Photo Credit: John.U || Look at all those eggs in one basket! The owner *is* watching it carefully, right? Jason Zweig recent wrote an article on owning stock in the company that you work for. Then today in his WSJ newsletter he asked the following question: What’s the most concentrated investment position you’ve ever had? (In other words, what single investment made up the greatest proportion of your portfolio?) Did it work out well or poorly? What did you learn from it? I have one article to answer both questions called Life with Wife. It’s a cute article which runs through two times in my life where I had an overly concentrated investment position. The first one was regarding The St. Paul … [Read More...]
Changing Direction Slightly
Photo Credit: mark m || Every now and then, a change in tactics is justified In 1994, there did come a limit where valuations of long debt undershot and started to come back. After more thought, the short-term yield effect of convexity hedging probably peaks out around 2.5-3.0% on 30-year mortgages. Unless the Fed becomes an aggressive seller of the their long bonds, and now-long MBS, I don’t see long rates going past their recent highs. As such, I am likely to begin buying a little bit of long Treasuries as a hedge against market weakness induced by the likely Fed overshoot. Recently the short-term correlation between stocks and 30-year Treasuries has seemed to go back to stocks down, bonds up, and vice-versa. … [Read More...]
Estimating Future Stock Returns, March 2022 Update
Image credit: All images belong to Aleph Blog Well, finally the bear market… at 3/31/2002 the S&P 500 was priced to return a trice less than zero in nominal terms. After the pasting the market received today, that figure is 3.57%/year nominal (not adjusted for inflation). You would likely be better off in an ETF of 10-year single-A rated bonds yielding 4.7% — both for safety and return. I will admit that my recent experiment buying TLT has been a flop. I added to the position today. My view is that the long end of the curve is getting resistant to the belly of the curve, and thus the curve is turning into the “cap” formation, where the middle of the curve is higher than … [Read More...]
The Scale Versus the Casino
Photo Credits: Jen and www.david baxendale.com with help from pinetools || The casino is exciting. The scale is honest and unrelenting. I want to give an update to one of the major concepts of Ben Graham, in order to make it fit the modern era better. Ben Graham said: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”https://www.goodreads.com/quotes/831517-in-the-short-run-the-market-is-a-voting-machine quoted from The Intelligent Investor So let me modify it: In the short run, the market is a casino, but in the long run, it is a scale. Is this an improvement? Probably not, but speculation has become so rampant that … [Read More...]
Neither a Crypto Borrower nor a Lender Be
Image credit: Diverse Stock Photos || Would that those shiny coins were the real thing. Metal coins are real. Code, not so. As I have said before, look at the underlying economics of an investment rather than its external form. It doesn’t matter whether it is public or private. The form of an investment does not affect its returns, for the most part. I grew up in investing as a risk manager within life insurance and fixed income. We faced three main risks: credit, liquidity, and duration. We had lesser risks as well, like FX, sovereigns, convexity, etc. My main goal was to see the firm survive under all reasonable circumstances. My secondary goal was to improve profitability over those same circumstances. In doing that, we … [Read More...]
Concealing Volatility
Photo Credit: Marco Verch Professional Photographer || With some private investments, you can’t tell what the value truly is. Third party professional help occasionally assists dishonesty Part of my career was based on concealing volatility. I sold Guaranteed Investment Contracts. I helped design and manage several different types of stable value funds. Life insurance contracts get valued at their book value, regardless of what the replacement cost of an equivalent contract would be like presently. Anytime an investment pool with no current market price has a book value above the underlying value of the investments that it holds, there is risk to those holding the investment pool. The amount of risk can be small yet significant with some types of money market funds. It can be … [Read More...]
Welcome Back to 1994! [Redux]
Image Credit: Aleph Blog with help from FRED || Look at the mortgage rates fly! Okay, you might or might not remember the last piece. But since that time, 30-year mortgage rates have risen more than 1%. Is the Fed dawdling? Maybe, but the greater threat is that they become too aggressive, and blow up the financial economy, leading us into another decade-long bout of financial repression. As it stands right now, mortgage rates are in a self-reinforcing rising cycle, and it will not end until the Fed raises the Fed funds rate until it inverts the Treasury yield curve. But if I were on the FOMC, I would ignore inflation and the labor markets, and I would watch the financial economy to avoid blowing … [Read More...]
Estimating Future Stock Returns, June 2022 Update
Graph Credit: Aleph Blog || How do you feel about 3.00%/year nominal returns over the next 10 years? That’s less yield than the 10-year T-note Stocks always beat bonds. Stocks always beat bonds. Stocks always beat bonds. Stocks always beat bonds. Quite a mantra. And for those with a long time horizon, this is true. What I am telling you this evening is if you want that to work for you, your time horizon should be greater than ten years. With the ten-year T-note yielding 3.41%, the S&P 500 at 3946 indicates likely nominal returns of 3.00%/year over the next ten years. Though the bond market has had a lousy year, many of the times I wrote about this over the last few … [Read More...]