Losing Money Together Is Still Losing Money
Top 5 of the Week of February 5
Matt Levine, writing for Bloomberg, heads up our Top 5 this week with an article about when bankers should not follow the crowd. Jason Zweig on his Safe Haven for Intelligent Investor’s blog reveals just who is behind the demise of the active management industry. And Mark Rzepczynski on his self-named blog examines the outcomes of the painstaking research in The Rate of Return on Everything, 1870-2015 (TRRE).
Jesse Livermore, the pseudonymous blogger of Philosophical Economics, looks at how pension funds generate their returns. And Lawrence Hamtil from Fortune Financial imagines what the next bear market will look like…
Losing Money Together Is Still Losing Money
- The top two functions of being a good banker are 1) complete a lot of good trades and 2) complete a lot of trades
- Or not. Rather than playing for numbers, it’s arguably better to hit fewer quality trades than hit many bigger, more inferior ones—except that’s often not the case
- The pressure to be shown being busy and trading usually outweighs the anxiety that will inevitably come for booking a loss later
- ‘Because everyone else is doing it,’ only means you’ll be in good company when you lose money too
The Architect of Its Own Demise
- A truism that is often overlooked is that the decline of the active investing industry over passive is very much its own fault
- If stock pickers had run their companies more thoughtfully or—at least addressed investors’ concerns with active management—investors may not have turned so readily to index funds
- As it is, that’s not how history played out, and active management has become “a deep out-of-the-money call option on hope—with no exercise date”
Safe Assets Aren’t Exactly ‘Safe’
- One of the most surprising results of TRRE research is that safe assets go through long periods generating negative returns
- Also significant is the rarity of high real rates of return on bonds, making it very unlikely that they will ever go back up toward the heights they reached in the 1990s
- All told, there’s no such thing as a ‘safe’ safe asset, and so, we should never be careless about our asset allocation choices
How ‘safe’ are your assets? Share your comments in the section below
Where Are the Returns Coming From?
- In an ideal world, pension funds generate an average annual return of 7.5%, which in today’s current economic environment is due to equities
- Since the 1950s, pension funds have been moving their allocations from fixed income into equities as the primary class with the average stock exposure now being 70% per fund
- This significant shift has also attributed to the overall increasing stock valuations across markets, thanks to pension funds being a large market participant
Hold Back on the Anticipation
- As ever, when in the midst of one market, everyone is already awaiting the next—making the upcoming bear market hugely anticipated
- With history to show us how unique each past bear market has been and the global markets being what they are today, it’s unclear what shape the next one will take
- This uncertainty may tempt investors to overdiversify in advance and mitigate any potential portfolio threat, but spreading capital that thinly would only have an adverse effect
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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