Good reads from around the Web.
The road to knowing a lot about investing is paved with knowing a little bit.
And as we all know, a little bit of knowledge is a dangerous thing.
I’ve seen the pattern on this very website. A new actively-minded reader will discover Monevator, often via one of my more actively focused articles, and then start commentating on other posts around the site.
They’ll usually state how they’re not stupid enough to put money into bonds or how they’re very cleverly positioned in the investing theme de jour (dividends, gold, and emerging markets at various points over the past few years).
Or, if you go back far enough, you’ll find them saying how unlike those other lemmings they aren’t being fooled by the bull market at all.
(Indeed the Armageddon-blog Zero Hedge now seems to be a support group for these particular people.)
Damascus is lovely at any time of the year
Anyway in time the market does what it does, which is punish over-confidence and piss on hubris.
Usually we don’t hear much from these chastened geniuses again, but a few have become regulars on my co-blogger The Accumulator’s articles. As best I can tell they’ve become largely passive converts.
I don’t point this out to mock them, but rather to applaud them.
For most people true wisdom in investing means coming to understand how little is knowable – especially if you need to slap timing onto the reckoning sheet – and instead focusing on what is controllable (costs, taxes, asset allocation, and your personal savings rate).
If like me you do carry on active investing (and my allusion to the famous old movies is entirely deliberate) then you had best be doing it with a mug of humility on the desk next to you.
It is happening again
One of the most consistent newish investor foibles is a belief that they can perceive market tops that somehow everyone else has missed.
They’ve all seen an asset crash or two and read all the quotes, and they can’t wait to opine that “this time is never different” or “We’ve seen this movie before and it ends badly”.
But we usually haven’t seen exactly this movie. To offer another over-exposed quote, history doesn’t repeat itself, it rhymes.
Markets rise and fall, but if the moves were as easily forecast by people who’ve done little more than read a few articles on Warren Buffett, we wouldn’t get stock market bubbles or busts.
Reality is far trickier, except with hindsight.
The continuing advance of both the US stock market and the bond market are current examples; the strength of London property a longer-standing one that’s totally humbled yours truly.
People have been wrong about these markets for years. Each will someday decline, but someday is another matter.
Boringly true
The brilliant blogger Ben Carlson points out that the quote “I’ve seen this movie before and it ends badly” is almost invariably used by doomster pundits, who are wrong far more frequently than they’re right.
It’s potent because it sounds so sassy and dark.
In reality, anyone who has seen the movie of the markets before knows that – over anything other than the short-term – it mostly doesn’t end badly.
As Carlson says:
No one ever says, “I’ve seen this movie before and it ends with higher dividend yields, lower prices, better valuations and higher expected returns.”
Over the long-term, investing in Western stock markets hasn’t been anything like a movie, but more like a long-running soap opera.
One that has continued remarkably.
p.s. My runner-up post of the week has to go to Morgan Housel. He made me laugh out loud when lamenting the poor state of US infrastructure and pointing out that someday it will inevitably need to be addressed, writing: “You can’t just let critical bridges and water structures fail and say, ‘Damn. That Brooklyn Bridge was nice while we had it.'” Touché!
From the blogs
Making good use of the things that we find…
Passive investing
- Someone is always outperforming your portfolio – PragCap
- Bonds are supposed to be boring – A Wealth of Common Sense
- Forecasting 30-year asset class returns – Rick Ferri
- Even quiet markets are risky – The Investor’s Paradox
Active investing
- A new 5.875% from IPF – Fixed Income Investor
- When beating the market is not enough – UK Value Investor
- The GM buyback: Beyond the hysteria – Musings on Markets
- Deep dive into the 3G/Buffett Kraft-Heinz deal – Brooklyn Investor
- Howard Mark’s latest memo; on liquidity – Oaktree Capital
Other articles
- Your ideal self versus your financial self – Abnormal Returns
- We’re tits to borrow for tat – Simple Living in Suffolk
- Leverage and success – Oddball Stocks
- The miserable maths of lifestyle inflation – The Escape Artist
- How to cut your electricity bill by 80% – Mr Money Mustache
Product of the week: Virgin Money has launched a new one-year fixed cash ISA paying 1.65% and a five-year option paying 2.35%. That makes them both Best Buys, reckons ThisIsMoney.
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
Passive investing
- Money managers RIP – Institutional Investor
- What happens when Vanguard owns everything? – MorningStar
- Swedroe: Avoid famous, authoritative experts – ETF.com
Active investing
- The big risk of ‘unconstrained’ bond funds – Fortune
- Retail bonds are back – Interactive Investor
Other stuff worth reading
- How to build a portfolio [Search result] – FT
- Merryn: Slow death of equity market is bad news [Search result] – FT
- Actor evicted because he sublet a room on AirBnB – Guardian
- Where to get a two-day mini-break for £100.04 all-in – ThisIsMoney
- Advice from Charlie Munger – Motley Fool (US)
- How seed VC Chris Sacca made his $1 billion – Forbes
Book of the week: Book reviewers and Silicon Valley insiders are raving about the new biography Becoming Steve Jobs
Like these links? Subscribe to get them every week!
- 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”. [↩]
If Shiller doesn’t know that the US market can grow higher or not does an average investor know? “Maybe it will continue to grow”http://finance.yahoo.com/news/european-stocks-are-cheaper-than-the-u-s—yale-s-robert-shiller-205754633.html
@Gregory — To be clear, I don’t have any argument against people deciding this market is too high or that stock too low or underweighting this or that or wotnot. I’d be pretty hypocritical if I did! 🙂
What annoys me — and what I’d wager has repeatedly done their investment returns few favours at all — is the smug certainty that I periodically encounter.
Shiller is showing his wisdom his use of the word “maybe” as much in as anything else there…
@Investor I’ve just referred to Schiller’s humility regarding the markets. So we agree.
I am no financial aficionado, hence my journey on these and other pages online and in print. The difference on Monevator and in a very few other blogs and sites is that point on humility.
I base my choices of whom to follow partly on whether there is a clearly defined ‘enemy’ against which their ‘philosophy’ is based. If there is a clear sense of ‘enemy’ I take their advice a lot less seriously, although I admit it can be rather seductive.
Take MMM for instance. I do enjoy his posts and ideas, but there is a supercilious element which I struggle with. That someone requires someone or something to rail against in order to support or define their lifestyle choice worries me. I detect a similar stance with TEA which for me detracts from the useful ideas and thoughts on his site.
This element of despising the ‘other’ way of life, investing, working or whatever, reeks of a recognition of that in themselves, maybe in a prior existence; a bit like the way only an ex smoker can hate smoking and smokers. It makes it too personal and alienates me from their ideas as I can’t quite get or trust their motives. I personally don’t mind the odd bit of passive smoking or passive investing for that matter.
When a financial commentator from an investment company is ‘humble’ enough to talk about the very real prospects of a loss outside the standard line of ‘the value of your investments may fall..’ it jumps out. Someone from Charles Stanley did that very recently on the radio and Mr Shiller’s recent interview was similarly balanced but not doom laden. These are the few who have a conscience which if they are in the business of expressing, must be extended to all.
Live and let live.
Another great article. Apologies in advance for what I am now about to do to your lovely metaphor…
The stock market is indeed a soap opera, and the doomsters are only reviewing one episode. However, the doomsters are right to say that an episode will end in disaster soon (they just can’t say which episode, how disastrous it will be, or how many episodes the unpleasantness will last). And the optimists are right to say that the soap opera will continue on a happier note (they just can’t say when, how happy, or if this will all happen after their parents have switched off the TV and sent them to bed).
The doomsters say that the disaster will be so bad and happen so soon that it’s best not to watch at all. Far better to play Scrabble with grandma in the kitchen. The optimists calmly settle down on the sofa with a nice hot cup of tea, only to get third degree burns when they drop the cup in fright at the first nasty plot twist. Personally, I prefer soap operas to Scrabble, but I make sure I rest my tea on a side table of well diversified passive funds* and I always have a good cushion of bonds to hide behind for when things get truly scary. (I also cross my fingers that I won’t be sent to bed right after a really scary episode, leaving me to cry myself to sleep while grandma chuckles smugly to herself in the kitchen.)
*Please note that no metaphors were harmed in the making of this comment.
I am a very long term passive investor, know nothing about stocks at all and lack totally the mental resolve to post about my greatness, methods, success, foresight, and why the market is topping.
I claim my prize for being the dumbest person on t’internet of things.
Cute and clueless.
What these conversations always boil down to is a lot of equal and opposite cliches: You say buy and hold pays in the long run, I say we are all dead in a lot of long runs, and both are true. You say if you didn’t fully invest in 2009 you missed the greatest etc., I reply that if you did fully invest in 2007 you equally missed the greatest etc. (because you had no cash on the sidelines in 2009). If you think the market looks toppy now, there is nothing wrong with deciding it is time to adjust your risk appetite rather drastically in the short-to-medium-term. There is nothing more annoying than driving past a house which is on the market and thinking that if you had sold 75% of your Vanguard portfolio 6 months back you could now get the house effectively for free.
Can anyone recommend a ‘Strategic Bond Fund’ that returns 5% yield guaranteed plus capital gains, offers zero interest rate risk, and is uncorrelated with equities or govt bonds, unless they go up in which case its 150% correlated?
@R Lee — Well, agree to some extent. And there’s certainly “nothing wrong” *if* you’re actively minded and that way inclined to do as you say. What is usually wrong, to my way of thinking, is saying other people are wrong for not doing the same thing. Because everyone has different objectives, things are seldom clear cut, probably the market is not about to drop 75% in 6 months, and the market can remain irrational etc etc, to reach for another cliche. 😉
And also because risk cannot be created or destroyed, merely transformed (which ties into your ying and yang point…):
http://monevator.com/the-first-law-of-thermodynamics-and-investing-risk/
I was thinking about this article in the aftermath of writing it with a hangover, and wondering if it sounded a bit overly grumpy.
The issue is I think that I have 7-8 years of moderating comments across many hundreds of posts on Monevator, some of which are with adamant people who come and go. I am the constant. So I see the patterns, over the years, whereas the typical person just sees a rational-sounding discussion at a point in time with someone on a blog some day, and doesn’t keep track of the outcome or their other comments or wotnot.
My view of these ‘no-brainer’ commentators urging all kinds of turns-out-to-be-wrong activity was summed up years ago by Shakespeare: “…it is a tale. Told by an idiot, full of sound and fury, Signifying nothing.”
The same could be said of yours truly too of course! 😉
Been reading your blog a while now and thought I’d finally chime in! Great reading, by the way – it has helped me a lot as I’ve started in the world of investing.
On the subject of weekend reading, I happened to read an article on Pragmatic Capitalism entitled “Someone is Always Outperforming Your Portfolio”. It made for curious reading, given you’ve covered this site before, and its author has a disdain for passive investing (or his definition thereof). However in the aforementioned article the whole thing reads like making a case for passive investing – going so far as to say “Trying to consistently “beat the market” is actually a fairly silly endeavor.”
He stops short of saying passive investing is the logical course of action. I wonder why. 🙂
And silly me – I just realised you linked it anyway (I guess in my haste I searched your blog links for “Pragmatic Capitalism” rather than PragCap). So you were already ahead there!
The thing is about these doomsday investors. They’re right. We could all die tomorrow. The world could explode. You could have a heart attack. But that’s not why we invest in in stocks and shares. If the economy was really that unstable then you would be better off investing in farmland to grow your own vegetables so you don’t starve. But even then there could be a drought…. or something. But the risk is relatively low.
Liking the commenst from @TimG and @Minikins – thanks 😉
I’d like to put in a word in favour of Shiller (author of Irrational Exuberance). It never does any harm to be reminded that markets are pretty strange and volatile things, driven by shifts in sentiment that are not easy to explain in purely financial or economic terms. I don’t think he would advocate stashing your money under the mattress or spending it all on tinned food and ammo, just that a bit of caution is probably advisable and that we should be aware that things may not go according to plan.
@Tim G — Absolutely, I am a big fan of Shiller’s work, and if you’re going to muck around active investing and market timing and so forth (as, for my sins, I do) then he’s an indispensable guide to have on your team.
At the risk of endless repeating myself, my problem is with people who speak in absolutes, especially to people who are passive investors with a long-term rebalancing strategy.
They say something like “You’re nuts to have money in the expensive US market!” Go back even on Monevator and you’ll find plenty such comments.
Yet these passive investors are not nuts — they are just confident that their strategy will deliver superior returns to most attempts at chopping and changing, which all the evidence is it will.
Similarly, an active investor who says “on balance I don’t find the US market that attractive relatively speaking, but who knows when the mean reversion will occur” is very different from the no-brainer crowd.
I have about 15% of my money directly in the US markets, and perhaps 20% to 25% on a ‘look through basis’ (i.e. held by global investment trusts or similar). This is cautiously, humbly, underweight, and it hurt me last year, though not by as much as all the people who said sell the US in 2013 would have suffered — with their calls based largely on the Shiller P/E ratio — some of whom commented here on this site. 🙂
Shiller himself has warned against using his long-term CAPE ratio as a market timing tool, incidentally.