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Weekend Reading Links 11/17/17
Happy weekend and welcome to a late edition of the reading links. It was an exceptional week this week with a lot going on. I spent a lot of time grading finals and attending kid events which did not leave much room for reading and writing. There are some other exciting developments under works as well, but those will be discussed over the next few weeks. So stay tuned and here are the stories that got my attention this week!
One of my very first investing idols was David Swenson, the CIO of the Yale endowment and author of the single greatest investment book I’ve ever read (yeah, I said it) Pioneering Portfolio Management. He is voicing his concern about this market being potentially over heated. – Yale’s Swenson Says Low Market Volatility Profoundly Troubling
Have you heard the news out of Africa? – Link from Reuters – Zimbabwe’s Mugabe, Coup Chief Meet with Smiles and Handshakes
It’s been a bad week for oil companies. First up, the world’s largest single pot of investible money on the planet is mulling the idea of completely divesting from fossil fuels. – Norway Idea to Exit Oil Stocks is ‘Shot Heard Around the World’
Then of course, the event TransCanada definitely did not want to hear. The opponents of Keystone XL are jumping all over this. – Keystone Oil Pipeline Leaks in South Dakota as Nebraska Weighs XL
This is an excellent blog post from Nick Maggulli (@DollarsAndData) about how easy overconfidence can affect you, including a graphic that every investor needs to observe and acknowledge throughout their career. The lesson is – the more you know, the more you know you don’t know. – A Little Knowledge is Dangerous
Elon and Tesla had a big announcement this past week. Some people were not completely enthusiastic about it. - Elon Musk Breathlessly Introduces Two New Products That He Will Inevitably Fail to Produce
That’s all for this week. Thanks for reading and let me know what you think
The Most Important …. Man for All Markets
Top lessons from two of the greatest investment minds of our time.
This summer's investment curriculum included two books which I was very excited to read.
The Most Important Thing by Howard Marks
To start with Marks, I am amazed it took me this long in my career to read this book. (Side note: the version I bought is The Most Important Thing Illuminated, which features commentary from other investors. I found most of the commentary worthless and skipped the majority of it. I would recommend buying the original version.) It really is a staple in the investment cannon and ranks right up there with The Intelligent Investor by Ben Graham and Random Walk Down Wall Street by Burton Malkiel as must reads.
The book is laid out as 21 chapters each titled as “The most important thing is ….” Suggesting that each of the points Marks lays out is, in itself, the most important thing. He outlays the importance of things like finding value, identifying cycles, contrarianism, among others. The book is short and concise, and it took me a long time to get through simply because I took a ton of notes and reread entire sections to make sure I retained as much as possible.
A Man for All Markets, is the autobiography of one on the most successful investors that no one has ever heard of. (I hope this book, and his subsequent appearances on popular podcasts, has helped to change that). It is a great look into how his mind works and the thinking that went into everything from beating blackjack to creating an insanely successful hedge-fund. His telling of this journey uncovers a ton of gems about how to assess risk, size bets, and think systematically.
I highly recommend anyone interested in investing to read both of these books but here are some ideas that are key takeaways.
Risk and Probability
Thorp – “(Academic Theorists) described stock prices using a distribution of probabilities with the esoteric name lognormal. This did a good job of fitting historical price changes that ranged from small to rather large, but greatly underestimated the likelihood of very large changes.”
Marks – Howard quotes his friend Bruce Newburg “There is a big difference between probability and outcome. Probable things fail to happen – and improbable things happen – all the time”
Lesson – calculate the odds, but also calculate the cost if your wrong. I liken it to being dealt pocket aces in a game of Texas Hold’em poker. It is statistically the best hand, but just because you have great odds of winning does not mean you should bet the whole stack of chips. Bad beats happen all the time, not just in Hold’em but in investing and in life as well. You have to be able to survive those bad beats.
Risk and Leverage
Thorp – “The lesson of leverage is this: Assume the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing”
Marks – “The Financial Crisis occurred largely because never-before-seen events collided with risky, levered structures that weren’t engineered to withstand them.”
Lesson – If you are seeking to increase your returns through leverage, remember your risk will also be magnified. Nothing leads to financial destruction faster or more often than over-borrowing.
Sizing Bets and Making Bets
Thorp – Explaining the Kelly Criterion method for sizing bets “…for a favorable bet that pays odds of $A for a bet of $1, the optimal Kelly bet is the percent of your capital equal to your edge, divided by the odds.” – Thorp tells the story of going to Vegas to apply his blackjack method and starting with risking a very small amount compared to his overall bankroll. As he counted cards and would evaluate a favorable deck, he would increase the size of his bets as his edge increased and reduce them as it went down. "I planned to play conservatively, betting twice my lowest bet when the advantage for me was 1 percent, four times as much with a 2 percent edge, and finally leveling off at ten times my small bets when the game was 5 percent or more in my favor."
Marks – “When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.”
Lesson – You should only put on an active bet when you have an edge, and even then, you should size your bet according to the odds.
Thorp – What it takes to beat the market, 1) Get good information early. 2) Be a disciplined rational investor. 3) Find a superior method of analysis. 4) Invest ahead of the crowd.
Marks – “To achieve superior results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently, or do a better job analyzing – ideally all three.”
These lessons just barely scratch the surface of what is offered in these books. I definitely recommend both, but if you need one or the other, I would say if you are serious about learning the craft of investing, you have to go Marks. If your interests are more worldly, than go with Thorp. Either way you can’t go wrong.
Until next time…..
“The most important thing is the relationship between price and value….Since buying from a forced seller is the best thing in our world, being a forced seller is the worst. That means it’s essential to arrange your affairs so you’ll be able to hold on – and not sell – at the worst of times. This requires both long-term capital and strong psychological resources.” – Howard Marks.
Further reading –
After a week off to carve pumpkins, take kids treat-or-treating, and to go see Thor: Ragnorak, the links are back. It has been a productive and enlightening couple of weeks with a lot of interesting things to read, but before I begin I want to share an excerpt from the book I am reading, Titan: The Life of John D. Rockefeller.
This really hit me because when my son, Dean, was 4 he got Scarlet Fever. No big deal, he took an antibiotic and was fine. Jack got Scarlet Fever when he was 4, and died. It is a little sobering to think that this child’s death lead to progress which meant that other children contracting the same disease would not have to suffer the same fate.
On that note, hug your loved ones, cherish the time you have together, and mind your health. Now let’s work on our mental health by catching up on some reading.
First up, is a link from Inc.com offering tips on how to approach learning. I assume that people reading this post with any regularity are doing so because they share a love of learning, and these are a few good take-aways. A short Tim Ferris video is a bonus. – 3 Geniuses Best Tips to Accelerate Learning
I cannot seem to escape crypto-mania. Bitcoin, ethereum, and others have taken the finance world by storm. I’ve made my views of this space clear (link here), but here are some recent, relevant links.
If you think crypto is cool because Floyd “Money” Mayweather is into it, watch out. These celebrity figures may be getting paid to promote it, and if they are not disclosing that, they could get into a heap of trouble from the SEC. I can only hope. – SEC Warns Celebrities Endorsing Virtual Money
A lot of people have compared the recent mania in cryptocurrency to the tulip bulb bubble in Holland in the 1630’s. One analyst has said that the recent development of a futures market for bitcoin is another parallel – Bitcoin Futures Mirror 1637 Tulip Bubble Crash, UBS Says
And remember, if you do plan on playing in the crypto sandbox, do so at your own risk. Josh Brown (@ReformedBroker) puts it elegantly….
And my friend, Professor Clive (@TooCliveCrew) has a slightly stronger opinion
This is the story they are quoting - ‘$300 million is cyrptocurrency’ accidently lost due to bug
One big development of the last couple of weeks is President Trump’s nomination of Jerome Powell to serve as the chairman of the Federal Reserve Board. This post is arguably one of the most powerful in the world and Jerome Powell is largely unknown to the greater populace. So naturally, people want to know....
And after you get to know Mr. “Jay” Powell a little, you really need to read this amazing Twitter thread from Josh Zumbrun (@JoshZumbrun) of the Wall Street Journal. – “…how Larry Klane, Alfalfa Bill, London Whale & Swedes led to Fed Chair Jay Powell”
The other big news people need to be paying attention to is happening in the Middle East. The Crown Prince has been arresting dozens of his cousins in the name of curbing corruption. Critics call it a blatant power grab, while supporters think it the greatest step of progress for Saudi Arabia in modern times. This story from Bloomberg does a good job of explaining what’s going on – The Saudi Purge Isn’t Just a Power Grab
This excerpt from the story illustrates well the dichotomy of the situation: ‘“The one positive thing is that maybe things will get more equitable, more meritocratic,” says a young Saudi management consultant who, tellingly, declines to be named. “It’s also scary. There’s no due process, and people can disappear.”’
One of the most interesting investing posts I’ve read in a while is from Corey Hoffstein (@choffstein) of the Flirting with Models blog. But, fair warning, this is for the more advanced investment geeks out there. – It’s Long/Short Portfolios All the Way Down
And finally, just for fun, check out this short video. – 7 Things You Didn’t Know About Sherlock Holmes. And if you haven’t, or it’s been some time, pick up a few of the original Conan-Doyle stories.
That’s all for this week. I have house hunting, yard work, and youth hockey to attend to this weekend. I’m also hoping to finish my book and to get started on another. I have the J.P Morgan bio on deck, but I’m thinking of calling an audible and throwing in something short and light to break up my education of the Gilded Age. (and yes, I am aware I’m mixing my sports analogies. Just remember to skate to where the hoop is going to be 😉)
Have a wonderful weekend!
books books books
This was a week spent out of the office, away from the 9-5, but still plenty busy. I was at the coffee shop most days reading, writing, grading, and meeting with great people. I got to spend a little more time with the kids and even snuck in a nap or two. All in all, it was just what was needed, in terms of catching up on housework, extra-curriculars and family time. However, especially after some great conversations, I am more than ready to get back to work. I’m looking forward to what the future brings.
Here are the links I found interesting this week. Let me know if there is anything I missed
To start, I liked this short click-baitey Business Insider (@businessinsider) on how investing billionaires make decisions. – I Tried the 10-10-10 Method Inspired by Warren Buffett and Ray Dalio
With all the speculation of tax reform and a couple of Trump tweets, 401k plans are a hot discussion topic right now. A couple of my regular reads picked up the story and offered some good takes.
The first one is Anthony Isola (@ATeachMoment), from the blog A Teachable Moment, where he portrays a dire and worsening situation for the poor and lower middle class. Unfortunately, for people in this category, life is too tough right now to worry about locking money up to retire sometime in the next 40 years. Therefore, saving rates are abysmal in those categories. - The Dirty Secrets of 401k Plans
What all these stats say to me is that Americans need to do a better job saving. The government could certainly do a lot to encourage or nudge, this behavior but you can’t expect material action to help reverse the situation. Last year, John Oliver did a take-down of the 401k business and railed providers about hidden fees and non-disclosures, but by far the biggest culprit is our own inability to save. Here were my thoughts about it then – What is Really Killing Your Retirement?
Continuing on with the retirement savings theme, but going even deeper, is a post from the aforementioned Ray Dalio (@raydalio). He’s the founder of the world’s largest hedge fund, Bridgewater, and now, with the release of his famed management and life philosophy in book form (Principles), a best-selling author. Not only are the bottom 60% of Americans (based on income) not seeing the benefits of a growing economy, in fact, life for non-college educated white Americans is getting tougher. - Our Biggest Economic, Social, and Political Issue The Two Economies: The Top 40% and the Bottom 60%
There are some startling statistics in this post, that I first saw this spring when John Mauldin (@JohnFMauldin) released his Angst in America series of posts. If you look at these numbers it can help explain some of the divide, the anger, and our current political situation.
Moving on, this post on Bitcoin was a lesson for me in drawing conclusions before reading. In what is a smart analysis of how volatility can impact a portfolio, I saw the headline and read the article with my crypto-BS shields all the way up and responded right away with, “this is ridiculous! How can you even try to plot Bitcoin on an efficiency frontier!?” In my haste, I missed the fact that it was a good thought experiment and not meant as a practical application. Thankfully, the author, Nick Maggiulli (@dollarsanddata) set me straight pretty quick - Is Bitcoin in the Optimal Portfolio?
Finally, cheers to Adam Grant (@AdamMGrant) for posting a link to this podcast. It’s called On Being (@onbeing) with Krista Tippett (@kristatippett) and this particular episode is a great interview with famed psychologist Daniel Kahneman. - Why Contradict Ourselves and Confound Each Other
That’s all for this week. Remember to be good to each other!
I’ve got a week-long stay-cation coming up and I am really excited about it. Sometimes it’s necessary to unplug and just hit the reset button. I plan to spend a lot of time at the coffee shop reading, writing, and having some conversations. There is plenty of housework to catch up on as well.
Most of all I am thrilled to be able to spend more time with the wife and kids. That being said, I am sure I will be almost as excited to get back to the office the following Monday. After all - everything in moderation.
I hope you get some free time to read this weekend. If you’re free next week in the Rockford area and want to talk investing, books, or genealogy for that matter give me a shout.
Here are some of the interesting things I read this past week.
First up is just a fun poll from Tadas Viskanta (@abnormalreturns). The question is about factors and for the uninitiated, a ‘factor’ is a characteristic of a stock that you can easily measure which can be used to determine likelihood of outperformance. For instance, the most famous factor is value. Value is determined by stocks which have low prices compared to the earnings they generate (low P/E ratios). This is a fun thought experiment about what you would do if you found a new factor? A lot of great people chime in with their take as to how would be best to cash-in on the discovery. Finance Blogger Wisdom: an Undiscovered Factor
For the record, I would write a book, trademark an index, and license it out to a fund manager. After some heavy marketing, good initial results, and a book tour, I would short it. Haha.
This article out of the Wall Street Journal is an excellent gauge of your financial literacy. If you don’t score well, it may be an indication you need to study up. – How Financially Literate Are You Really? Let’s Find Out
The next two links are stolen from the CFA Institute’s online magazine, Enterprising Investor (@Enterprising) and Lauren Foster’s (@laurenfosternyc) Weekend Reads. They do a much better job of getting their list out before the actual weekend starts! Good news for me, so I can add some to my weekly link list. If you are into investing and not already subscribed to receive updates from Enterprising Investor, I highly recommend you do so. If you have a CFA charter and you are not subscribed, shame on you.
This one is for anyone who loves the English language and looking for some throw-back words and phrases to bring back to life – 8 Words and Phrases we Should Use Again
And this link, from the NY Times, had to get posted because Norway is on the top of my list for travel goals. – In Norway, the Journey is the Destination
And then, while snooping around the NY Times site, I found this article on attempts to reforest Iceland. Fascinating stuff. Iceland is also in the top 5 in travel goals. – Vikings Razed the Forests. Can Iceland Regrow
This week marked the 30th anniversary of the worst crash in market history. The S&P 500 dropped by 20% in a single day. Just to reiterate how major that was, the average daily move in the market is around 0.03% with a standard deviation of 0.98%. That translates to black Monday being a 20-standard deviation event! That means if returns were random you could expect the market to be down about 1% only 15% of the time, down 2% just 2.5% of the time, and down 3% a mere 0.25% of the time. So down 20% would have the same statistical probability as you winning the mega-millions lottery 20 times in a row.
Now we all know that markets are not random normally distributed creatures, however, it is still shocking to see the scale. This article from Fortune gives Robert Shiller’s take on whether or not it could happen again. – Black Monday 1987
And of course, no recap would be complete without hearing from everyone’s favorite floor trader, Art Cashin. – Market Legend, Art Cashin, Remembers Black Monday 30 Years Later
Finally, watch this commercial from Burger King. Burger King, home of the worst mascot/spokesperson in history with that creepy King character, put together a moving commercial that teaches a power lesson about bullying.
This write-up in Ad-Week tells the story.
On that note, let’s all enjoy the weekend. Be good to one another, look out for one another, and let me know what you think.
Further Reading: Personal Finance 101