Due Diligence

take the l

Wrongness and a Strange Animal

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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The Angels’ Share

As a whisky (whiskey here in the States) matures, it loses about 2% of its volume to evaporation each year.  Distilleries call this The Angels’ Share.  They fill oak casks with a precious liquid knowing that each year part of their hard work will simply disappear.  I can’t help but think of the angels’ share when I look at expense ratios.  An investor sets aside a certain amount of money, let’s say $100,000.  They pay a money manager to invest that money – I’ll use the S&P 500 as an example.  When the investor looks at their statement, they should see that their investment returned the same amount as the index, less whatever the expense was, right?  Looking at the annualized returns, yes, that’s approximately right.  Looking at actual dollars, we see something different.  A portion of the returns evaporates, escaping the pockets of both investor and money manager. This chart…