Favorite Aleph Blog Post of 2017?

As you might recall, I was invited to participate in The Best Investment Writing, Volume 1. Well, volume 2 is being discussed. This time, I thought I would let my readers offer their opinion on the matter. So, let me know, you can take this poll — oh, and can vote for as many as you like. Thanks, David Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Classic: Wrecking Ball Looms for Big Housing Spec

==================== I thought this old post from RealMoney.com was lost, never to be found again.  This was the important post made on November 22, 2006 that forecast some of the troubles in the subprime residential mortgage backed securities market.  I favored the idea that there there would be a crash in residential housing prices, and the best way to play it would be to pick up the pieces after the crash, because of the difficulties of being able to be right on the timing of shorting could be problematic.  In that trade, too early would mean wrong if you had to lose out the trade because of margin issues. With that, here is the article: ==================== I have tried to make the following topic simple, but what I am about to say is complex, because it deals with the derivative markets. It Continue reading "Classic: Wrecking Ball Looms for Big Housing Spec"

Estimating Future Stock Returns, September 2017 Update

Another quarter goes by, the market rises further, and the the 10-year forward return falls again.  Here are the last eight values: 6.10%, 6.74%, 6.30%, 6.01%, 5.02%, 4.79%, and 4.30%, 3.99%.  At the end of September 2017, the figure would have been 4.49%, but the rally since the end of the quarter shaves future returns down to 3.99%. At the end of June the figure was 4.58%.  Subtract 29 basis points for the total return, and add back 12 basis points for mean reversion, and that would leave us at 4.41%.  The result for September month-end was 4.49%, so the re-estimation of the model added 8 basis points to 10-year forward returns. Let me explain the adjustment calculations.  In-between quarterly readings, price movements shave future returns the same as a ten-year zero coupon bond. Continue reading "Estimating Future Stock Returns, September 2017 Update"

Notes from an Unwelcome Future, Part 1

============================================================== Dear Readers, this is another one of my occasional experiments, so please be measured in your comments.  The following was written as a ten-year retrospective article in 2042. ============================================================== It was indeed an ugly surprise to many when the payments from Social Security in February 2032 did not come.  Indeed, the phones in Congress rang off the hook, and the scroll rate on incoming emails broke all records.  But as with most things in DC in the 21st century, there was no stomach to deal with the problem, as gridlock continued to make Congress a internally hostile but essentially passive institution. Part of that gridlock stemmed from earlier Congressional reforms that looked good at the time, but reduced the power of parties to discipline members who would not go along with the leadership.  Part also stemmed from changes in media, which Continue reading "Notes from an Unwelcome Future, Part 1"

The Crisis Lending Fund

=================== Last week, there was an article in Barron’s describing how many mutual fund families take advantage of a provision in the law allowing them to have funds lend to one another.  Quoting from the article:
Under normal circumstances the Securities and Exchange Commission bars funds from making “affiliated transactions,” but there’s a loophole in the Investment Company Act of 1940 for funds to apply for an exemption to make such “interfund loans.” Until recently, few fund families applied for this exemption. None had before 1990. From 2006 to 2016, the SEC approved just 18 interfund lending applications. But since January 2016, the agency has approved 26. Most major fund families—BlackRock, Vanguard, Fidelity, Allianz—now can make such loans. Stiffer regulations of banks, which are now less willing to offer funds credit lines, partly explain the application surge.

I’m here tonight to suggest making a virtue Continue reading "The Crisis Lending Fund"

Short-Term Rational, but Intermediate-Term Irrational

Don’t look at the left side of the chart on an empty stomach

================== This will be a short post.  At present the expected 10-year rate of total return on the S&P 500 is around 4.05%/year.  We’re at the 94th percentile now.  The ovals on the graph above are 68% and 95% confidence intervals on what the actual return might be.  Truly, they should be two vertical lines, but this makes it easier to see.  One standard deviation is roughly equal to two percent. But, at the left hand side of the graph, things get decidedly non-normal.  After the model gets to 2.5% projected returns, presently around 3100 on the S&P 500, returns in the past have been messy.  Of course, those were the periods from 1998-2000 to 2008-2010.  But aside from one stray period starting in 1968, that is Continue reading "Short-Term Rational, but Intermediate-Term Irrational"

The Little Market that Could

Picture Credit: Roadsidepictures from The Little Engine That Could By Watty Piper, Illustrated By George & Doris Hauman | That said, for every one that COULD, at least two COULDN’T

====================================== So what do you think of the market?  Why are both actual and implied volatility so low?  Why are the moves so small, but predominantly up?  Is this the closest impression of the Chinese Water Torture that a stock market can pull off? Why doesn’t the market care about external and internal risks?  Doesn’t it know that we have divisive, seemingly incompetent President who looks like he doesn’t know how to do much more than poke people in the eyes, figuratively?  Doesn’t it know that we have a divided, incompetent Congress that can’t get anything of significance done? Leaving aside the possibility of a war that we blunder into (look at history), what if Continue reading "The Little Market that Could"

The Little Market that Could

Picture Credit: Roadsidepictures from The Little Engine That Could By Watty Piper, Illustrated By George & Doris Hauman | That said, for every one that COULD, at least two COULDN’T

====================================== So what do you think of the market?  Why are both actual and implied volatility so low?  Why are the moves so small, but predominantly up?  Is this the closest impression of the Chinese Water Torture that a stock market can pull off? Why doesn’t the market care about external and internal risks?  Doesn’t it know that we have divisive, seemingly incompetent President who looks like he doesn’t know how to do much more than poke people in the eyes, figuratively?  Doesn’t it know that we have a divided, incompetent Congress that can’t get anything of significance done? Leaving aside the possibility of a war that we blunder into (look at history), what if Continue reading "The Little Market that Could"

“Bank” Some of Your Gains

======================= Recently I read Jonathan Clements’ piece Enough Already.  The basic idea was to encourage older investors who have made gains in the risk assets, typically stocks, though it would apply to high yield bonds and other non-guaranteed investments that are highly correlated with stocks.  His pithy way of phrasing it is:
If I have already won the game, why would I keep playing?

His inspiration for the piece stems from a another piece by William Bernstein [at the WSJ] How to Tell if Your Retirement Nest Egg Is Big Enough.  He asked a question like this (these are my words) back in early 2015, “Why keep taking risk if your performance has been good enough to let you reduce risk and live on the assets, rather than run the possibility of a fall in the market spoiling your ability to retire comfortably?” Continue reading "“Bank” Some of Your Gains"

The Many Virtues of Simplicity

Photo Credit: Christopher || Maintaining a marriage is simple… if you do it right…

============== There are at least eight reasons why taking a simple approach to investing is a wise thing to do.
  1. Understandable
  2. Explainable
  3. Reduced “Too smart for you own good risk”
  4. Clearer risk management
  5. Less trading
  6. Taxes are likely easier
  7. Not Trendy
  8. Cheap
Understandable You have to understand your investments, even if it’s just at the highest overview level.  If you don’t have that level of understanding, then at some point you will be tempted to change your investments during a period of market duress, and it will likely be a mistake.  Panic never pays.  How to avoid panic?  Knowledge reduces panic.  Whatever the strategy is, follow it in good times and bad.  Understand how bad things can get before you start an investment program.  Make changes if needed when things are calm, not in the midst Continue reading "The Many Virtues of Simplicity"

Book Review: The Best Investment Writing, Volume 1

I was pleasantly surprised to be invited to contribute a chapter to this book.  I am going to encourage you to buy this book, but let me give some of the reasons not to buy this book:

Estimating Future Stock Returns, June 2017 Update

I’d say this is getting boring, but it’s pretty fascinating watching the rally run.  Now, this is the seventh time I have done this quarterly analysis.  The first one was for December 2015.  Over that time period, the expected annualized 10-year return went like this, quarter by quarter: 6.10%, 6.74%, 6.30%, 6.01%, 5.02%, 4.79%, and 4.30%.  At the end of June 2017, the figure would have been 4.58%, but the rally since the end of the quarter shaves future returns down to 4.30%. We are now in the 93rd percentile of valuations. Wow. This era will ultimately be remembered as a hot time in the markets, much like 1965-9, 1972, and 1997-2001. The Internal Logic of this Model I promised on of my readers that I would provide the equation for this model.  Here it is: 10-year annualized total return =
😉
Continue reading "Estimating Future Stock Returns, June 2017 Update"

How to Invest Carefully for Mom

======== Just a note before I begin. My piece called “Where Money Goes to Die” was an abnormal piece for me, and it received abnormal attention.  The responses came in many languages aside from English, including Spanish, Turkish and Russian.  It was interesting to note the level of distortion of my positions among those writing articles.  That was less true of writing responses here. My main point is this: if something either has no value or can’t be valued, it can’t be an investment.  Speculations that have strong upward price momentum, like penny stocks during a promotion, are dangerous to speculate in.  Howard Marks, Jamie Dimon and Ray Dalio seem to agree with that.  That’s all. Now for Q&A:
Greetings and salutations.  🙂 Hope all is well with you and the family! Just have what I believe is a quick question. I already know [my Continue reading "How to Invest Carefully for Mom"

Redacted Version of the September 2017 FOMC Statement

July 2017September 2017Comments
Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.No change.  Feels like GDP is slowing, though.
Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined.Job gains have remained solid in recent months, and the unemployment rate has stayed low.Shades labor conditions down, as improvement has seemingly stopped.
Household spending and business fixed investment have continued to expand. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked Continue reading "Redacted Version of the September 2017 FOMC Statement"

Book Review: University of Berkshire Hathaway

I feel like the skunk at the party here. I have no argument with the authors, per se. They came up with their concept and executed it adequately. No one else that I know of has done a book of their notes from Berkshire Hathaway annual meetings, in this case extending over 30 years. But the bar for writing Buffett books is low, because they sell so well.  Many marginal concepts get written about that aren’t as good as simply reading the writings of Buffett and Munger themselves.  This is true of this volume in two ways. 1) It is notes, not a transcript.  Notes aren’t as good; if I want Buffett, I want him unfiltered, unless the person has a significant interpretation of an aspect of Buffett that is consistent with what Buffett has said, but brings a lot more to the table.  This doesn’t bring much more to Continue reading "Book Review: University of Berkshire Hathaway"

Book Review: Big Money Thinks Small

Joel Tillinghast, one of the best mutual fund managers, runs the money in Fidelity’s Low-Priced Stock Fund.  It has one of the best long-term records among stock funds over the 28 years that he has managed it. The author gives you a recipe for how to pick good stocks, but he doesn’t give you a machine that produces them.  In a style that is clever and discursive, he summarizes his main ideas at the beginning and end of the book, and explains the ideas in the middle of the book.  The ideas are simple, but learning to apply them will take a lifetime. Here are the five ideas as written in the beginning (page 3):
  1. Make decisions rationally
  2. Invest in what we know (did I mention Peter Lynch wrote the foreword to the book?)

  3. Worth with honest and trustworthy managers

  4. Avoid businesses prone to obsolescence and financial ruin, and 

  5. Continue reading "Book Review: Big Money Thinks Small"

Where Money Goes to Die

============== It is often a wise thing to look around and see where people are doing that is nuts.  Often it is obvious in advance.  In the past, the two most obvious were the dot-com bubble and the housing bubble.  Today, we have two unrelated pockets of nuttiness, neither of which is as big: cryptocurrencies and shorting volatility. I have often said that that lure of free money brings out the worst economic behavior in people.  That goes double when people see others who they deem less competent than themselves seemingly making lots of money when they are not. I’ve written about Bitcoin before.  It has three main weaknesses:
  • No intrinsic value — can’t be used of themselves to produce something else.
  • Cannot be used to settle all debts, public and private
  • Less secure than insured bank deposits
In an economic world where everything is relative in a Continue reading "Where Money Goes to Die"

Redacted Version of the July 2017 FOMC Statement

Photo Credit: Leo Newball, Jr. || I visited that building when I was 24.

===========
June 2017July 2017Comments
Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.No change.  Feels like GDP is slowing, though.
Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined.Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined.Shades labor conditions up
Household spending has picked up in recent months, and business fixed investment Continue reading "Redacted Version of the July 2017 FOMC Statement"

The Best of the Aleph Blog, Part 32

============================== In my view, these were my best posts written between November 2014 and January 2015: Stay Calm Political changes rarely create the policy/legal changes that people fear or hope for, so relax. Problems in Simulating Investment Returns There are seven problem areas in investment return modeling that are rarely dealt with, and certainly never as a group.  That’s why I would encourage you to be at least least slightly skeptical of any simulation analysis that you might receive.  This goes 10x for the schmendricks that propound multivariate normal simulations. Revenue Misses Can Be Good Every dollar in the door may be the same, but not every sale or promise made is equally good.  The contribution margin matter a lot.  Earnings, especially future earnings, always matters more than revenues. Is This Legit? It is little known that I analyze simple and complex investment situations for Continue reading "The Best of the Aleph Blog, Part 32"

The Best of the Aleph Blog, Part 36

In my view, these were my best posts written between November 2015 and January 2016: Don’t be a Miser in Retirement (Or Ever)
“There is a fine line between over-saving and under-living.”

Another way to phrase it: God isn’t a miser; you shouldn’t be either. On Lump Sum Distributions Managing a lump sum distribution for income is one of the hardest things to do in investing. Easy In, Hard Out (III) Continuing the series on the troubles the Fed will have shrinking its balance sheet. Understand Your Liabilities Your investment decisions should be driven by when you will need to convert the assets to cash for spending purposes. The Limits of Risky Asset Diversification Because of the behavior of investors, and increasing interconnectedness between markets, the degree that risky assets diversify each other has been decreasing over time.  There is really only one diversifier for Continue reading "The Best of the Aleph Blog, Part 36"