This is the second post in a series that seeks out undervalued posts in the financial blogosphere. You can find the first edition also at the Enterprising Investor.
When it comes to content in the financial media and blogosphere it pays to read with a practiced eye and take what bloggers write with a grain of salt. This is due, in part, to the fact that everyone is talking their book. Also the pressure to generate content puts bloggers at risk of publishing items without a true editorial process in place.
Any one reading the Financial Analysts Journal, and other similar publications, can be confident that what they are reading has been given a thorough going over. Even that may not be enough these days. A recent paper by Harvey, Liu and Zhu argue we should begin holding research findings in finance to a higher statistical standard. They note that t-ratios of 2.0 for newly found factors are insufficient to account for the extensive data mining inherent in financial research.
What does this mean? In short, many of the findings touted in the financial media and blogosphere are “likely false” and may simply be a function of chance. This puts a higher burden on the reader to think through not only the statistics being presented but also the underlying economic and/or financial assumptions being tested. Marginally statistically significant findings absent some solid intuition behind them should be approached with a healthy amount of incredulity.
Writers (and readers) especially in the age of increasingly short attention spans want findings served up in bite-size chunks that are easily digestible. There is room in our media diet for some of that. In this edition of “undervalued posts from the financial blogosphere” I want to highlight posts that takes the opposite tack. The pseudonymous Jesse Livermore at Philosophical Economics in “Dilution, Index Evolution, and the Shiller CAPE” that looks a rarely discussed issue.
Livermore notes that much of the index-level valuation data we use and discuss has a significant flaw. To simplify, we treat today’s index as being substantially similar to the index 5, 10 or even 20 years ago. We do this despite the fact that company turnover and sector shifts inevitably change the underlying nature of the index over time. In short, today’s S&P 500 is not your father’s S&P 500.
Livermore uses the example of Ireland’s ISEQ to show how the financial crisis had a profound impact on the composition of the index, thereby making historical comparisons moot. This second-level thinking has applications to the US and broader European markets as well. Most importantly it shows us why we should not take index level data at face value. The short hand of indexes is valuable in talking about broader market trends but should be scrutinized to a greater degree when it comes to making actual investment decisions.
The next post I want to highlight “The Myth of Passive Investing Begins to Unravel” by Cullen Roche at Pragmatic Capitalism also challenges some of our long-held beliefs. The active-passive debate has been fodder for academic, practitioners and bloggers since the first index fund was launched. Roche is rightly skeptical that what is passed off as passive these days is anything but.
Once we move beyond a true global market portfolio every deviation is an implicit active bet according to Roche. There is not necessarily anything wrong with approach. There are very good reasons, including risk tolerance, and bad reasons like home country bias, to deviate from the global market portfolio. However we should acknowledge that these deviations are active investment decisions. This realization makes the active-passive debate a sideshow that distracts investors from more important issues.
Changing gears it is worthwhile noting the work that goes into a post that on its face seems quite simple. Tren Griffin at 25iq has been writing a series of posts about “a dozen things” learned from notable investors and venture capitalists. In “A Dozen Things I’ve Learned From Jeffrey Gundlach About Investing” looks for lessons from the reigning “bond king.”
For a figure like Gundlach many of these insights will seem familiar. However for nearly everyone there is something in this post, and others, that will be novel and interesting. From a blogger’s perspective I can say with confidence that each of the editions take far more time to compile and edit than you would think and for that reason alone are worthy of note.
Celebrity in the investing world is a bit of mixed blessing. At it best it gets you a “dozen things learned” write-up. At worst it gets you a quick takedown of your talking points. The launch of Tony Robbins’ new book Money Master the Game: 7 Simple Steps to Financial Freedom was conducted with a degree of public relations precision rarely found these days. Once Robbins’ book hit the shelve it attracted attention from skeptical bloggers including most notably Barry Ritholtz at Bloomberg View and Ben Carlson at A Wealth of Common Sense.
In “Backtesting Tony Robbins’ All-Weather Portfolio” Carlson analyzed Robbins’ preferred portfolio and showed that it was nothing all that unique. Robbins’ all-weather portfolio past performance is highly dependent on the strong recent historical performance of the bond market. So rather than having to take Robbins at his word readers are able to take an informed look at his advice, especially prior to buying his book.
One of the things that has changed most since I began blogging is that writers focus much more now on the behavioral challenges facing investors, both novice and experienced. It is helpful to see, written in plain English, that the markets are a challenge for all investors not just us.
James Osborn at Bason Asset Management in the well-named post “Diversification Sucks” notes a frequent challenge for diversified investors. Diversified investors inevitably experience disappointment because there is always an asset class in a diversified portfolio that is underperforming at any point in time. The behavioral challenge is not to abandon a thoughtful portfolio construction because of the dissonance that comes with inevitable asset class return dispersion.
In nearly every linkfest I write I like to include some non-financial items as well. Today it seems like we are all spread thinner than ever before. This is due in part to our inability to say no to professional and personal requests. Shane Parrish at Farnam Street in his post “Eight Ways to Say No With Grace and Style” highlights some valuable lessons on taking charge of our calendars.
This skillset is apt because it applies also to our consumption of financial media as well. We all need to conscious consumers of content, finance-related as well. There is no shortage of ‘junk content’ that provides us with a short-term high like that found in junk food. Conscious consumers on the other hand seek our content that provides us with lasting lessons as opposed to sound bites. The challenge as always is identifying nutritious content. Hopefully posts like this can help you in that process.