them ‘not to fight the Fed’ all you liked (and I did). This time was apparently different.
Whoops!
In truth all of us take what we can and justify it as we go along to some degree, however much we try to stay alert to these sorts of behavioural flaws [4].
Long-term buy and believe
Now, most of you are passive investors, to whom this post has been at best a semi-interesting diversion that’s probably outstaying its welcome.
However don’t think you’re not betting on the same sort of reversions that my friend is looking for.
Passive investors in equities and are other assets are not neutral on the direction of those prices in the long-term.
On the contrary, their implicit position – which of course I think is eminently sensible – is that while ups and downs are apparent on a graph of stock market returns, over the long-term, for most markets, the trend is definitively higher.
What would you tell a cynical family member who said you were wasting your money, given that shares were down but you were still pumping your hard-earned cash regularly into your index funds?
“It’s too soon to say that,” would be your reply. “Let’s wait and see over the long-term.”
You don’t know Jack
The truth is whether we’re passive investors, permabulls, or inveterate doomsters betting on a crash, we only have so many decades, which means we can only afford to take so many steps back from those graphs.
Eventually our time horizon shrinks to such an extent that the zags down on the graph look more like ravines, and the zags up more like distant summits that always seem to be just another valley out of reach.
That’s why we’re told to reduce our exposure to riskier assets as we age [5].
It’s also why we diversify – in case we’re climbing the wrong mountain.
How things turn out are only ever obvious in hindsight. I’m always reading Grant’s 12-18 months after it publishes its (always extremely readable) thoughts, which could make me feel like a genius if I’m not careful.
I know better than they do! True, I haven’t seen the ending but I have seen the spoilers.
But real life is not like reading old publications, obviously. However we invest, and wherever we think things are going, we’ve walking along with our hands outstretched, feeling our way through the fog.
One reason passive investing works so well is because it acknowledges and even exploits such uncertainty with a humble and automatic strategy that can cope with almost anything that looms out of the gloom.
Us more egotistical active investors have to work hard to remember we know nothing, and to challenge our preconceptions all the time.
Reading yesterday’s thoughts from the super-smart writers at Grant’s – and debating The Bear’s gruesome stories in the moment – are some of the ways I try to do that myself.
From the blogs
Making good use of the things that we find…
Passive investing
- A great Q&A with Charley Ellis – The Evidence Based Investor [6]
- Selling capital to generate an income – diy investor (uk) [7]
Active investing
- Revisiting Apple, Facebook, and Twitter – Musings on Markets [8]
- Is it so bad to close the market for a week? – Value Perspective [9]
- How two of history’s greatest investors deal with losses – Josh Brown [10]
- Beyond value traps: The value graveyard – Oddball Stocks [11]
- 10 questions for a long-term investing checklist – iii blog [12]
Other articles
- Staying in your job after financial independence – The Finance Buff [13]
- An interview with the man [re-issue] – The Escape Artist [14]
- How inflation affects returns – A Wealth of Common Sense [15]
- I need an IFA? What a stitch-up… – Simple Living in Suffolk [16]
- Podcast with journalist legend (and Buffett pal) Carol Loomis – Longform [17]
Product of the week: Feeling heady about the future of English cricket following the Ashes triumph? Surrey county cricket club surely suspects as much – which might be why it’s just launched its 5.5% paying five-year mini-bond (as reported in The Guardian [18]) to fund a new stand at the Oval. Remember that mini-bonds have particular risks, and are not protected by the FSCS.
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 [19]
Passive investing
- A financial plan on an index card – USA Today [20]
Active investing
- Ken Fisher: Grow your own dividends [Search result] – FT [21]
- Which asset classes are out of favour? – Interactive Investor [22]
- Is Google’s Alphabet a tech Berkshire Hathaway? [vid] – Motley Fool [23]
- Discounts widen on UK-listed China funds [Search result] – FT [24]
Other stuff worth reading
- Lessons from the long US bull market – Morningstar [25]
- Time is an investing ally, not an enemy – Bloomberg [26]
- Right-to-buy has been a definitive disaster – Guardian [27]
- £1,083 a month, for what’s seemingly a shed in Hackney – Guardian [28]
- £96,000 extension added £600,000 to house price [vid] – Telegraph [29]
- Beware of recycled bank accounts – Telegraph [30]
Book of the week: Disney shares dropped recently when it said an ongoing decline in cable subscribers could hit revenues at ESPN, its lucrative US TV brand. I think we underestimate this trend in the UK, what with the dominance of the BBC, Sky, and to a lesser extent ITV, but you can’t fight technology. With Amazon selling its powerful Fire TV Stick [31]
Like these links? Subscribe [32] to get them every week!
- Note some 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”. [↩ [36]]