Blogs y opiniones de economia en ingles

Episode #357: Marko Papic, Clocktower Group, “If You Don’t Make Calls, Why Are You In This Industry?”           Guest: Marko Papic is a Partner and Chief Strategist at Clocktower Group, an alternative investment asset management firm based in Santa Monica, California. He leads the firm’s Strategy Team, providing bespoke research to […]

The post Episode #357: Marko Papic, Clocktower Group, “If You Don’t Make Calls, Why Are You In This Industry?” appeared first on Meb Faber Research - Stock Market and Investing Blog.

Over the past week, Chinese military aircraft have entered Taiwan’s defence airspace (which is not the same as its national airspace, by the way) no less than four times. Some aeroplanes even exited Taiwan’s defence airspace along the Bahi Channel which is of extreme geopolitical importance. The Bashi Channel connects the Pacific with the South China Sea and is the main shipping route for cargo ships between East Asia and the West Coast of the United States as well as the location of several main undersea cables that are the foundation of global communication systems.

This was clearly intended as a show of force to the world. Does it mean that we are witnessing the start of an escalating conflict that might end in a military conflict or a blockade of the South China Sea? I think not. At least not yet.

But it reminds me of crucial mistakes that contributed to the outbreak of World War I. Back in 1898, Germany had the world’s most formidable land army but a weak navy. Meanwhile, the British Empire’s global influence rested on the unassailable might of the Royal Navy. In 1898, the second-worst political leader Germany ever had, Kaiser Wilhelm II, was no longer advised by the political genius of Otto von Bismarck and decided to try to challenge the British Empire. Under Admiral von Tirpitz, German military expenditures were directed mostly to the navy in order to build more and more modern ships that could challenge British supremacy on sea.

While military expenditures overall remained largely constant, this German pivot led to an arms race between the British and the Germans over the coming decade that would sour British political leaders to Germany and tipped British sympathies in favour of France and Russia which ended in the Triple Entente and British involvement in World War I on the side of France and Russia.

Military expenditure as share of total government expenditure pre-World War I

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Source: Eloranta 2005. Note System total = 16 largest military powers.

Today, China has the world’s largest army by conscription and the People’s Liberation Army is possibly the world’s mightiest land army. Meanwhile, the US Navy and Air Force are unassailable and guarantee US military supremacy around the globe. But while official military expenditure as a share of total government expenditure is declining, the Chinese are rapidly modernising their navy and air force and have entered an arms race with the United States in crucial 21st weapon technologies like drones, submarines, and military AI.

Military expenditure as a share of total government expenditure

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Source: World Bank

Today, China’s navy and air force are too weak to challenge the United States and launch an outright assault on Taiwan or a blockade of the island. But in my view, China is catching up quickly and I wouldn‘t be surprised if, within this decade, China’s military can achieve parity with the United States on a regional basis.

And once that is achieved, the room for error is dramatically reduced.

Note that the United States has just suffered a massive defeat with its botched exit from Afghanistan after a long and costly war that couldn’t be won. US military supremacy in the world is increasingly questioned due to its military failures in Iraq and Afghanistan.

Similarly, the early losses of the British Army against a relatively untrained and unsophisticated army of farmers in the Second Boer War marked the end of unquestioned military supremacy of the British Empire. And let’s not forget the rather embarrassing ‘victory’ of the British in Afghanistan in 1880 or the need for an alliance of eight western armies to defeat the Boxer Rebellion in 1900.

It is only a matter of time until a rising Chinese military might miscalculate and decide to test US resolve to defend Taiwan. Just like the British Empire didn’t have a formal treaty with France and Russia to come to their aid should they be attacked by Germany, Taiwan and the United States have no formal defence alliance either. Chinese military leaders may think that the United States would shy away from military confrontation and thus make a crucial mistake that could lead to a rapid escalation of tensions to the point of war.

But as I said above, I think we are not at that point, yet. So far, Chinese leadership has been cautious not to escalate the situation too much to cross any red lines. But with waning US military leadership and a declining power gap in the South China Sea these red lines will become fainter over time.

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I recently experienced two very different Sundays. The first was a modern-day version of Planes, Trains, and Automobiles as I attempted to navigate my way home from a trip to the Midwest. The second consisted of a 5am wakeup thanks to my younger son, a lunch that was disliked by both boys, and an afternoon driving my older son field-to-field as he officially entered youth sports mania. Yet as different as these days were, they paled in comparison to the things I read/watched.

On that first Sunday, I picked up a Wall Street Journal for the flight home. One of the cover articles was titled “The Social Media Stars Who Move Markets” and profiled a number of “investing influencers”. This group of twenty-somethings with little-to-no investment experience have managed to attract massive audiences and earn millions by doling out investment advice on TikTock, Twitter, and YouTube. The unifying mantra among all of them? Be bullish. Always. It is all they’ve known.

The following Sunday was the twentieth anniversary of the September 11th attacks. Unsurprisingly, this day was filled with remembrances and reflections of that day. Articles covered how 9/11 had shaped America for more than two decades and created a vulnerability not felt in generations. Yet it also highlighted the bravery displayed by many, most notably a 60 Minutes profile of the New York City Firefighters who charged up the towers.

The contrast between the two Sundays was stark, yet makes perfect sense. Given September 11th occurred more than two decades ago, the country is now split between those who “experienced it” and those who have just heard or read about it. For those who lived and/or worked through it, 9/11 kicked off a very difficult decade, especially when you consider the subsequent dot.com bust and Great Financial Crisis. For younger Americans, these events barely represent a blip on their radars. The result is a generational divide centered around the tension between experiencing and learning.

Experienced versus Educated

You can read thousands of books about the Civil War, but you will never truly know what it felt like to be a Union soldier on top of Little Round Top. You can study the Cold War, but you will never fully understand it unless you watched Nikita Krushchev bang his shoe on the desk at the United Nations. You can read about market crashes, recessions, and depressions, but you cannot fully grasp them unless you have invested through one. Unsurprisingly, those who live through moments like these often emerge more risk averse, while those who do not tend to be unphased, or in some cases even more emboldened. Look no further than the 1970’s and the years that followed.

In 1978, Stan Druckenmiller became the youngest director of research at Pittsburgh National Bank at just 25 years old. While Druckenmiller would go on to become one of the most successful investors of all time, he was a relative unknown at the time.

After receiving this promotion just one year into the job, Druckenmiller asked his boss why he was elevated over numerous more senior colleagues. He recalled his boss replying,

“For the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968. I think a big secular bull market is coming. We’ve all got scars. We’re not going to be able to pull the trigger. So I need a young, inexperienced guy to go in there and lead the charge.”

The 1970’s were a brutal decade for the country and the economy. Inflation was rampant, the U.S. dollar lost half its value, oil shortages were widespread, the Vietnam War divided Americans, and the stock market produced a negative real return. There were plenty of brief equity rallies, but nearly everyone who put money to work during these years had been burned. As a result, this decade caused an entire generation of investors to become risk averse. Yet something else happened during the 1970’s that doesn’t get enough attention. It created a massive opportunity.

As Druckenmiller’s boss highlighted, when a generation becomes scarred by past experiences it also opens the door for hungry, risk-seeking, and entrepreneurial young men and women. Luckily, several of them them took advantage during this period; from Druckenmiller to Bill Gates, Steve Jobs, Richard Branson, Sandy Lerner, Howard Schultz, Indra Nooyi, Jamie Dimon, Oprah Winfrey, Michael Moritz, Doug Leonne, and Paul Tudor Jones, among countless others. All were born in the mid-1950s, entered the early parts of their careers in the late-1970s, and started to have a material impact shortly thereafter. Coincidence? I doubt it.

Over the next twenty years (1980-2000), young entrepreneurs, business leaders, and investors helped lead the country through one of the longest economic expansions and secular bull markets in history. They leveraged the infrastructure built in 1960’s and 1970’s (semiconductors, personal computers, automation, digitization, and the earliest stages of the internet) to launch their businesses in the 1980’s and scale them through the 1990’s. There were certainly bumps along the way, including a recession in both the early 80’s and 90’s as well as Black Monday in ‘87, but each proved to be relatively minor speed bumps within a secular market expansion.

Given this backdrop, it begs the question — could we be witnessing a similar pattern today? After the most difficult economic stretch since the 1970’s, the country faced a very similar situation in the late 2000’s. After two deep recessions and a near meltdown of the financial system, another door had opened, and a new generation of unscathed and risk-seeking people once again took advantage.

Today’s Set Up

Why does this happen? Why do some of the most innovative ideas get funded and companies get started during the darkest of days? It seems counterintuitive, but these are often the ideal times to be an entrepreneur or join a startup. The fact is that when the economy is doing poorly, established firms are typically eliminating investments, slashing jobs, reducing compensation, and cutting back on new hires. As a result, the competition for projects is falling, the opportunity cost of going out on your own is low, and the competition to hire talented colleagues is even lower.

This happened in the 1970’s/early 1980s when established firms like General Motors, Ford, AT&T, IBM, Proctor & Gamble, Dupont, and many of the banks pulled in their reins, while Microsoft, Apple, Versace, Activision, Whole Foods, Starbucks, Bloomberg, Tudor, Dell, Adobe, Cisco, Blackstone, and Sequoia all got their starts.

Fast forward to the late 2000’s when Goldman Sachs, Bank of America, Cisco, Marriott, McKinsey, Citigroup, Johnson & Johnson, AIG, and countless “big box retailers” were the ones dialing back, while the likes of AirBnB, Square, 23andMe, Stripe, Shopify, Slack, NuBank, Zoom, Twilio, Moderna, WhatsApp, and Andreessen Horowitz emerged. All were founded after 2006, and most in 2008 or later. The bottom line is that recessions plant the seeds for future economic growth.

What it all Means

So, you may be thinking, “That’s sounds plausible, but it is all in the past. How about what lies ahead?” Three things stand out:

State of the Job Market: If it is more appealing to launch startups and easier to hire talented people during difficult economic times, is it less appealing and more difficult to do so amid an economic expansion and raging bull market? Typically yes, especially when larger companies are generating record profits, hiring hand-over-fist, and paying out generous compensation packages? Yet, while starting a new company and hiring capable teams may still be a challenge, it may not be quite as difficult as in years past. There are several reasons, but one that stands is that venture capital and growth equity firms have been raising massive funds, which are increasingly being used to recruit top talent to join their portfolio companies. The result is that smaller companies are as well positioned as they have ever been to thrive at this stage of a cycle.

Risk….Location, Location, Location: My gut reaction to Millennials and Gen Z’ers chasing jobs in startups and providing investment advice on Tik Tock, Twitter, and YouTube was that it had to be a sign of a top in the market and/or a bubble. On second thought though, isn’t that what younger generations should be doing? Shouldn’t they be the ones taking outsized risks and making bold investments given their youth? If so, could this actually be considered a material positive, especially when the older generations are scarred and more defensively positioned? I would argue absolutely. They are the ones who have the time and earnings potential to recover from any losses they may experience. Said another way, risk today may actually be located in the right hands, which has not been the case in numerous other past cycles.

Secular Bull Market: If risk is in the right hands, capital is flowing into venture capital and startups built off prior technologies, and challenging periods tend to be followed by longer sustained expansions, could we be in the midst of a secular bull market today? As you can see in the chart below, it was certainly true following the 1970s and World War II, and may be true as we look ahead. As with all things though, time will tell.

JP Morgan Guide to the Markets

Added to: BABA

Some time ago, I have written about Henrik Bessembinder’s analysis of stocks with extreme returns in the past. His analysis suggests that there are a couple of fundamental indicators that can be useful to narrow down the list but even so, these factors only explain 2% of the variation in stock returns. In other words, finding the next multibagger stock based on fundamental analysis is a fool’s errand and mainly a matter of luck.

But what about using simple momentum? How likely is it that a stock that has multiplied in value fivefold does so again, and again, and again? Bessembinder’s latest paper provides some interesting answers to that question.

First about 45% of all stocks that listed in the United States between 1950 and 2020 managed to get to 5x their market value from their all time lows. But once a company has multiplied by five, about three in ten of these stocks go on to multiply their market value again by 5x. Of those companies that managed to multiply by 25x, about three in ten go on to multiply their market value again by 5x (now ending up with 125x the market value of their all time low). And of these another three in ten stocks multiply once more by 5x. That means that one in eight stocks manage to multiply their market value by 25x, one in thirty stocks go to 125x and one in a hundred stocks go to 25x! Restricting the sample only to stocks with a minimum market value of $500m by the time they have multiplied 5x doesn’t change these probabilities. Only if you ask how many companies do each multiplication in less than 10 years, you get somewhat lower probabilities, but even so they stay remarkably constant for each hurdle as well.

Probability of multiplying market value 5x again and again

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Source: Bessembinder (2021)

So, extreme performers aren’t that rare. And because the probability of multiplying 5x when a company has done so before is relatively high, one has to wonder if one can’t just buy stocks like Apple, McDonald’s, Walmart or Franklin Resources (all of which have managed to multiply 25x from their all-time lows) and hold on to them?

The problem with that strategy is that the extreme returns are extremely lumpy as well. The chart below shows the average return vs. the market in the 10 years before a stock hits a 5x multiple. Most of the time, these stocks perform pretty much in line with the market, and only in the two to three years before they eventually hit their 5x multiple do they start to outperform. And even so, almost all of the return comes in one year.

Average return vs. market in the years before a stock hits 5x

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Source: Bessembinder (2021)

But if the first multiplication “announces itself with a couple of years of outperformance vs. the market, what happens after a stock hits 5x should make you worry. Returns are all over the place in the ten years after that. There simply is no “long-term momentum effect” that would ensure that stocks that have done extremely well in the last decade will continue to do so in the next few years or even the next decade.

In the end, it all boils down to the same message once again: Finding extreme performers is a matter of luck not skill.

Average return vs. market in the years after a stock hits 5x

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Source: Bessembinder (2021)

The price of Bitcoin has rise for it to go any higher. I’m kidding and serious at the same time. Bitcoin isn’t tethered to fundamentals like say a privately held business or a publicly traded company. If a company generate $2 in cash flow per year, there is a limit to how high a potential buyer will go. Bitcoin isn’t burneded by any such data and paradoxically, the higher it goes, the less risky it becom...

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Science was the first academic subject I stopped pursuing, and I regret it. In high school, the only science options senior year were A.P. and required an extra hour for the lab work. I had other priorities, including a semi-professional dance career that took up a lot of my time. In college, I took the bare minimum of two science courses and chose biology and astronomy. Physics and chemistry were never my strong suit. So...

The post Pluto is a Planet appeared first on The Belle Curve.

Episode #356: Jim Paulsen, The Leuthold Group, “The Wildcard Is Inflation and Whether It’s Truly Transitory”               Guest: Jim Paulsen is Chief Investment Strategist of The Leuthold Group, LLC. He is a member of the investment committee, authors market and economic commentary, and works with the Leuthold investment team […]

The post Episode #356: Jim Paulsen, The Leuthold Group, “The Wildcard Is Inflation and Whether It’s Truly Transitory” appeared first on Meb Faber Research - Stock Market and Investing Blog.

Today’s Animal Spirits is brought to you by NaviPlan by InvestCloud On today’s show Ben and I answer listener questions on: How much cash should you keep on hand? When to refinance Do commodities have a place in your portfolio? How to get a job at an RIA, and much more Listen here: Links: Why do we need inflation? Three fund portfolio How to become a financial advisor XYPlanning Network Charts Contact us at ...

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Salesforce.com Inc. (CRM) continued its upward momentum, outperforming the S&P 500 and rising by approximately 69.2% compared to the S&P’s gain of about 33.3% since the start of 2020. The cloud services company saw positive second-quarter results, and long-term 13F metrics between 2004 and 2021 suggest that Salesforce’s investment potential remains strong.

Salesforce is a cloud-based software company and global specialist in customer relationship management (CRM). It provides CRM services and a suite of applications that focus on customer service, marketing automation, analytics, and application development. Salesforce’s business model has become more attractive during the coronavirus pandemic by allowing customers to use their cloud technology for improved communication and information-sharing during a time of increased telework and remote collaboration. In addition to Salesforce’s 2021 acquisition of Slack Technologies, Inc. that complemented its communication services, Salesforce also recently held its annual Dreamforce conference. The conference focused on helping companies find solutions to problems related to the pandemic and highlighted the importance of digital headquarters.

Hedge Funds Are Buying

Hedge funds and institutions were increasing shares in their portfolios. The aggregate 13F shares held by hedge funds increased to about 185.5 million from 174.1 million. Of the hedge funds, 69 created new positions, 176 added to an existing one, 28 exited, and 110 reduced their stakes. Overall, institutions increased their aggregate holdings by about 1.9% to approximately 713.3 million from 700.2 million.

(WhaleWisdom)

Positive Long-term Projections

Analysts estimate that earnings will fall slightly by January of 2022 and anticipate a subsequent rise by 2023 and 2024 of approximately 4.7% and 20.7%, respectively. These year-over-year changes would bring earnings to $4.62 per share by 2023 and $5.57 by 2024. Revenue estimates are very encouraging, with initial revenue figures for January 2022 of $26.3 billion, followed by more year-over-year estimated increases that would bring revenue to $37.0 billion by 2024, up from $31.8 in 2023.

(WhaleWisdom)

Analysts See Potential

Analysts are optimistic about the stock and raising price targets. Mizuho Financial Group analyst Gregg Moskowitz raised the firm’s price target to $320 from $300 and kept a Buy rating, citing the confidence level of Salesforce’s management team and the quality of sales opportunities. Patrick Walravens of JMP Securities took a positive view of the integration of Slack into Salesforce and raised the price target to $325 from $320, maintaining an Outperform rating. Wells Fargo analyst Michael Turrin kept an Overweight rating on the stock, raising its price target to $340 from $325. Piper Sandler Companies’ Brent Bracelin raised the company’s price target generously to $365 from $280 and shared confidence in a multi-year period of profit expansion and sustained growth.

Favorable Outlook

Salesforce’s history of growth and future multi-year estimates are encouraging for investors. The cloud services company continues to thrive through the pandemic and gain momentum. Analysts’ ratings and price targets speak to the company’s increased value and growth potential.

Hello again. Here’s my latest quarterly portfolio review. After lagging behind global markets in the first quarter, I was a little ahead in both the second and the third. Year-to-date, both my portfolio and the global market tracker I benchmark against are up around 12.5%. Portfolio / Benchmark Q3 2021 Q2 2021 Q1 2021 Annualised…

Read the full article

The post Q3 2021: Quality Fights Back appeared first on IT Investor.

When I talk about climate change and its impact on investments, I tend to observe more scepticism in the United States, Australia, and the Middle East than in Europe. There is obviously a pattern here in the acceptance of climate change and its impact on the planet and financial markets across different regions because, well, the United States, Australia, and the Middle East are three regions with an economy that depends heavily on the production and export of fossil fuels.

Yet, if you go and ask the leading finance professionals in academia, public and international organisations, and private organisations like think tanks the picture changes significantly. There is enormous consensus amongst the people who are at the cutting edge of research in climate finance. Johannes Ströbel and Jeffrey Wurgler from NYU asked 861 top finance professionals about their attitudes on climate change and how it impacts financial markets. Most notably, while 55% of respondents of this survey were academics, 36% were lead economists at private institutions, and 9% at public institutions like the World Bank or the IMF. And only about half of the respondents worked in climate finance, while the other half were outside observers of the field and had no personal research interest in the relationship between climate change and financial markets.

So, what do these experts on financial markets think about climate change? The responses are remarkably similar across regions and professions. Asked about the most important climate-related risk in the next 5 years, all of them came up with regulatory risks as the most important ones. No matter if you asked academics or private-sector economists, people in North America, Europe, or Asia, people who worked in climate finance or not, they all said regulatory changes like the introduction of a carbon tax are key risks for the next 5 years. Looking further ahead, there is also a consensus that over the next 30 years, physical climate change poses the biggest risk for markets and investments.

Furthermore, there is a clear consensus that these risks are currently not priced correctly in financial markets. While almost no one believes that climate risks are overpriced in stock markets at the moment (the share of respondents who believe this is generally less than 3% in each group), about three times as many experts think that climate risks are not priced enough rather than priced correctly. Also, by a margin of two to one, experts generally think that climate risks can be captured by investors in both good and bad economic times compared to good economic times only. In other words, there is a strong consensus that climate risks are underpriced at the moment, which means that active managers who can identify these risks and their impact on stocks can create additional performance, both in good and bad economic times.

Are climate risks priced correctly in stock markets?

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Source: Ströbel and Wurgler (2021)

Originally Published: October 2021 The US debt ceiling is in the news again due to Congressional gridlock, along with the possibility of a US sovereign default and the unintuitive idea of the US Treasury Department minting a trillion-dollar platinum coin to bypass the problem. This article breaks down some of the nuances involved in this […]

In December, it will be 5 years since I started this blog.

In the last 5 years, my views have been tested and have evolved.

I have been investing since the late ’90s, but a bulk of my knowledge has been accrued over the last 5 years as a result of writing and experience.

I thought it would be a good idea to write down the things that I have learned about investing in the last 5 years.

• You should measure your performance and write down what you think.

The process of writing about my personal investments have been eye opening. I recommend that everyone does this. Even if you don’t do it publicly on a blog, at least do it personally.

I have been following markets and investing since the late 1990’s, but it was only until 2016 that I started actually writing everything down and rigorously measuring my performance.

The key advantage of this is that you cannot lie to yourself, which the brain constantly does.

Sometimes, I’ll read through an old post and not even remember that I thought a particular thing – particularly things that I was wrong about. When it’s in writing and you read it, you have to confront your thesis and rigorously measure whether that opinion was correct.

The brain has a funny way of only remembering the wins and forgetting the losses and bad calls.

Writing will make you a better investor because it will force you to be honest with yourself. Your brain is constantly trying to fool you to protect your ego. Writing circumvents this.

• Many quantitative value strategies amount to the small cap value factor, which can be accessed cheaply via an ETF like $SLYV or $VBR. For the more aggressive, there are strategies like $QVAL and $DEEP.

I started this blog after spending years reading about quantitative value investing and spending a lot of time back testing various value-oriented stock screens.

I set out to implement my own version of Ben Graham’s preferred stock screen: low P/E and low debt/equity investing. I added my own twists on this and some qualitative views.

What I failed to accept was that the out-performance of value stock screens amounts to owning a small cap value fund. I would have been better off buying Vanguard’s small cap value ETF and would have had exposure to the same factor.

In fact, the performance of Vanguard’s small cap value fund winds up outperforming many many of the screens I was testing. More importantly, buying & holding a small cap value fund is less prone to the kind of behavioral errors you’ll experience by actually managing a 20-30 cheap stock portfolio.

If I simply owned a small value ETF, I would have had exposure to statistical cheapness but I wouldn’t have struggled as much with the implementation. Getting into the depths of some of these junky companies led to behavioral errors. I sold a Florida insurer because a hurricane was imminent even though the losses were already priced in. I sold GameStop because the private equity deal fell through. I made many mistakes because I was too in the weeds.

The nice thing about an ETF is that you can just let the strategy work. Getting into the weeds actually detracted from my performance and led to behavioral errors. An ETF can simply be put on a shelf for years and the result will be much the same.

The big small value ETF’s like VBR and SLYV give exposure to the factor. Things like QVAL and DEEP are higher octane.

• You can’t time the market.

I took Warren Buffett’s quote ‘be fearful when others are greedy and greedy when others are fearful’ to heart. Reduce risk when markets are hot. Get in on risk when markets aren’t frothy.

I figured this could be accomplished with two metrics: market cap/GDP and the yield curve. Market cap/GDP tells you how overvalued the market is. The yield curve is a warning sign that a recession is imminent.

This didn’t work for me. My conclusion is that the market cannot be timed and doing so leads to behavioral errors.

It’s easy to say “something unprecedented happened” and that’s why this didn’t work. Unfortunately, something unprecedented is always happening in markets and is a part of the game. Every method that has a perfect track record will stop working once investors know about it and try to implement it.

Trying to find this solution is seductive, but it is folly.

• Factor exposure is critical to dissecting returns.

Often, when you hear about a great investor, you can dissect their returns by analyzing their factor exposure and their asset allocation.

For instance, many of the heroes of the 2000’s was simply long small cap value. Many of the heroes of the 2010’s was simply long large cap growth.

The superstars will take credit for their out-performance, but I don’t believe it’s real. They were simply in the right place at the right time. They ought to get some credit for being in the right place at the right time, but not as much as we give them.

• Asset allocation should be the focus for most investors.

When I started this blog, I thought only asset allocation that made sense was 100% stocks – particularly statistically cheap stocks. I no longer think that this is true.

Not everyone is comfortable with lost decades and a 50% drawdown every 15 years, for instance. That’s the track record of stocks.

This blog represented money I set aside to buy cheap stocks. The rest of my money was in a real soup of random ETF’s and stocks – most of which had a value focus.

I set out in 2018 to organize ‘the rest’ of my money into something more consistent and systematic. This turned out to be a critical exercise.

That journey led me to develop the weird portfolio. I’m lucky that I developed this approach going into 2020. For this allocation, I didn’t allow myself to get active – to pick and choose which assets would outperform.

This asset allocation would up out-performing the account that I track on this blog – which is my ‘active’ money.

These asset allocation decisions are critical for investors and can help generate a more consistent rate of return more attuned to their needs.

Everyone needs to figure out what asset allocation they are comfortable with and will meet their needs, but I think that this particular decision is more critical than I ever imagined.

• Looking for moats & quality is not a waste of time.

5 years ago, I thought that buying statistical bargains was the only option. I now think that a quantitative approach is best implemented through an ETF.

Meanwhile, I scoffed at people who thought they could identify ‘quality’ and I thought that they were deluding themselves.

Sure, it’s quality now, but it will just mean revert and you’re crazy to think you can find a good company.

These days, when buying individual stocks, I think that it is important to find quality companies.

I was confronted with this through my own errors buying individual value situations. Because I was always waiting for the other shoe to drop with the economy, I would sell cheap companies as soon as they experienced trouble.

The stocks I bought were not ‘long term’ situations and I intuitively understood this.

The problem is – if it’s not a long-term situation – you need to get the timing right. I could never quite get that timing right.

Rather than completely give up on this ‘active’ account that I track on the blog, I decided to adjust my approach. I’m still looking for value, but I’m looking for value situations that I would be comfortable holding for the long term.

The only way I’ll be able to hold a company through a drawdown is if I actually believe the firm. What do you do with an airline or steel company when it looks like the economy is about to collapse? Tough question. Meanwhile, owning something with a moat – a defense contractor like General Dynamics – is something I’m actually capable of doing.

When buying individual stocks, I want to own the sort of firm that I would be comfortable holding for a very long time.

I used to think this was an impossible pursuit, but the more I’ve read and experienced with stocks the more I have changed my mind. Some key influences on this journey were the work of Pat Dorsey, Terry Smith, and – from the Twitter verse – Lawrence Hamtil.

• Everyone needs to figure out their own approach.

5 years ago, I thought there was one true path to investing – and that path was buying statistically cheap stocks.

I no longer think that this is the case. For some people, flipping deep value will work for them. For others, coffee canning growth stocks will work.

For me, an asset allocation approach with ETF’s solved many of my issues. Having a side portfolio with the ability to buy individual stocks helped me, as well.

Everyone needs to figure out their own approach. Everyone has different risk tolerances and beliefs.

The most important thing is finding an approach that you can actually stick with. It’s a different journey for everyone.

• Savings rates trump everything.

In my 20’s, I got myself into a bind with debt. I focused and worked in extreme ways to dig myself out of it.

In my 30’s (which are now almost over), I carried over the same intensity I had towards paying off debt and harnessed it towards saving money.

5 years ago, I didn’t quite appreciate how much money I had saved. I was more focused on my CAGR and less on my savings rate. My savings rate was already high at that point – but I never appreciated that those frugal behaviors were so critical.

I can’t understate the impact that my high savings rate had on my life. More importantly, I can’t understate the amount of peace this has brought to me. Indeed, the best thing about money is not having to worry about money.

I think back to the days when I was in debt and would be in a constant state of panic & worry (particularly after a period of homelessness) – constantly worried about losing my job, where I would live if I lost my job, how I would pay for food this week, etc.

I don’t have those worries, anymore. It’s freeing.

I remember thinking things in my mid-20’s like “I wish I had an apartment, a few thousand saved, and no debt.” That was literally all I wanted back then. I have now wildly exceeded those modest wishes.

I used to look back on the years I accrued debt with regret, but now I feel fortunate that I experienced them.

If I didn’t go through the experience of living out of my car, I probably would still foolishly waste my money. Those hard times taught me important lessons about money those other folks simply can’t understand because they didn’t live through it.

The amount of money I’ve saved since those days has exceeded my wildest expectations. The reason I’ve gotten there is frugality and focusing on savings. I’ve succeeded in this arena due to this focus on saving money, not due to any investing acumen.

Savings rate is more important than CAGR. If you’re not saving and living beneath your means, then it doesn’t matter how much you make in investing. You’re going to blow it on lifestyle choices.

Indexing? Growth? Value? It doesn’t matter if you’re not saving money and living beneath your means. Without savings, financial knowledge is wasted.

Random

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Read the full disclaimer.

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I'm already confident that one day I will reach financial independence. But what will I do then? There are so many options to pursue!

The post Financial independence and my plans appeared first on European Dividend Growth Investor.

The Art of Doing Nothing

I didn’t do a single trade this quarter.

I just let everything sit.

It was great.

I believe that this is the first time this has occurred in the history of this blog.

Overall, my portfolio is up 13.61% YTD. It’s not bad considering that 28% of the portfolio is in long term treasuries and gold.

Currently, this is the composition of the account that I track on this blog:

Note that the above results are not YTD, but from my purchase price.

I haven’t changed any allocations or done any trades this quarter. I’m letting my individual stock picks sit and I’m letting the weird portfolio do its work.

Weird YTD

If you’re unfamiliar with the weird portfolio, you can read a cliff notes version of it here.

YTD, the ‘offense’ assets are ripping and the defensive assets are struggling.

This is as it is supposed to be. If the economy were to take a dive, I would expect this situation to reverse.

I see everyone arguing about what’s going to happen to the macro-economy and I cannot bring myself to care about their predictions. I’m totally comfortable having a bulk of my money in the weird portfolio because it has something that will do well no matter what happens.

Is inflation going to rage? Ok. I have gold and real estate.

Is the inflation truly transitory and simply a result of supply chain issues? Ok. I have long term treasuries, which should benefit from deflation.

Is the economy going to continue going gangbusters? The ‘offense’ slice of the portfolio should be fine.

Will the Delta variant and Fed tapering cause a downturn? Treasuries ought to save the day.

I just don’t care about this stuff any more.

That’s the kind of serenity that this sort of portfolio brings.

Substack

I have been negligent with my sub-stack this quarter. I need to get back into that habit.

My actual job continues to be insane after my promotion and I just haven’t had the time or mental energy to do deep dives into companies.

Another reason for my negligence is the overvaluation of the market. Every company that I look at is so insanely overvalued relative to its history that I can’t get particularly excited about the project.

The purpose, of course, is to have the work done on companies before a downturn in the market – or, alternatively, when one of these companies experiences a temporary problem that makes the price attractive.

I’ve done the work on many companies and I’ll know an opportunity when I see it. There aren’t any opportunities, right now. I need to get back into the habit of updating this on a regular basis.

Hopefully I pick this up, again.

But . . . don’t expect any buys. The typical company I’m looking at is nearly 50% overvalued relative to its history. I’m not putting a dime into that sort of situation. The weird portfolio is a much superior alternative to that kind of set-up.

Books

I spent a lot of time with Anne Rice’s first three Vampire Chronicles books this quarter.

Interview with the Vampire

The Vampire Lestat

Queen of the Damned

They were all fantastic. They were also far removed from Finance – which was the point.

On one level, the books are just a rip roaring adventure through the supernatural. This is particularly true once the story is told from Lestat’s POV in book #2. Louis (the protagonist of book #1) is a bit emo and morose. He feels damned and doesn’t want to be a vampire. In contrast, Lestat positively loves the adventure that he’s on.

On a deeper level, the books explore deep themes about life and death, good and evil. Stories about vampires who live forever and feed on us is a great template to explore those concepts. There were multiple times I had to put the books down because something in them blew my mind so much.

Additionally, I love the books because they’re about vampires who are genuinely terrifying. These aren’t vampires that are going to fall in love with you. They’re certainly not going to go to high school or sparkle. They’re actual, blood sucking, monsters.

Here is an example of a passage that blew my mind and made me think:

I highly recommend these books if you’re into something a little supernatural. It’s certainly the right time of year for that.

Random

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Read the full disclaimer.

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A selection of correspondence