Linking Up – 1/8/14

New leader of the Fed:

Janet Yellen was confirmed to lead the Federal Reserve. (Politico)

Her expected impact on the economy. (Time) and (Fox Business)

Can she inspire more women to follow her lead? (Bloomberg)

Forecasts for 2014, some more serious than others:

A comprehensive look at where we are now, and what could happen next. (Reformed Broker)

Gold analysts are bullish. (Bloomberg) But wait… they were also bullish a year ago. Oops. (Kitco News)

A geopolitical look towards 2014, reviewing some of their general forecasts for the year. (STRATFOR)

Twelve predictions that are delightfully cynical – and yet surprisingly accurate. (25iq)

A longer list of mostly economic predictions … but with a Miley sighting at the end! (Avondale Asset Management)

Miscellaneous and informative:

Like any enjoyable movie based on real life, now we can learn more about the true story that inspired “The Wolf of Wall Street.” (Wall Street Journal)

There have been several articles recently noting value investors’ increased cash holdings as they find bargains tougher to uncover. (Bloomberg) and (Wall Street Journal)

Change your attitudes regarding investing by becoming more flexible. (Research Puzzle Pieces) and (Adam H Grimes)

Long-Form:

**This style has become part of a new favorite tradition, where I try to consume several long-form articles each week before falling asleep. The good ones are insightful, inquisitive, and remarkably informative in a way that most forms of journalism are simply unable to be. So when I’ve read something good, I’ll include it in my link posts, even if the article is not recent (since unlike most other links here, these maintain relevancy long after their date of publication).**

An awesome look at the ground-floor of a larger international dispute between China and the Philippines, with the USA watching closely from afar. (NY Times)

Attempting to lift the veil behind Netflix, one of today’s most analytically progressive companies. How do they know what I want to watch? (The Atlantic)

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Looking Back to Look Ahead

Most weeks, 361 Capital posts a research report examining various market related topics. They’re generally excellent, and the final report of 2013 contained a chart (Figure 4) which looked at the annual price performance of the market. There were a few takeaways from this chart that I thought were useful.

Firstly I’m offering a disclaimer, particularly in light of my post yesterday where I alluded to the market’s fixation on setting expectations. Just because the market behaved a certain way in the past has no bearing on what will happen in the future. The market could go up. Go down. Go nowhere. Bane could take over the NYSE. Who knows what else?? Barry Ritzholtz had the right idea. I view predicting the future moves of the market as a colossal waste of time.

Having said that (shout-out to Larry David), looking at what’s occurred has its uses. At the very least, it doesn’t hurt to see how past investors have responded to similar circumstances. Talking heads love to declare that something happening now is the biggest and baddest ever, throwing out declarations such as “This is the most dysfunctional political climate in US history” (uhhh…. Civil War, anyone?). It’s seductive to think we live in extraordinary times, as people like to think that they and the times they’re living in are unique. There certainly are many parts of today’s life that differ from the past; that’s not my point here. In the realm of investing, however, I believe that much of what drives the markets has changed little through the years. We as humans are still prone to fear, euphoria, and bias, just as we always have been. So, in looking at 361 Capital’s chart, I had the following thoughts:

  1. The market goes up far more than it goes down. Admittedly, this is not groundbreaking news. I feel it’s important to point it out, however, as many people I know and respect view the markets skeptically. Over 65% of the years since 1896 have been in positive territory. 65%!!! And over the past three decades that number jumps to 77%! Since 1984, there have been two years where the market was down at least 20% (2002 and 2008), whereas the markets have gone up at least 20% in ten different years. Check it out:
  2. 1.7.14 chart2013 will be tough to repeat. Aside from the 4-year stretch we saw in the mid-1990’s, the last time the S&P 500 increased for two consecutive years above 20% was 1954-55. The phenomenon did occur a few times earlier in the last century (1897-98, 1904-05, 1924-25, 1927-28, and 1935-36; note that the DJIA was used for the years before the S&P 500 was established), but in the past half century it’s been a rare occurrence. 
  3. Great years happen more often than we think. Twelve of the last fifty years have seen the S&P 500 increase by at least 20%. Looking at the following year, the average increase is 12.41%, an amount that exceeds the S&P’s average annual return:

1.7.14 chart2

Again, don’t expect the market to increase 12.41% just because that’s what it’s done on average following years like 2013! The point here is not to predict, but rather to show what has occurred before. Given the trauma experienced around with last recession, many writers, thinkers, and investors are seemingly on pins and needles, waiting for the other shoe to drop. If fundamentals remain strong, earnings continue to improve, and no unforeseen calamities strike, then there’s no reason the market can’t continue to grow! It may not occur at the level of 2013, but history shows us that – more often than not – a year like we just experienced is not in of itself a predecessor of economic calamity.

 

Next time…

I’ve started this blog with the intention of writing frequently about stocks, investing, economics, and business.  In addition to my own work, I plan on compiling links of enjoyable/useful readings found elsewhere on the web. By forcing myself to transcribe my thoughts into something coherent, I hope to become a better thinker, debater, researcher, and of course, investor. I’m excited to see where this goes! The next one will be more charts and fewer words… It’s good to be writing again!

The Market’s Expectations

“So much of school is a waste,” he said, “it took 4 years of accounting classes to learn what took 3 months at my firm.”

(I should note that this is a post about expectations, particularly in investing. I’ll get to that in a minute.)

When my friend made that statement recently I didn’t have a good response. We went to college together, and he now works as an auditor. I was over that day to get his thoughts on which prospective UCLA accounting class would be most useful, but  after a few hours I left his apartment without a recommendation. This conversation got me thinking, however, about the following question: what things in adult life does college fail to prepare us for?

There are many responses. My friend believes that college often concentrates on the theoretical at the expense of what’s practical. David Brooks has opined that given its outsized impact on one’s happiness, colleges should offer courses on who to marry. James Altucher says skip it entirely and start a business. My first thought was about the art of managing others’ expectations, a concept I’ve learned a lot about since graduating. I’ve been surprised to find that people can tolerate all kinds of terrible developments, so long as they don’t feel blindsided by them. At the time I was finishing school, however, the only relevant wisdom I had was: 1) better to under-promise and over-deliver, and 2) the worst way to drink Absolut is when you thought the cup contained water.

Expectations are a powerful force, as we crave having even a hint of what’s next. It’s gratifying when what we expect comes to pass, as we’re able to appropriately calibrate our emotions ahead of time. Doing so allows us to avoid situations where – because of a surprise invalidating our expectation – we respond with irrational emotions. Being wrong about an expectation is often worse than not having one at all. The most devastating curveball, for example, is one the hitter doesn’t expect. We see it constantly in the market, when companies hitting or missing earnings expectations can be the impetus for wild price movements. In recent months, hearing “shares rose after company XYZ beat expectations” has been a welcome and prevalent sound bite.

What’s maddening in the markets is that the reaction to hitting or missing analysts’ consensus predictions is not always rational; Apple announced staggering profits a year ago, but because they didn’t sell enough iPhones that quarter, their shareholders were promptly rewarded with a 14% price drop (you can probably guess why I’m still bitter about this). So it goes… but what can be done about it? One individual can’t teach the entire financial system not to irrationally overreact because some analysts’ expectations were invalidated. In fact, I wouldn’t want to, since great opportunity awaits when the herd is being irrational.

A relatively famous investor once said, “… try to be fearful when others are greedy and greedy only when others are fearful.” The quote’s fine print is that following this advice is scarier than advertised. There’s comfort being amongst the herd; everyone succeeds or fails together. For the investor with low self-belief, the fear of failing alone often overshadows the potential of succeeding alone. But if you aspire to do better than the herd, looking to profit off the market’s irrational reactions is an excellent place to start. If you don’t feel comfortable with taking unpopular positions in unpopular companies, then you’ll save time, energy, and heartbreak by buying a low-cost index fund and letting the market work its magic. But if you’re feeling bold, the opportunities are out there… and on this blog I’ll be looking for them.

Getting Started

Getting the blog together… had no idea it would take all day (completely missed the football game). After setting up all the formatting, design, and code, I completed my library. Check it out!

Update 1/6/14: Posted links to my thesis and another, more recent, research paper. I’m done tinkering (for now) with the About Me page, and just finished the final draft of my first post. Next up, more content!