“One of the advantages of being disorganized is that one is always having surprising discoveries.” – A. A. Milne
It’s been over a year, so here is another weekly edition of Blogger Wisdom. As we have done in previous years we asked an esteemed group of finance bloggers a series of (hopefully) provocative questions. Their answers are unedited and the author’s name, blog name and Twitter handles follow. We hope you find something of interest below.
Question: What have you learned in the past year (or so) that genuinely surprised you? Or said another way, what thing have you changed your mind about recently? (Answers are in alphabetical order.)
My thoughts and feelings about the FIRE movement in the beginning were quite negative. I thought everything about it was impractical. While I am still not a fan, and I think they have a marketing problem (i.e. If it’s about financial freedom and not early retirement than why do you have it in your name?), I’ve come to appreciate what they are trying to do. Choosing this lifestyle is just that, a choice. And if you choose to aggressively save and invest so that you have optionality in your life, who am I to say that’s wrong?
I was surprised to learn that a flat 200-day moving average has been followed by above average returns. At least in the S&P 500. I assumed it was the opposite.
I’ve been ghosted professionally a number of times in the last year. That’s generally more common these days, but it’s been a surprise to me, happening in circumstances where it hasn’t before. I think that those doing it (more generally, not just to me) are making a poor calculation, avoiding a short-term interaction but potentially hurting themselves over the long run.
I’m increasingly persuaded that P/E ratios based on forward earnings estimates are reasonably predictive of stock price performance. When we looked at it in Quantitative Value, it was the only price-to-a-fundamental ratio that didn’t predict stock price performance. But some newer research seems to suggest that it is one of the better predictors. The jury is out, but it’s worth considering.
I went to the Stigler Institute Conference on regulation of Big Tech. I walked in expecting to not be in favor of any regulation. I walked out seeing room for regulation. I still think that the flashpoint for all the consternation for regulating Big Tech comes from Trump’s ability to dominate it-and winning the election. If Hillary would have won I am not sure if we’d be talking about it. But, read Fiona Scott Morton’s piece on digital regulation and it should provoke some thoughts. Listen to Luigi Zingales podcast at Capitalisnt on regulating Big Tech and you might start to see some areas where Big Tech can be very George Orwell like and inhibit’s competitive markets. Also, there is enough evidence that Big Tech clearly limits different point of views that we probably need to do something rather than wait for a Hayak like creative destruction event.
It’s not that my mind has been changed in the last year, but there has been a lot of productive conversation this last year about diversity, privilege, and different life experiences that I have been able to be able to grow and become more sensitive and aware of obstacles others have had to overcome that I didn’t even realized existed. These conversations have covered everythign from upbringing to childhood struggles to discrimination to mental health issues and more–I am more sympathetic and aware of what others have gone through or might be going through.
One of HumbleDollar’s bloggers, Jim Wasserman, mentioned that–when you borrow money–you aren’t borrowing from the bank, but rather from your future self, who will have to repay the debt you take on, plus interest. Will your future self be happy with the choices made by your current self? I think that’s an enormously powerful way to think not only about debt, but also about countless other financial decisions.
Cliff Asness is going throw his shield at me here, but I am starting to wonder, very seriously, if “automatic” or “robotic” flows (whether systematically active, or truly passive) are creating price pressure in certain, specific, circumstances. As an active manager, of course I might say something like this, but it sure does seem to me that there have been, and will be, opportunities for the objective, active investor to be opportunistic about dislocations in certain individual securities.
I was shocked to see a friend’s managed futures strategy close shop late last year. After almost two decades of running multi-manager CTA strategies and then creating a beta-like passive mutual fund, they reached the end of their rope with redemptions. Since 2009, there has not been a market environment in which trend-following managed futures strategies could make money. Will there ever be again? I don’t know.
I think it’s got to be what’s been going on in the UK over Brexit. I honestly didn’t ever expect to see the day where politicians (of all parties) would put themselves and their parties ahead of the good of the country and the people they are elected to serve. I didn’t expect Brexit to be so utterly divisive as it has turned out to be, and I never expected the country I grew up in to become so insular and backward looking. I’m glad I moved to mainland Europe 12 years ago. I would have to say I now feel far more European than I do British. Britain in its current state does not represent me at all. I’m actually pretty ashamed of my country and that’s an awful thing to say.
It is no surprise that, at least in small doses, highly volatile assets can be value-adds to a portfolio. That being said, I’m warming to the idea that a small crypto allocation could play that role in a portfolio.
As a quant, I found a recent paper by Lopez de Prado and Lewis on the trade-off of Type I versus Type II errors very intriguing. In some associated slides, they argue that the conventional 5% significance threshold focuses solely on the reduction of false positives and fails to acknowledge the risk of failing to trade false negatives.
The real potential benefit in this line of thinking, however, arises if the cost of Type I and Type II errors are asymmetric. For example, trading a Type I error (false positive) should simply lead to random noise. Failing to trade Type II error, however, leaves alpha on the table. Diversification may allow us to exploit this asymmetry.
Under this line of thinking, it may make sense to build a diversified portfolio of signals that may not be worth trading individually, but together help balance Type I and Type II errors.
I’m starting to buy into the idea that interest rates will stay low for a long, long time. I’m not 100% — maybe like 70% — but if you had asked me a few years ago what the odds were that interest rates would eventually revert to, say, 5-7% in the next few years I’d say “99%.” Now I’m not so sure. And it has all kinds of implications on assets and valuations and business operations if that’s the case.
So it turns out that trade wars aren’t good and easy to win ¯\_(ツ)_/¯
I used to believe all that mattered for an investors’ ability to stick with a strategy were small short-term drawdowns and strong long-term absolute performance. I now believe all that matters for an investors’ ability to stick with a strategy are religious level beliefs in the strategy, a forgotten investment account password, and low tracking error relative to the headline returns of the Dow Jones Industrial Average when its consistently making new all-time highs.
The Blues winning the Stanley Cup went against everything I’ve believed about the franchise since childhood.
On the finance front, I haven’t exactly changed my mind, but I’m thinking about risk tolerance in more dimensions than before, specifically how portfolio design adapts to the willingness and ability to tolerate different types of risks beyond the return variability of a portfolio.
Besides my annual realization that I’m not as smart as I think I am, this year it really struck me how much my mood affects my productivity. For example, I write a lot, though not as much as I should because I’m often not in the mood. And I’ve noticed this trait – waiting for the muse to come – in a lot of other areas of my life. Having this realization at 51 is sobering, but it’s also empowering. Side note: Steven Pressfield’s book The War of Art is a great primer on this subject.
I was going to write a post about how intelligence doesn’t matter in investing, but then I read a working paper that made me think otherwise. It was tough because my post was basically done, but after reading the paper I had to re-write it. Intelligence does affects investment performance, but probably not in the way that you think it would.
I’m not a bull on energy now. Too many want to produce crude and natgas at present prices, and wind and solar are becoming genuine useful.
I have changed my attitude towards investment “alpha”. Technically, alpha is just an unexplained return in a regression…I don’t want something in a portfolio that I can’t explain! I think it is much easier to stick to a strategy when you know what it is, why it is struggling, and be able to run attribution analysis to understand the inner workings of “why”. If alpha is, by definition unexplained, how will you ever know if that unexplained return was skill or luck? How are you going to understand if that skill has been arbitraged away or if it was due to a particular manager or the strategy? I have changed my mind and have almost entirely stopped looking for “alpha”.
I have been genuinely surprised by the innovative expansion of Presidential power by the Trump Administration, and the weak Congressional reaction. I have lost count of the actions that would have seemed incredible in the past. I won’t list them here, of course, but this is an important subject that we will see again. Perhaps it will be a different President, of course, but it is a fundamental change in checks and balances.
In my days as a college professor I taught courses in these subjects. If I were teaching now, a lot of re-writing would be needed!
I have come to have a better appreciation and understanding of asymmetric risk. Bitcoin is a great example, it could easily go to zero but could also be everything that all the touts say. I have a small amount such that it going to zero would not impact me adversely but if it goes to one of the crazy price targets that the touts are calling for, the result could be financially life changing. If you buy a little and it grows into a life changing piece of money, sell it and let it change your life.
Maybe it’s my age and skepticism, but I’m not easily surprised by much. If anything, I’ve had some ideas strongly reinforced, especially: When someone shows you who they are during a disruptive time, anchor your expectations on that version of them.
I kept on hearing that investment advice in the UK in the 1980s and early 90s was like the Wild West. It’s only in the last few months that I’ve started to look into it, and the profiteering and plain dishonesty at that time was far, far worse than I had ever imagined. The banks, insurance companies and large advice chains were the biggest culprits. I used to think they would get away with it, and that those affected, who are either near or already in retirement today, would never see justice. I now suspect that rip-off asset management fees are a huge mis-selling scandal in the making.
I’ve started doing this thing where I always assume that other views are right before I assume they’re wrong. For instance, I often hear political narratives about this or that and I tend to defer to my priors first. But now I start by considering all the reasons why that view might be right. Even if I end up disagreeing in the end it’s a nice thought process that helps me better understand the other side of an argument and where it’s coming from.
Kahneman et als. have generally taught that our cognitive and behavioral shortcomings pretty much are what they are – we can “nudge” them, but not much else. I have come to be much more optimistic. The scientific method is the strongest mechanism we have to counter these shortcomings, while its success offers the best demonstration I know for how to do it.
I was reminded yet again that expensive stocks can get even more expensive, and cheap stocks can get even cheaper. If you’re a value investor, you have to be patient and wait for an uptrend because no matter how attractive a stock looks, if momentum is going the wrong way on you, you’re going to get killed.
Far and away, my greatest learning–and surprise–has come from reading texts across various religions, including Buddhism; Christianity; Hinduism; Islam; and Judaism. In the past week alone, I have been reading 19 books concurrently, drawing parallels and identifying common themes even amidst the differences. The book I’m writing (Radical Renewal) is based on two theses:
1) The major challenges of “trading psychology” are actually spiritual challenges, in which our ego attachments to market views/calls and profits/losses interfere with our ability to objectively process market information.
2) The world’s great spiritual traditions can be viewed as best practices honed over millennia for moving beyond the ego and connecting with the soul.
Traditional psychology–and trading psychology–is mainly concerned with self-improvement. The methods that might be most helpful for market participants, however, aim toward self-transcendence. The surprise has been the similarities among religions, not so much in terms of specific beliefs, but in terms of processes/practices for expanding awareness/consciousness.
It never ceases to amaze and surprise me how short the memory is of market participants. We began 2018 with historic low volatility that led to the whiplash of a decline in stocks in February and the eventual burial for one overly popular inverse volatility ETN. A few months went by and over-confidence quickly re-imaged with volatility being rocked into slumber ahead of the fourth quarter decline. The time periods between volatility regimes can vary and is correlated to the shortening memories of those who it impacts in what’s become a rinse and repeat psychological process.
Thanks to all the bloggers for their time and effort. Stay tuned for a new Blogger Wisdom question tomorrow.