Evidence Based Investing

Modelling the Future?

Evidence Based Investing | March 11, 2017

An analyst one sunny morning was searching for something in front of his house. A passer-by asked him what he was doing. ‘Looking for my watch,’ he said. After some time looking around, the perplexed onlooker asked him if he was sure that he lost it there, to which the analyst replied “No I lost it in my shed, but it’s too dark in there to find it.’ When you ask an equity salesman whether stocks are “cheap”, the answer follows without hesitation (and it’s always in the affirmative). The most popular justification over the last 20 years has been that shares are “cheap” relative to bonds, and they often point to the Fed Model to emphasise this point. As the chart below shows, the track record between 1980 and 2000 has been impressive.

Dancing on the Ceiling

Evidence Based Investing | March 3, 2017

“Investing is complicated by the fact that doing dumb things and losing money are not very strongly correlated”. Evan Bleker, tweet, 1st March 2017. Like the Greek debt crisis, furniture store sales promotions, and Arsenals hopes of winning the Premiership, some situations are doomed to be repeated, almost endlessly. Once again, a potential US debt crisis has resurfaced, with March 15th (coincidentally the date of the Dutch general election too), the focal point of renewed angst, as some are now openly talking about another Government shutdown.

The Gh(ars)tly state of GARS

Evidence Based Investing | February 24, 2017

This saying may be true, but sometimes it too hard a temptation to resist. Standard Life is a HUGE company]. According to it’s Website, it directly runs £269 billion in funds, and several hundred billion in third party money, as of June 2016, which is more than the GDP of Scotland, from whence the company came.

The Anatomy of Earnings

Evidence Based Investing | February 17, 2017

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”- Warren Buffett. It is always helpful to focus on what a share actually represents- it is a claim on a stream of long term cash flows to which shareholders are entitled over time. Given that the price one pays has a strong relationship with future returns, (the higher price one pays, the lower the expected return will be), a method of valuing these cash-flows would seem a sensible starting point. The future being what it is, however, it is not an exact science. Whether it is by design or malice, analysts often get their projections badly wrong. One of the reasons may be to do with their methods of analysis, or more precisely their mindsets when doing said calculations.

Good and Bad Behaviour

Evidence Based Investing | February 3, 2017

“Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?” ― Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions Conventional Finance theory has long assumed that Investors/Consumers etc. are rational, risk-neutral wealth maximisers, but the experience of the Dot Com bubble, the mortgage bubble and so on has led many to question this premise. Thus was born the field of Behavioral Finance, which posited that people make irrational decisions in a large number of situations, partly due to hard-wired psychological impulses that we find difficult to control.…

Investing in the Past?

Evidence Based Investing | January 27, 2017

Despite oceans of liquidity, zero (or sub-zero) interest rates and all the politician’s exhortations, Companies appear unwilling to invest. Thus, despite the best efforts of Carney, Yellon, Abe and Draghi, the global economy continues to stagger along, with only stock markets showing signs of strength (and even here, it appears that Investors and Traders are fully invested – and absolutely terrified!) Uncertainty rules, with a myriad of “problems” ahead that could end the bull market in an instant (“could” is emphasized here, for good reason). But what is clear is the Reagan’s “Trickle Down economics” has not happened, with the Gini Co-efficient (a measure of in…

Party like it’s 1999

Evidence Based Investing, Factor Based Investing | January 13, 2017

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one… Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome… Nations, like individuals, cannot become desperate gamblers with impunity” Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841 Since the victory of Donald Trump, (equity) markets have been on a tear: there appears to be nothing to stop them, as optimism abounds. But there are some strange reminders of a past era, one that didn’t end well for Investors. Will history repeat – does it have to?

Concentrate – this may get tricky

Evidence Based Investing, Market Commentary | January 6, 2017

“This too shall pass” – medieval Persian poetical saying. The Big Money (Sovereign Wealth Funds, Global Pension money etc.) invests primarily on the basis of Currency – they first select the currency they wish to invest in and THEN the asset class that they prefer, according to their risk tolerance… It is the ebb and flow of this gigantic amount of money that creates Capital Account surpluses and deficits, which in turn can move interest rates and thus currency values themselves, in a feedback loop. Global Capital moves to where they feel safest, and at times they all seem to agree on a preferred course of action – this may be one of those times.

The value of Value

Evidence Based Investing, Factor Based Investing | December 2, 2016

“Price is what you pay. Value is what you get.” – Warren Buffet. [All returns are quoted in US Dollars, to avoid the currency effects of Brexit on Sterling returns. The basic premise, however, is not changed by the base currency choice as currencies tend to be correlated with the economic cycle, whereas the Value (and Size) premium is understood to be independent thereof. I have used the MSCI World Index, as a global equity proxy. Essentially the same situation pertains throughout the regions of the world and especially so in the UK].

Right in Two…

Evidence Based Investing, Market Commentary | November 25, 2016

Blackadder: I was under the impression that it’s common maritime practice for a ship to have a crew?Captain Rum: Opinion is divided on the subject. Everyone else says you should-I say you shouldn’t. Blackadder. “Potato” 1986.