Evidence Based Investing

The Market for Lemons

Evidence Based Investing | March 15, 2019

“Successful investing is about managing risk, not avoiding it” – Benjamin Graham. This phenomenon describes the adverse selection / knowledge asymmetry between buyers and sellers in, for example, the used car market. As prices (or in this case, standards) fall, the only willing sellers at a given price will be those that have “lemons” (defective goods) to sell. Thus, the average quality of goods available in the market gradually falls, leaving only poor quality goods left, which is a form of Gresham’s Law.

What’s Wrong with Buybacks?

Evidence Based Investing | March 8, 2019

“When stock can be bought below a business’s value it is probably the best use of cash.” – Warren Buffett (at the 2004 Berkshire Hathaway AGM). We covered this issue previously in June of last year, primarily from the economic angle, but recent events have appeared to politicise the issue. Several prominent Democratic Senators (Chuck Schumer and Bernie Sanders) want to prevent firms from buying back their shares unless they also increase worker pay and benefits, implying a link between low wage growth and high share buybacks. Marco Rubio, a Republican Senator has joined in. He wants to end the favourable tax treatment afforded to share buybacks (so that they are treated the same as Dividends for tax purposes). Thus, it is believed, firms may be more inclined to either pay out higher dividends or invest more in their businesses.

A Torrid January

[The above appeared on the window of a Bookshop, “Bookends of Fowey” in Cornwall]. We don’t often do market commentaries in this blog, but after the biggest January gain for 32 years, it might be useful to look at what drove asset markets to such giddy heights, whereby nearly ALL asset classes went berserk. Once one pores over the fine print regarding performance, some interesting pictures emerge. The first is the economic backdrop, which does not appear overly helpful. Interest rate markets imply no more rate hikes, as the US economy appears to be slowing substantially, potentially taking the global economy with it.

Horses for Courses

Evidence Based Investing | January 25, 2019

“He’s like a man with a fork in a world of soup.” – Noel Gallagher on brother Liam, (Q Magazine, April 2009)

Something Wicked This Way Comes?

Evidence Based Investing, Market Commentary | January 18, 2019

The passing of Jack Bogle this week leaves the world of investing much poorer, but his career has benefitted investors enormously (nearly $1 trillion) according to some. He eschewed the riches that most on Wall Street seem to covet and genuinely helped millions of investors get cheap access to capital markets returns. This post sums up what many of us owe to him; he has truly left an enormous legacy, which we should all try to keep alive. “Success is not final, failure is not fatal: it is the courage to continue that counts.” – Winston Churchill

Are Markets Becoming Less Illiquid?

Evidence Based Investing, Market Commentary | January 11, 2019

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price – Investopedia.

Balancing all the Factors

Evidence Based Investing, Factor Based Investing | January 4, 2019

As our clients are well aware, EBI uses “Factors” within our portfolios to “tilt” our holdings towards those areas that exhibit a premium over and above that of the market for exposure to various specific characteristics. All portfolios have a tilt towards Small Cap and Value shares, but for the World Portfolios, we also employ Momentum, via iShares and Vanguard managed ETFs. It begs the question as to why we don’t use more “Factors”, which we shall attempt to address here.As the chart below describes, the growth of Factor Investing has been enormous, quadrupling in the last 6 years, as US investor interest has mushroomed.

Equity Orphans

Evidence Based Investing | December 7, 2018

“Victory has a thousand fathers, but defeat is an orphan”. – John F. Kennedy As ESG/SRI goes mainstream, with more providers offering ethical options for investors, the spotlight has fallen on those shares that do not fulfill the criteria required for inclusion in “Responsible” portfolios. As a result of the potential tracking error risk for Investors arising from wholesale deletions of a large number of firms from the mainstream indices, Fund Management firms have been cautious in what they omit from their Index funds, mostly restricting themselves to 3 main sectors; controversial weapons, Coal producers and those firms that fail to comply with the UN Global Compact on Corporate sustainability.

Expert Analysis

Evidence Based Investing | November 30, 2018

“The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’ — which states that the number of potential connections in a network is proportional to the square of the number of participants — becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s” – Paul Krugman 1998 If we were in any doubt as to the value of predictions, the above quote should put it to rest. One wonders how one can be so spectacularly wrong and still retain credibility, but it does not appear to have damaged his reputation – he is a Nobel Prize winner no less!

Bond Features

Evidence Based Investing | November 23, 2018

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody”. -James Carville US Political Commentator. Bonds, like the companies that issue them, come in a bewildering array of forms, from the plain (Government bonds etc.) to the downright esoteric (High Yield, Municipal and even PIK varieties), but investors in all of them have to ask themselves, how confident am I that I will get my money back and (more importantly for the investor’s return on capital), when?