Evidence Based Investing

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.

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.

My Name is Bond…

Evidence Based Investing | November 18, 2016

“You expect me to talk Goldfinger?’ “No, Mr Bond, I expect you to die” Goldfinger, 1964.

Watch out for the Traps

Evidence Based Investing, Factor Based Investing | November 4, 2016

“Bankers are just like everybody else – except richer. Ogden Nash (US Poet 1902-71).(This post is going to be a little formula heavy. Sorry, I shall return to my usual inanity next week). Since 2009 Central Bankers (via QE etc.) have created a situation whereby all asset prices now have more or less the same expected long-term returns, such that Investors are now indifferent between them. So, Investors have (as was intended), been forced to look for alternative strategies to improve their return outlook. Two such strategies have emerged: the “reach for yield”, namely the buying of High Yield equities on the one hand, whilst others have focused on “Value”, to wit, the purchase of assets that are relatively cheap compared to their respective alternatives. Both contain some assumption flaws, which we will look at in turn.

Europe- the Final Countdown?

Evidence Based Investing | October 14, 2016

“Once a barrel of lit matches rolls into a field of dynamite sticks, you don’t try to predict which one will explode; you just get the heck out of there”- John Hussman (US Portfolio Manager). Sterling’s immolation has taken centre stage again this week, but behind the scenes, after a long lull, problems in Europe are starting to re-appear. Both political and economic issues, long avoided, have come home to roost, putting the prospect of full-scale crisis back on the agenda. Let us count the ways…

Structured to Fail…

Evidence Based Investing | September 30, 2016

The hypocrisy of some is that we like to think of ourselves as sophisticated and evolved, but we’re still also driven by primal urges like greed and power- Michael Leunig (Australian Cartoonist and Poet). [This posting serves as an adjunct to the latest Wendy Cook article, posted on Tuesday, regarding Structured CD’s in the US. What follows is a more UK-centric version of same].—Last week an adviser asked me about a new Structured Product a client had shown him. My first reaction was to rubbish it. However, I felt duty-bound to delve deeper into it. What I found made me wonder whether I had under-reacted! What I want to show today is not only how bad these sorts of things are for Investors, but how these firms make money on them (at the investor’s expense). Indeed, given access to these markets, investors could actually construct these products for themselves.