There’s been a lot of words thrown around lately saying that indexing has been leading to overvaluation of the US stock market. I’m here to tell you that is wrong. I have two reasons for that:
1) Active managers have been pseudo-indexing for a long time. The moment they get benchmarked to an index they do one of two things:
a) accept it, gain funds for mandates that are like the index, and then they constrain their investing so that they are never too different from the index, and hopefully not in the fourth quartile of performance, so they don’t lose assets. This is the action of the majority.
b) Ignore it, get less fund flows, and don’t let the index affect your investment decisions. The assets should be Continue reading "Overvaluation is NOT Due to Passive Investing"
Investment entities, both people and institutions, often say one thing and mean another with respect to risk. They can keep a straight face with respect to minor market gyrations. But major market changes leading to the possible or actual questioning of whether they will have enough money to meet stated goals is what really matters to them.
There are six factors that go into any true risk analysis (I will handle them in order):
Net Wealth Relative to Liabilities
- Net Wealth Relative to Liabilities
- Investment-specific Factors
- Character of the Entity’s Decision-makers and their Incentives
The larger the surplus of assets over liabilities, the more relaxed and long-term focused an entity can be. For the individual, that attempts to measure the amount needed to meet future obligations where future Continue reading "Perceived Versus Real Risk Tolerance"
During this era, I started contributing articles via tumblr to Yahoo Finance. That also meant that every article would start with a picture, graph, or photo.
In my view, these were my best posts written between August and October 2014:
The Investments Matter More than their Form
Hedge funds and mutual funds are shells — what goes into them matters more than the form itself.
Down 70%+ since then. In general, complexity is not rewarded in investments, and particularly insurance companies. It also helps if you choose lines of business that are good risks, which long-term care and mortgage insurance aren’t.
The Tip Culture in Amateur Investing
Shortcuts in investing are generally not a good idea.
Ranking P&C Reserving Conservatism
Prescient — the liberal reservers have not done well as a group. I will be doing an update on this.
The Victors Write Continue reading "The Best of the Aleph Blog, Part 31"
This is a small update of my last piece
. I wish that I had put this graph in that piece, because it completes it.
Over the interest rate range of 0% to 30%, the average absolute deviations from perfect doubling using the Rule of 72 was 2.794%. Given the simplicity of the Rule of 72, that is wonderful.
But the “Rule of K” is virtually exact. The average absolute deviations from perfect doubling using the Rule of K was 0.036%.
Is this great? Well, with modern computers, exactitude is easy to come by. But if you are in a pinch to figure out the time to double, and all you have is a pencil and paper, the rule of K can do it with addition, subtraction and division. No fancy powers or logarithms. A four-function calculator will handle it, which, if you are using a rate that does Continue reading "The Doubling Rule, Redux"
If you are famous and dead, many people will attribute clever sayings to you that you never said. As Yogi Berra said:
I really didn’t say everything I said.
Except that Yogi did say that. Now, if Einstein didn’t do enough for us, he supposedly made many statements praising compound interest, but the articles I have seen haven’t been able to trace it back to an original source. Personally, I think compound interest is overrated, because business processes can’t forever compound wealth at a steady rate.
But some also have tried to credit Einstein with the Rule of 72. You know, the rule that says the time it takes to double your money in years is equal to 72 divded by the annual compound interest rate expressed as as an integer. E.g., at 8% your
Continue reading "The Doubling Rule"
Stocks always return more than Treasury Bonds. So why doesn’t Social Security invest the trust funds in stocks rather than Treasury bonds?
The first reason is simple. The government wanted Social Security to be free from accusations of favoritism. Why should public businesses have access to government capital, when private capital doesn’t have that same advantage? The second reason is also simple: do we want the government to be an owner of a large percentage of the businesses of the country? Do you want the government to have even more influence on businesses than activist investors do?
The third reason is complex. Do you want to mess up the stock market? A large dedicated buyer would drive the market up to levels where future returns would be very low, much lower than at present. Very marginal businesses would go public to take advantage of the Continue reading "Why Social Security Should not be Invested in the Stock Market"