Anytime anyone offers you anything with a big commission and a 200 page prospectus, don’t buy it. Occasionally, you’ll be wrong if you adopt the “Munger Rule”. However, over a lifetime, you’ll be a long way ahead – and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.
Source: Bevlelin, P. (2003) Seeking Wisdom From Darwin to Munger. Sweden: Post Scriptum AB
NYU Professor Aswath Damodaran is a well known expert in valuation, but he is also an investor in many of the companies he values. His investment style is to look for companies in the market that are currently trading at a discount to what his valuation analysis shows is its intrinsic value.
He is kind enough to post these valuations and importantly the narrative and assumptions used in valuing the subjects in detailed posts and videos on his blog. He is the ultimate teacher, who loves to instruct and puts all of his intellectual property online for free for anyone who wants learn.
In his recent post on his valuation and investment in Valeant Pharmaceuticals, he highlights an important and much overlooked part of investing.
Faith and Feedback
In both my valuation and investments classes, I spend a significant amount of time talking about faith and feedback and how they affect investing.
Faith: As an investor, you are acting on faith when you invest, faith in your assessment of value and faith that the market price will move towards that value. If you have no faith in your value, you will find yourself constantly revisiting your valuation, if the market moves in the wrong direction (the one that you did not predict) and tweaking your numbers until your value converges on the price. If you have no faith in markets, you will not have the stomach to stay with your position if the market moves against you.
Feedback: As an investor, you have to be open to feedback, i.e., accept that your story (and valuation) are wrong and that market movements in the wrong direction are a signal that you should be revisiting your valuation.
Source: Musings on Markets
A few years ago Vanguard performed a study to see how the Barclays Aggregate Bond Index would be affected by an overnight 3% rise in interest rates (something that has never actually occurred). They calculated what would happen if rates suddenly rose from 2.1% to 5.1% and showed the impact going out 5 years:
You can see the immediate loss would be around 13% (they also noted that the worst 12 month loss ever in bonds was -13.9% in 1974). But because the yield on bonds would now be much higher, the expected return going forward would now be around 5.1% annually, meaning the breakeven would be just over 3 years. So not exactly a crash of epic proportions.
The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.
Source: How Renaissance’s Medallion Fund Became Finance’s Blackest Box – Bloomberg
REITs have been the darling asset class for the last few years, they out performed all other asset classes in 2010, 2011, 2014, 2015 and the first half of 2016. After being up 13.7% through June 30th of this year they have almost entirely wiped out that gain and are about to go negative for the year.
The Vanguard REIT ETF which tracks the MSCI US REIT index is currently yielding 3.92%, not much of a premium over the riskless US 10 year Treasury at 2.35%.
REITs have benefitted from investor’s search (reach) for yield and low borrowing rates on properties. That could be coming to an end with the rise in the 10 year Treasury, a looming rate hike by the Federal Reserve in December, and rising defaults on commercial mortgages.
Buyer beware, we could be looking at a repeat of the Master Limited Partnership (MLP) debacle in the second half of 2015.
Head over to the Mebfaber.com website and listen to a master class on factor investing (smart beta). Two of the best quantitative researchers on the subject do a deep dive into their findings and how most investors don’t implement the strategy correctly.
Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.
The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.
So what are inflation-linked bonds? They are most typically debts issued by sovereign nations whose nominal interest rate is adjusted, either up or down, by an inflation measure.Despite the obvious allure of this kind of debt — it eliminates a risk: inflation, duh! — there are not many issuers worldwide. Total global issuance is $3 trillion. The United States, with $1.2 trillion, and the United Kingdom, at about $800 billion, are the principal movers, though there is growing issuance in France, Italy, Spain, Germany, and Brazil, among other markets.
