News

Where’s Your Parade?

Cleveland toasts the NBA champion Cavaliers today.  The victory parade marks the end of a grueling season filled with ups and downs.  There were challenges on and off the court.  Some were very real (making a coaching change partway through the season).  Some were manufactured (the drama around Kevin Love from selfies to Banana Republic modeling).  In the end, the team came together and won the whole damn thing, ending Cleveland’s championship drought.  We face similar challenges as investors.  We won’t win every game (and sometimes the folks with the “best” records come up short when it counts).  We will run into challenges real and imagined.  There will be 20%+ drawdowns in the stock market.  The media will do its best to worry us, giving low probability hypothetical disasters unwarranted exposure.  At the end of your investing journey, where’s your parade?  It ain’t coming. There’s no parade.  There’s no medal.  You don’t…


Six Degrees

There’s a theory/urban legend that everyone is just six degrees of separation from knowing every other person on the planet.  I prefer the Six Degrees of Kevin Bacon theory that every actor is six degrees (or less) removed from working with Kevin Bacon.  For example, Sean Connery is two degrees from Kevin Bacon.  Connery was in The Untouchables with Robert DeNiro who was in Sleepers with Kevin Bacon. We can play the same game of telephone with investment ideas, but this can play out like making a copy of a copy. Theranos, the Silicon Valley startup that set out to disrupt blood-testing, became a media darling under the assumption that everyone else had done the due diligence.  The company got its start by raising money from the CEO’s daddy’s friends.  Further fundraising rounds were based on the assumption that the investors in the previous round did their due diligence.  The media…


Cutting Corners

If cutting corners in business is bad, cutting corners when your business is selling sketchy loans means disaster as Lending Club CEO Renaud Laplanche just found out.  The stock is down huge today and the CEO resigned in light of news that Lending Club didn’t deliver what it had promised to one of its clients.  This was one of my fears when we were pitched several different peer-to-peer lending schemes. Lending Club bundled together loans and sold them to investors.  Investors had very little ability to do true due diligence on the bundles and it looks like it tempted LC to stretch the truth on what it was peddling in one case. This example ticks several due diligence boxes for me.  We like to see 3-5 years of live performance for a reason.  Brand new companies or management teams need time to understand the reality of their investment environment, regardless of…


McKinsey & Co Declare New Normal

Well it’s officially over.  The golden era of investing is no more, at least according to McKinsey & Company’s latest research.  “The forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing. It may be time for investors to lower their expectations.”  According to McKinsey, the last 30 years of returns can be attributed mostly to happy coincidence. Does this sound familiar to you?  It should.  In 2009, PIMCO announced the dawning of the NEW NORMAL, an age where investors would be lucky to scrape up 8% returns.  What actually happened?  There was a wailing and gnashing of teeth.  There were annualized returns of over 14%.  An investment in the S&P 500 would have more than doubled.   Wait.  It turns out the NEW NORMAL wasn’t so bad (unless you managed money at PIMCO). It’s odd to think of 30 years ago as being…


Wisdom vs Intelligence

For investors, it’s more valuable to be wise than intelligent.  The investment world is littered with the carcasses of funds run by the ‘smartest guys in the room’.  In the investing ecosystem, intelligence is a given.  Ivy League credentials saturate fund manager bios.  Sophisticated quantitative models crunch numbers while algorithms trade by the microsecond.  Meanwhile, Charlie Munger and Berkshire Hathaway have a system of three stacks:  Yes, No, and Too Hard.  If a deal comes along that sounds good, but isn’t in their wheelhouse, they put it in the Too Hard bucket.  Intelligence is a commodity.  Wisdom is a scarce resource. Which brings me to “How do I play [headline] here?” Today the news story is oil or energy.  No one is really knows where ‘here’ is, though.  Is oil rallying or about to plunge to $10?  Commentary around news headlines makes it feel as though investors should be continuously trading their portfolios to keep up…


Happy Anniversary

  Yesterday marked the anniversary of the market’s lowest point during the financial crisis, the birth of our current bull market.  A quick recap:   From its previous peak on 10/10/2007, the S&P 500 dropped 55% through 3/9/2009. From 3/9/2009, the S&P 500 gained 237% (almost 19% annualized), including dividends through 3/9/2016.   Today, there are plenty of people on TV who “called” the peak before the financial crisis.  They never tire of patting themselves on the back, saying it was clear to them that there was a bubble and obvious that we were on a road to ruin. This is bullshit, of course. The wizards on TV who “warned you all” are largely perma-bears who predict a new stock market crash every year, a case of a stopped clock being right twice every day.  Some of them pull out data like the CAPE ratio, saying it showed an extremely…


Fear of the Dark

They come in the night.  From the deepest dark, they reach out.  Searching.  Your fear sustains them.  Panic slides you deeper into their grip and dawn will never break for you.  You can light bonfires and set a watchman to keep them at bay, though.  Light is their enemy and a diligent guard will quickly put them on their way to seek an easier meal. Market selloffs can mean dark times.  This is the easiest environment for investment product sellers to hunt for their prey – you (and me).  I get cold calls and emails daily ranging from what worked last year (but is probably a dog now) to today’s buzzword (liquid alts and smart beta these days).  They know that down markets motivate people to take action, even if it’s against their best interest.  It’s easy to forget that the market will turn around and a long-term perspective will carry…


Business as Usual

The S&P 500 is down almost 8%.  It’s the worst start to a new year EVER.  Is this a sign of things to come?  Is the stock market doomed in 2016?  Exactly how rare is a downwards move of such epic magnitude? The market has recovered from every downturn it’s ever experienced.  That’s a pretty good track record.  The most surprising thing about this downturn is how much publicity it is getting.  Every year since 2000 had a drawdown of at least 7% at some point except for 2013.  In 2013, the big worry was that it had been too long since the last correction.  For real. Here’s some data from Morningstar on the S&P 500 as of 1/18/2016: Max Drawdown Return YTD -7.93 -7.93 2015 -12.04 1.38 2014 -7.28 13.70 2013 -5.58 32.41 2012 -9.58 15.97 2011 -18.64 2.11 2010 -15.63 15.07 2009 -27.19 26.48 2008 -47.71 -36.94 2007…


Sell Everything

So The Royal Bank of Scotland (RBS) says 2016 will be a cataclysmic year and to “sell everything except high quality bonds”.  There’s even a cute analogy, “In a crowded hall, exit doors are small.  Risks are high.”  So says RBS analyst Andrew Roberts. “Risks are high.”  Risk is the chance for permanent loss of capital.  So are stocks going to go to zero?  The article says he sees a pullback of 10 – 20 percent for stocks.  Not exactly the craziest prediction since the stock market sees a 14% pullback once a year on average.  This isn’t ‘high risk’.  This is standard operating procedure for a healthy stock market. It’s silly to say “Sell everything!” and this guy is catching some flak on the internet from people who manage real money for real people.  Timing the market has been revealed to be a sham and is in the same…


January Effect

By now, you’ve heard that the US stock market is off to the worst start to a calendar year ever.  This is the sort of news that is trumpeted far and wide as humans are wired to value and pass along bad news (and to elevate the status of those who sound the alarm).  This undoubtedly helped our ancestors warn each other about saber-toothed tigers, but can trip us up as investors today, leaving us easy prey for today’s investment product-selling predators.  I even heard a local economics professor talking about the ‘January Effect’ on the radio this morning.  The ‘January Effect’ is the superstition that as January goes, so goes the rest of the year.  So if the month of January is positive, then so will the rest of the year.  If the month of January is down, the rest of the year will be negative, too.  It’s so easy…