January 7, 2016


My Most Recent Thoughts

Weekend Reading Links 9/22/17

Weekend Reading Links 9/22/17

I just got back from a great trip to New York City.  I was asked to go out for the week to work with our office out of Tarrytown (30 miles north of NYC) so I took the opportunity and went out early with the wife to do some touristy sight-seeing.

To be honest, I did not think I would like New York all that much.  The stereotypes of the rude fast-talking, fast-walking people is not really my style, but I was excited to visit either way.  Unfortunately, things did not start off well.  We flew in Friday night and when I grabbed my bag off the carousel the handles felt wet.  I smelled it and it reeked of beer.  Turned out my entire bag got soaked through with someone’s beer.  Everything, including my work clothes, which I picked up from the dry cleaner that day to take on this trip, were completely soaked!  The Spirit Airlines Baggage service lady was not very helpful either.  Thankfully after a little public shaming on Twitter, I was able to get things worked out.


After that little adventure and a bit of orienting I have to say my opinion changed pretty quick.  We stayed down in lower Manhattan which was great and started Saturday morning with a tour of the 9/11 museum.  The rest of the weekend was basically a lot of walking and taking pictures.  We didn’t do any clubs or shows or fancy dinners.  We ate breakfast from the bagel cart at Zuccotti Park and had crepes at a great little spot in SoHo.  The people we met were all very pleasant.


Subway like what

Washington Square had some fun people

Apparently Friday at 11:30pm is a good time to get some alone time with the bull

The Oculus looks like one of those big flying aliens from the Avengers.


I look forward to going back and visiting again soon.  I’ll plan to spend a little more time there and try to connect with some NY Twitter peeps.  I’ve definitely been converted to a fan.


Here is the short list of things that I found interesting this week:

Going with the New York theme, here is a really interesting article from Katie Richards (@ktjrichards) in AdWeek on the Fearless Girl from a marketing perspective.  We’ve all seen the statue and doubtless seen some social media opinions on it, but this is the genesis and results. – Fearless Girl Stole the World’s Heart, but What Did it Do for the Client’s Business?

By the way, I shared this photo on Twitter of my 3 year-old watching TV which I thought was funny.


The 3yo watches TV fearlessly



Tadas Viskanta (@abnormalreturns) with a great post on ESG investing. ESG – Don’t let the Perfect be the Enemy of the Good


While it’s sad when a beloved celebrity passes, the public nature of their lives sometimes continues into the afterlife - or into the execution of the estate anyway.  Some important estate planning lessons can be taken away from the examples left. Take this post from WealthManagement.com (@wealth_mgmt) on do’s and dont’s of disinheriting kids from wills, courtesy of Jerry Lewis. – Jerry’s Kids Get Cut Out … Or Do They?


This is a potentially really important update for global investors that did not seem to get much press via Reuters (@reuters) – ECB Launches New Reference Rate After Failed Reform


From the CFA Institutes blog Enterprising Investor (@Enterprising) a recap of a speech made by William Goetzman, Yale professor, financial historian, and author.  I bet you didn’t know that writing is a financial innovation. - Finance: How It Made Civilization Possible


John Shanley (@john_shanleyCFP) on why the 4% rule may be outdated – A Deeper Dive Into the 4% Rule


James Picerno (@jpicerno) writing in the Capital Spectator blog with a reminder that investors are often their own worst enemies – Investor Returns vs. Market Returns: The Failure Endures


In books, I just started reading the Chernow Rockefeller biography Titan.  I have paused my revolutionary era education and have skipped ahead to the Gilded Age.  Next up I have House of Morgan, and then a broader overview with The Tycoons.  I am still looking for one more book to round it out.  I’m thinking of going with either Dark Genius of Wall Street, the Jay Gould bio, or American Colossus by H.W. Brands.  Let me know if you have any recommendations.

After this foray into Gilded Age history I’m thinking of doing a dive into the economic classics.  I’ve never read Wealth of Nations, Keynes’s General Theory, or Road to Serfdom.  Unlike a lot of people on Twitter and in the blog-o-sphere I’m not a fast reader so all this will likely take me into next year.  Especially because I do take the occasional detour, like I did with my last book, Garry Kasperov’s Deep Thinking.


And finally, a cool video of Elon (@elonmusk) being Elon.  Who else creates and distributes a montage of all their spectacular failures?  

 That’s all for now.  I start teaching again next month and I have a million students in this class (14 as of right now, but that feels like a million to me) so I am not sure how the writing will fare.  I do have a post coming out soon rebutting a NY Times article which suggests endowment boards under $20million should not hire any advisors and just buy a stock index and a bond index and call it a day.  I had way to many problems with it to address in a tweet so I had to go long form.  There will hopefully be a book review or two coming soon as well.


Drop me a line and let me know what you think! 

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Weekend Reading Links 9/08/17

Weekend Reading Links 9/08/17


For those of you who had enjoyed the weekend reading links, (and there were a couple of you out there) sorry for the summer break.  I stopped when we took our Disney vacation in the beginning of June and ended up taking the rest of the summer off.  I tried to play more golf (not well), spend time with the kids, and getting some projects done around the house.

I thought for a while there I may not start the links back up.  Even just posting links to other people’s work was time consuming and I thought I may have better uses for my time.  This week, however, changed my mind.  I read some great articles where I thought “if I were still doing links, I would have to add this one.”  So I took that as a sign to get it back up and running…for the time being anyway.  If you want to see more of this type of thing, let me know.

Here are the articles and podcasts I found interesting enough to start the reading links up again:


Howard Marks’s Chairman memo – Yet Again?

Jesse Livermore (@Jesse_Livermore) Philosophical Economics – Profit Margins, Bayes’ Theorem, and the Dangers of Overconfidence

Meredith Jones (@MJ_Meredith_J) MJ Alternative Research – Pith in the Wind

Morgan Housel (@morganhousel) Collaborative Fund – Overcoming our Demons



While the length of the ads and lead-ins are starting to kill me, the Tim Ferris (@tferriss) podcast with Nick Szabo(@NickSzabo4), co-hosted with Naval Ravikant (@Naval) is excellent – The Quiet Master of Cryptocurrency

The Meb Faber (@MebFaber) podcast with Corey Hoffstein (@choffstein) was excellent.  It is not too often I hear new ideas or new ways of explaining the investing landscape but that is what I got from this one – Risk Cannot be Destroyed, Only Transformed

Patrick O’Shaughnessy (@patrick_oshag) celebrated 1 year of the podcast by chatting up the Ritholtz gang.  Joshua Brown (@reformedbroker) Barry Ritholtz (@ritholtz) and Michael Batnick (@michaelbatnick) were great riffing off of one another.  Team Ritholtz – The Wu Tang Clan of Finance



I’m almost done with Gary Kasperov’s (@Kasparov63) new book Deep Thinking.  Anyone interested in chess and artificial intelligence will appreciate it.  Garry is open, honest, and unapologetic in his views, but also so smart and insightful.  Below is a great quote.

“Lastly on talent, don’t tell me hard work can be more important than talent.  This is a handy platitude for motivating our kids to stydy or practice piano, but as I wrote 10 years ago in ‘How Life Imitates Chess’ hard work is a talent”

Finally, I could not end without wishing the best for all my friends down in Texas, Florida, the Caribbean islands.  I hope you all stay safe and wish you a speedy recovery.


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Dealing in Cryptocurrency – the Professional Investor’s Take

Cryptocurrency is the hot new thing.  It seems that everyone these days is catching the crypto-bug.   Whether Bitcoin or Ether, or any of the hundreds of other digital currency offshoots, here is the rundown of what you need to know from a professional investor’s perspective.

In my job of managing money for a living I have gotten asked on a couple of occasions “When are you going to start buying bitcoin or other cryptocurrencies?” The short answer is: not anytime in the foreseeable future.   I’ll say why, but first, let’s look at what cryptocurrency is.

Cryptocurrency is basically a digital form of cash.  It gets its ‘crypto’ tag because it is generated and transferred using encryption technology which makes each unit unique and verifiable.  What makes this possible is a technology called blockchain, which is essentially just the digital transaction ledger.

The actual units are called coins or tokens and are ‘mined’ by the keepers of the blockchain network.  Think of it as the miners with pick axes getting paid with small nuggets of gold.  These ‘miners’ can then exchange their tokens to anyone in the market and ‘viola’ you have a currency in circulation.

On this point, let’s look at a quote from Blockgeeks.com:

“If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions. This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.”

This quote is pretty good and makes a great case for cryptocurrencies as currency.  However, whether or not it is a currency is not the question.  That does not really matter.  I can put a picture of my face on a limited set of blue subway tokens and call it a currency. In fact, when I was in middle-school, Pogs were a form of currency.  You would win them in the morning with a battle, and use the rare ones at lunch to buy french-fries from friends.

The real question about cryptocurrencies is whether or not any of them can become a legitimate part of our monetary system.  For that to happen – for them to be widely accepted as a medium of exchange - it needs to satisfy two major functions.

1)      Trust – that the rules of exchange are as expected

2)      Consistency – expectations that the value of exchange will not deviate

And here we have a problem.  Bitcoin, Litecoin, Ether, and all the other cryptocurrencies can’t yet fulfill either of these promises.

With a tag like ‘crypto’, cryptocurrency will always have the aura of a black-market currency and have trust issues.  It sounds a little too ‘cryptic’.  Even if cryptocurrencies went by another blander name (like an early predecessor, Digi-cash) it would still take a very long time to earn the kind of trust that would make it any kind of meaningful part of our monetary system.  This industry, whatever it eventually becomes, is currently in it’s infancy.  It is being plagued by market hacks, flash crashes, and lots of fraud.

Trust is the essential tenant of our monetary system, and our U.S. dollar, (despite the cries of some conspiracy theorist, cryptocurrency fans) has earned that trust over many decades.  Our entire financial system is based on the idea that I can trust that a dollar given to me will be accepted by anyone else for an expected value.

It is impossible to treat any cryptocurrency as a legitimate currency when the price fluctuations are as dramatic as they are.  Is it possible that price movements level out and bitcoin, ether, and the others become more stable?  Sure, but right now, cryptocurrencies would lose 80% of their clientele if it were to do that.

I don’t understand why the path to becoming a stable currency alternative seems to mean that the price must escalate by 1000%.  If the holders of cryptocurrency are being honest, this is the real reason they have them.  The vast majority of purchasers are really just hoping to buy a little bitcoin now, and cash that bitcoin in later

Privacy – “I use cryptocurrency because it is untraceable and I don’t trust central governments”

Sorry but this is only an excuse for the debilitatingly paranoid, and those operating in the black market.  Bitcoin is great for those dealing in the drug-trade, and human trafficking.  Digital cash which is not traceable and fully anonymous?  Who else benefits more in such an environment?

Learning Experience – “I’m buying to learn more about it.”

What I find interesting is the number of well known investors, (many of whom I have tremendous respect for) who are buying these cryptocurrencies “to learn more about it.”  I personally think the real reason is that they recognize this is a bubble and are hoping that they are early enough to make some money on the thing.  If these things appreciate by 10,000% then they get to say they were in on it, and if it crashes and goes to $0, they can chalk it up to the cost of “education”.

I wish they would just come out and say “look, I’m speculating that these things are going to appreciate in price by a ton.  So, I am going to buy my lottery ticket and see what happens.”

Speculation – “This thing is going to $1 million!”

At least you’re being honest!  If you want to buy a few bitcoin because you think it may go up by 1,000 or 10,000%, then go right ahead.  Just be real about it and keep it in the speculation bucket.  Do not use your retirement bucket or your kids’ college bucket to gamble on the craps table of cryptocurrency.  I have seen ads for a bitcoin IRA, and that makes my stomach drop.  There is no way this stuff should be anywhere near your retirement bucket (bucket mindset explained here).  Just remember that no matter what anyone says this stuff is speculative and could go to zero just as easily (more so in my opinion) than to $1 million.

Goldman Sachs analysts made a statement recently (h/t @davidschawel) that said “real dollars are at work here and it deserves watching”.  That statement sums up my entire opinion on the space.  No one is buying bitcoin because someday it will make buying groceries super easy – they are buying it in hopes that it makes them more DOLLARS.

The bottom line is that buyers of cryptocurrency fall into 2 camps: Speculators and Blackmarket participants.  You are either subscribing to the ‘greater fool theory’ or you need to transact in back-alley channels.

Finally, there is this graph from Liz Ann Sonders (@LizAnnSonders) of Charles Schwab.

While I normally regard a chart with 2 different scaled y-axes as a cardinal sin, the trends in this chart are revealing.  As the popularity increases, the price increases.  As the price increases, the popularity increases.  This is the very definition of a bubble.

I’m not trying to say that this particular bubble will pop now, or even soon.  We could still be very early in its expansion and it could continue expanding for a long time.  All forecasts on where the price could go are completely wild guesses.  I do not know how any analyst maintains their intellectual credibility and tries to offer a specific price forecast.  What in the world would you base it on?  A surge in Google search trends?

That isn’t to say that this bubble in cryptocurrency is a totally bad thing.  Just like the tulip mania in Holland back in the 1630’s garnered the rise of the first financial derivatives, and the tech bubble of the late ‘90’s accelerated our transition to the internet age, the rise of cryptocurrency could help usher in new financial innovations based on the underlying blockchain technology.  The potential for progress is there; however, if history teaches us anything, it’s that innovation does not proceed up in a straight line.

I’m still ok sitting on the sidelines for this one.

Until next time…

“When you see reference to a new paradigm you should always, under all circumstances, take cover. Because ever since the great tulipmania in 1637, speculation has always been covered by a new paradigm.” – John Kenneth Galbraith



photo credit: Chris Martin via flickr.com

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Baby Steps and Quarter Points

The Fed continues to execute according to plan.

The market had largely anticipated the recent move by the Fed to raise short-term rates by 0.25%.  They liked the more the even-keeled and cautious tone that Fed chairwoman Janet Yellen conveyed in the press conference.  Per Binyamin Appelbaum of the New York Times:

Figure 1: Ebullient(adj.) - Cheerful and full of energy

The market rallied on this news because they have a higher confidence that the Fed won’t be too quick to take away the punch bowl.  Recent good news in economic numbers, such as the positive jobs report last Friday, made many market participants worried that the Fed might move too quickly.  Meanwhile, just like every time the Fed is on center stage, there are plenty of armchair quarterbacks who suggest numerous reasons why they are wrong.

But really, what has changed?  Janet Yellen and the Fed have been remarkably consistent in their messaging and execution, especially since the first rate increase back in December of 2015 (remember the market frenzy that caused?  Lucky for you I have a reminder… see the chart below)

Figure 2: Price Chart of the S&P 500 Index

Back then the market was freaking out and saying either that, either 1) the Fed was behind the curve and should have moved sooner, or 2) that they were premature and were trying to raise rates too soon.  Famous market prognosticator Jim Grant even forecasted that after the first hike in 10 years, the next move the Fed would make would be to take it back!

Figure 3: Jim Grant tries to convince Kelly that real men wear bow-ties

What Janet Yellen said in that press conference was “this process is likely to proceed gradually.”  And gradually it has proceeded.  While many people point to the fact that the Fed was over optimistic about the economy and predicted that they would raise rates 3 or 4 times in 2016, they held off and raised rates next in December 2016.  This is fully consistent with what their message has been.  The Fed, and Janet Yellen especially, never said they were going to raise rates ‘come hell or high water’.  They have always said that they would need to see meaningful economic progress, and that future interest rate hikes would be “data dependent”, meaning if the data did not fully back the case for raising, they would wait.  Sure, they thought the economy would grow a little faster than it has, but so did everybody!  They have to be optimistic.  The crystal ball at the Federal Open Market Committee, where the Fed decides interest policy, is not any better than anyone else’s.

What armchair quarterbacks of Fed policy fail to understand, is that it is perfectly rationale for a Fed president to come out and say something to the effect of “given what we see in the economy, our base case is for growth of (X), and if we do indeed see growth of (x), it would be appropriate to raise rates (y) number of times in the year.”

Think about it like the old favorite analogy of Wall-Street when we were still nursing major injuries from the financial crisis, where the economy was the patient, and the Fed, as the doctor, is trying to diagnose the malady, and prescribe the cure.

The Fed predicted that they would raise rates 4 times in 2016, they have no credibility.

Imagine you go to your doctor, and he says “take these pills for 2 weeks, and I expect that after that your condition should be improving and you will be able to go to a lower dose after that.”

You do as prescribed, and go back to see your doctor after the 2 weeks are up.  He checks you out and says “hmmm, you’re not progressing as well as I would like.  Let’s keep the same dose for another 2 weeks and we will hopefully lower you after that.”  Would you immediately rail the guy for being wrong in his forecast on your progress?  Of course not.

But the Fed is moving too slowly and savers are getting punished by these low rates!

You go to your doctor and tell him that the pills you are taking are causing you abdominal pain and you read that long-term exposure could cause problems for your liver.

“Yes, I realize that this cure has some potential negative side-effects, but unfortunately, until we are certain that you are over the condition that nearly killed you, it is safer to error on the side of continuing to use the pills.  We will continue to gradually lower the dose as we can, until you are 100%”

I see your silly doctor analogy and I say, why doesn’t the Fed just rip the Band-Aid off and raise rates back to a more normal level?

Were you around in the 2013 taper-tantrum?  Did you see the chart above that showed the first time the Fed raised interest rates?  The response from the doctor might be as follows:

“Taking you off the medication too quickly can be dangerous.  Your body has exhibited some withdrawal symptoms as we have been lowering doses and we do not want those withdrawal symptoms to get so severe that they cause a relapse.”


This 0.25% increase in rates from the Fed was widely expected due to the improving economic conditions, and Janet’s press conference afterward confirms that the Fed has not deviated from their strategy.  They will raise rates gradually, as economic conditions allow for them to do so.  The Fed does not drive economic conditions, but rather responds to them.  The Fed haters from all sides should concede this point, and that if nothing else, the Fed has done exactly what they told you they were doing and it has been a very appropriate strategy.

Jim Grant was wrong when he signed the “Open Letter to Ben Bernanke” warning that the easy monetary policies were going to cause hyper-inflation like that from the Weimar Republic.  He was wrong in 2015/2016 when he thought the Fed would have to reverse course and lower interest rates again.  He was wrong in July of 2016 when he recommended to buy gold at $1,350 (it’s down over 11% since then).  And finally, he is completely wrong when he said in September that markets are losing confidence in the Fed!  They have since risen rates twice and the markets are taking them at their word for expected increases in 2017.  If anything, the Fed has gained credibility.

The Fed is steering monetary policy back to normal over time; and they are doing so in the exact way they said they would – as conditions allow.  This latest increase of 0.25% is another step in that direction… a baby step, but one of more to come.

Until next time…

“Do what you feel in your heart to be right – for you’ll be criticized anyway. You’ll be damned if you do, and damned if you don’t.” – Eleanor Roosevelt


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Gold Revisited


Anyone who has read my posts in the past, know that I am not a fan of gold as an investment.  It's not that I think gold is awful, I just have a hard time investing in assets without measurable value drivers.

What I do have a real problem with, are the hucksters that try to sell gold with faulty logic and misleading rationale.  What that in mind, here are the reasons gold-bugs give to won the yellow metal, followed by why they are wrong.

1)      It is a store of value and cannot be debased like paper money.

a.       Wrong!  Instead of a central banker turning up a printing press and printing more money, in a golden currency world, you could have producers just amping up the mining operations, or those same central banks flooding the markets with their supplies.  The price went from $1,900 down to below $1,100 and is now around $1,250.  It’s down 30% over the last 5 years.  Store of value?!  At least your 0.5% bank account will still buy you the same amount of bread as it did 5 years ago; gold will buy you 30% less - not exactly storing its value.


2)      It’s a positive hedge against inflation.

a.       This is the same argument as above stated differently.  There are much better assets to own during periods of inflation, should inflation ever come back - for instance - STOCKS!  They actually perform much better as an inflation hedge than gold does believe it or not.


3)      Gold will be worth many times what it is now when Armageddon hits.

a.       There are so many better things to invest in if you are preparing for the apocalypse; namely, guns, ammunition, sandbags, canned food, and bottled water.  Gold should be very far down your list.    


4)      Gold has been money for 5,000 years and will always be considered money.

a.       The fact is that gold is priced in dollars.  All things residents of the US tend to purchase are priced in dollars.  The value of gold is stated in dollars and fluctuates wildly.  Sea shells were once considered tradable currency.  Gold has ideal elemental characteristics which lend it to being used as a currency, and therefore was for many years.  It can be melted and pressed into coins fairly easily, it won’t ever tarnish, it looks all sparkly and stuff… but just because something has been used in one capacity for a long time does not mean it is practical to be used in the same capacity in the future.  The only real currency is trust.  People trust that when they receive a dollar, they can take that dollar and exchange for a like amount of goods or service.  Most people who buy gold today do so in hopes that the price (in dollars) goes higher.  It’s a speculative trade.


For a great history on Gold and its place in the birth of money from the ancient Lydians to the 49ers, read Peter Bernstein’s Power of Gold: A History of an Obsession.


…and please do not listen to anyone trying to tell you how to buy gold based on technical indicators.  That’s exhibit number one on how fools and their money part ways.

Now if you have a collection of gold coins, or even a stash of gold bullion, I would not suggest you are foolish for keeping it.  By all means, keep it, but just treat it for what it is, a collector’s item.  It is a really pretty metal that someday in the future may be worth a lot more than it is now… but it also could be worth a lot less, and anyone who says they can say for certain otherwise is lying or incompetent.


Until next time…

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett


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