|A market pullback is likely, maybe even inevitable, but market timing is a dangerous game. Carefully and over time is the preferred method of creating wealth.|
With lots of anecdotal evidence suggesting caution when betting on the equities markets these days, maybe we shouldn’t be. An oft-discussed subject in what passes for financial commentary is the sell-in-May-and-go-away theory. The debate is framed by the biases of the respective authors and can be used to support both action and inaction. Then again, maybe it could be a bit of both?
The Boys at Bespoke point out that the results of market returns during May over the last 20 years has appeared to be influenced by the direction of indexes during the first part of the year – May is more likely to be up if equities had a good start to the year. June has statistically proven to be worse than May, but then July has traditionally seen relatively strong returns. And their advice seems about right for most casual investors, “hold-in-May-and-go-away.”
Looking at the views of people whose musings I tend to respect, current market valuations are higher than one might like to see as net purchasers for the long term, but certainly not unreasonable. The recent (apparent) lack of market volatility has masked an underlying trend of segment sell-offs, making last year’s high flyers today’s dogs. And investor sentiment, far from enthusiastic, seems to suggest a continued reluctance of the individual investor to earnestly commit to embracing individual stocks.
So my bias has been toward action over the last couple of months, as it will likely remain over the early part of the summer. Adding the S&P ETF (VOO) on the big down days, but also picking up smaller and more volatile stocks for the short-term. A couple of the names I’ve been playing with (and this is pure gambling) are IRVRF and RUTH. There are still some nifty stocks to own over the long haul (for those of you with some history in the markets, not any nifty-fifty type of opportunities) but these are intended specifically for retirement accounts due to their yield and opportunity to add a bit of upside to a basket of sector-specific ETFs (LTC and BX as examples).
Yes, a market pullback is likely, maybe even inevitable, but market timing is a dangerous game. Just ask Warren Buffett, successful investing is a marathon, not a sprint. Carefully and over time is the preferred method of creating wealth.
|The bull and its blood symbolize a call to nature at its most brutal, pure and irrational. -Jose Antonio del Moral|
If you are not a fan of bullfighting please move along. My interest in defending this sport is exactly zero.
There is a documentary about bullfighting, The Matador, by Seavey and Higgins, that follows a very young (and now very famous) Spanish bullfighter, David Fandila, over a three-year period as he struggled to complete 100 corridas in a single season. A cursory glance at the reviews found the film to have been well received when it premiered in 2008, and this in spite of the subject. While I found the story of “El Fandi” more engaging than the story-telling, it certainly offered up some great bullfighting video and even better quotes; from Jose Antonio del Moral, “The bull and its blood symbolizes a call to nature at its most brutal, pure and irrational.”
Many casual comments become quite compelling when scrutinized, including agreement from El Fandi, that he is not an artistic bullfighter. This observation is not without merit, since a comparison to, for example, Enrique Ponce provides a clear contrast in styles. Ponce performs with an elegance of posture and movement that even a first-time viewer would likely define as classical. Whereas El Fandi demonstrates a theatrical, often coarse flair more akin to an entertainer. This difference in approach is not just about technique. It is about the purpose of the spectacle found only in a corrida.
El Fandi states unambiguously his desire to deliver a memorable performance, to “bring the audience to ecstasy.” Being a great bullfighter in the traditional sense appears less interesting than being an inspiring entertainer. del Moral offers another observation to this point, “…but it is a beautiful savagery with an artistic payoff.” By comparison, he refers to ballet, where the movement of the human body is regarded as artistic expression. Yet for El Fandi, it is the elegance displayed in the face of death that defines the artist. While a whiff of fear will destroy an otherwise masterful performance, El Fandi chooses to exaggerate his bravado, delivering a show that forcefully reminds the viewer of the high stakes being wagered with each corrida. His technique is less about the form (classical) than in the delivery (entertaining).
It is also worth noting that the documentary does an excellent job of reminding the viewer that the bulls can give as good as they get. The remarkable scene of El Fandi being gored, immediately undergoing surgery, then returning to the ring forty-five minutes later to continue fighting is unsettling to the extreme. And a vivid reminder of what separates the truly great from the rest of us mere mortals.
Finally, it is worth knowing that a bull only fights once, if it survives it is put to pasture. Speaking about the bulls that survive the corrida, a young David Fandila talks about the “inner calm” he senses when in the presence of these winning champions. Interesting observation from a guy whose death in the ring is the only way for a bull to enjoy an “inner calm.”
|“Avoid the unforced error, nail the basics and don’t take outsized risks” might be the best advice the individual investor can follow.|
An often-underestimated influence on equity and bond markets is the heavy hand of luck. Frankly, you can do everything “right” and still get bad results. And since luck can’t be controlled, knowing how to react – whether that luck initially appears to be good or bad – can separate winners from losers. But just because something can’t be controlled doesn’t mean it can’t be managed.
We all know bad things happen that are beyond our control to foresee or influence. Fires, floods and financial crisis come to mind. So we buy insurance, avoiding home purchases in areas prone to flooding and create investment portfolios that are well diversified with a healthy dose of cash savings. But what else?
One of the best thinkers on this subject, and a terrific writer to boot, is Michael Mauboussin. The man knows how to think about how we think – especially as it relates to investing. I read his terrific 2012 book, The Success Equation, when it first came out. Subsequently, the opportunity to hear him talk about his book in person helped to clarify some of his more nuanced arguments and observations.
One of the many surprises that will be found in The Success Equation is an important reason why individual investors should look to exchange-traded funds as their best bet to achieving financial goals when using the stock markets. Discussed in many posts here at Invest-Notes, by choosing to invest in indexed funds smaller investors earn the market averages over time with much less risk or cost than owning individual stocks or traditional mutual funds. Remember, for as long as equity markets have been measured, they have gone up more often than they go down.
Let the Big Dogs Bark at Each Other Instead of You
As noted recently in The Economist, 70% of U.S. stock markets are now owned by large institutions like Blackrock, Vanguard, Fidelity, pension funds and hedge funds. That percentage was just 35% in the 1980s. This means the self-described investment professionals are competing against each other more fiercely than ever before. As Mauboussin intriguingly suggests, the more skill involved in a competition the bigger the impact of luck on the outcome.
As a reality check, the following is from the prospectus of an initial stock offering (IPO) for a high-tech company that went public in March of 2017. Hyped by many, including the original investors then in a position to sell their much-appreciated shares, this quote sounds like a fair warning in my books, “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.” But if this is such a great investment, why would the private owners want to sell their stock in the company? If you had purchased shares at the IPO, you paid the original investors around $26 per share. Your investment is now worth about $13. So, as two of the biggest money-losing companies on the planet begin selling shares, no names but they provide ride-sharing services, best to avoid this ride.
By being honest and observant about the outcomes of our investment strategies – repeatedly and over time – we can create mental models that help anticipate the unexpected (to minimize risk) while expanding opportunities (to maximize upside). You can easily improve your overall return just by minimizing costs like fees and commissions (nail the basics). You can stay calm and remain inactive during times of great stress (avoid unforced errors). You do not have to go head-to-head with the pros (no outsized wager on a hot stock tip).
As Rudyard Kipling noted a century ago, just ”…keep your head when all about you are losing theirs…”
More on… “The Success Equation”-Michael Mauboussin:
The pursuit of wealth (and then figuring out how to keep it when successful) has a long history. The wide-ranging insights below are offered without commentary. However, where additional context is available a good source has been recommended on the pundit or their life. I have read all of the books suggested.
Circa 600 BC
“The observation of the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyment, or to admire a man’s happiness that may yet, in the course of time, suffer change.”
(Nassim Taleb translates this into the vernacular by quoting Yogi Berra, “it ain’t over until it’s over” in Fooled By Randomness, 2001)
Leonardo da Vinci
“Do not undertake things if you see that you will have to suffer in case you do not succeed.”
“Trust only those who have exercised their minds not on proofs of nature but on the results of their own experiments.”
Estimated net worth in current dollars: $400,000,000,000
(J.D. Rockefeller clocked-in at only $340,000,000,000)
“When I go to bed, I face no obstacles to sleep. I remove with my shirt all the cares of battles and business.”
“I will earn a profit as long as I can.”
The Richest Man Who Ever Lived, Greg Steinmetz, 2015
Netted $3,000,000 in the 1929 market crash.
(Went bankrupt twice before and after 1929)
Cut your losses quickly.
“If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.”
Let profits ride until price action dictates otherwise.
“It never was my thinking that made the big money for me. It always was my sitting.”
Control your emotions.
“All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope.”
“Buy all-time new highs.”
“We have met the enemy and they are us.”
“One investor’s two rules of investing:
- Never lose money.
- Never forget rule #1.”
“Concentrate your investments. If you have a harem of 40 women you never get to know any of them very well.”
“Investors operate with limited funds and limited intelligence: They do not need to know everything. As long as they understand something better than others, they have an edge.”
“If I had to sum up my practical skills, I would use one word: Survival.”
Money Masters of Our Time, John Train, 2000
“Excesses in one direction will lead to an opposite excess in the other direction. Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.”
“Fear and greed are stronger than long-term resolve. Investors can be their own worst enemy, particularly when emotions take hold.”
“When all the experts and forecasts agree — something else is going to happen.”
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Considered one of the most successful hedge fund managers of all time.
“Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.”
“Don’t make small investments: You only have so much time and energy when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.”
For more: More Money Than God, Sebastian Mallaby, 2010
Investor and author of What I Learned Losing A Million Dollars, 1994
“There is an inverse relationship between your threshold for pain and success in the markets, so as soon as you feel the pain: get out.”
“I am always thinking about losing money as opposed to making money.”
“No matter how you cut it, there are enormous emotional ups and downs involved.”
More Money Than God, Sebastian Mallaby, 2010
Now, who and what can you add to this list? Leave your comments below…
|Don’t let hubris or fear keep you from considering participation, even in a small way, in the world economy.|
It is a fact that the U.S. now accounts for only 40% of the world’s stock market capitalization. Yet a look at international rankings of market capitalization by country tells a more nuanced story and confirms that the U.S. remains the best bet, by a long shot, for equity investing. However, Invest-Notes has from its earliest days been an enthusiast of international equities. As with most asset classes, international exposure is best pursued through exchange-traded funds, such as VEU (discussed below). And with the recent drawdown in prices around the world, international stocks might be an interesting place to invest some retirement account money at the first of the new year.
After the U.S. the second spot of most valuable equity markets is held by Japan with 7.75%. Number three is China at 7.5% followed, surprisingly, by Hong Kong at 6.75%. Great Britain and France round out the top six with less than 5% each. More importantly, over the last ten years, the U.S. has gone from 34% to the current 39.81%. We are not losing ground to Asian or European nations, but instead growing at an impressive rate. Reports of our economic demise have been wholly mistaken. Japan, Great Britain, and France have all lost ground with the annual growth for China and Hong Kong at about 2% each. This bears taking a moment to think about. Hong Kong has a population of 7.5-million people in a land-locked area of 426 square miles; China has over a billion people occupying 3,700,000 square miles. Even New York City has more land and people than Hong Kong.
Looking behind the headlines, major S&P 500 exchange traded funds (SPY, VOO, RSP) remain the smartest choice for most individual investors to keep most of their long-term savings and investments. Again, get past the hype, and even after the big drop over the last few weeks, the S&P is still flat for the year (though when I originally started work on this article a couple of weeks ago, the S&P was up 5% for 2018). By comparison, the exchange-traded fund used as a proxy for Chinese equities, ASHR, is down over 25% year to date. Over the last 5, 10 and 20-year periods the S&P 500 has delivered annual returns of over 10%. The often-repeated idea that the U.S. is somehow losing its status as the big dog in global finance is wrong. However, hubris is always a bad approach to investing strategies.
Hubris is not an Option.
In their just-released The World in 2019, The Economist features three articles offering thoughts on how world markets might perform next year. On the one hand, there seems to be some level of confidence that the current bull market in America will see at least month 121, an anniversary of what would become the longest market expansion in U.S. history. On the other hand, these same pundits all suggest our next recession will likely begin before the end of 2019.
But the most intriguing suggestion is to ask whether the gap between the U.S. and most other world markets begins to close because the U.S. economy weakens, or everyone else gets stronger or even just stabilizes. One prognosticator suggests that if the U.S. markets soften, the rest of the world will tumble in tandem. Perhaps though trade wars and U.S. federal reserve interest rate hikes could begin to bite domestically more than internationally. Reversion to the mean is not guaranteed, but it happens surprisingly often.
So, why is investing in foreign equities a good idea right now?
Because there have been and will continue to be times when in the on-going race for returns, international stocks can retake the lead position. My best bet is that most readers have not added any international exposure to retirement accounts in a long time.
An exchange-traded fund like the Vanguard All-World Ex-US Index (VEU) make very good sense as a method of diversification. First, VEU currently offers a 3.1% dividend. Second, the expense ratio is 0.1% (that’s one-tenth of one percent). Finally, the U.S. still only has 40% of the equities markets, and there are some very fine companies worth holding in your IRAs and 401Ks. Stocks like Nestle, Novartis, Toyota, Royal Dutch Shell, and Samsung are solid investments – and better owned in a fund than individually. Don’t let hubris (only local matters) or fear (the world has gone crazy) keep you from considering participation, even in a small way, in the world economy.
|The wheel of the world swings through the same phases again and again.| ―
For no particular reason, I’ve again been reading the collected works of Rudyard Kipling. Mostly he is remembered today (if at all) for two memorable movies based (loosely) on his short stories, The Jungle Book and The Man Who Would Be King. Yet the remaining trove of poems, ballads, mysteries, short stories, and novels are all equally compelling. Luckily, weighing in at around 900 pages, there is much to enjoy.
So imagine my surprise in discovering that the lyrics to the Frank Sinatra classic, On the Road to Mandalay (from 1957’s Come fly with me), are in fact a Kipling poem penned about a century earlier. Equally fascinating has been the number of old chestnuts still in circulation that finds their origins in a Kipling work – “He was a better man than me,” indeed. And I’ll bet many folks of my generation (and their kids) have fond and vivid memories of Walt Disney’s animated version of The Jungle Book. Even though the story of Mowgli is but a small part of a larger work.
The Man Who Would Be King
Yet it was the revelations around both the short story and the movie, The Man Who Would Be King, that inspired this note. First, while the movie has long been a favorite, it has now taken on an added luster. After the first viewing, this movie was an inspiration for my long serving friend David and me to pursue Masonic studies, though in the book this theme is not nearly so prominent but remains important. Second, the pairing of Sean Connery and Michael Caine proved to be a stroke of genius. What a great movie.
However, I had been unable to appreciate just what a tremendous job had been done by John Huston (think, The African Queen with Humphrey Bogart, who was originally cast to play Peachy) when preparing the screenplay. I continue to run across lines from other Kipling stories totally unrelated to The Man Who Would Be King that are included as dialogue in the movie, such as the line “Straight as a beggar can spit.” Additionally, the added scenes allowing a short story to fill a feature-length movie were brilliantly conceived, and a couple of them I actually missed when reading the original story. Clearly, Huston was just as interested in recreating the world of Kipling as he was in retelling this one short story.
With the next viewing of The Man Who Would Be King, it will be the first look through a new lens. And what grander adventure is there than to enjoy discovering something so familiar still has mysteries to uncover.
|Moments of brilliance, moments of bombast and moments of madness give people a reason to talk about jazz, perhaps so they don’t have to listen to the music.|
Half listening to the radio, my full attention turned suddenly to a song I hadn’t heard before. After a couple of minutes, I guessed it must be from a new album from Kamasi Washington. Turns out there is a recent release from Washington, Heaven and Earth, that came out in June. Though relatively new to the scene as a leader, there is a lot of personality in Washington’s music. His sound is distinct, much more so than many other musicians with a larger jazz catalog.
There was tremendous hype, even internationally, surrounding the release of Washington’s 2015 album The Epic. I found it to be a huge, chaotic, sprawling and often frustrating work. Clocking in at almost 3-hours, the range of his music touched on everything, from old jazz standards to Debussy’s Claire de Lune, from free jazz to musically challenging sounds hard to classify. Whether you find his music exhilarating or exasperating, it demands attention. So, it was a surprise to read a review of Heaven and Earth in a mainstream jazz publication that sounded more like a critique of Washington than his new album.
Washington’s sensibilities are clearly on display with this new album.
Brash horns and choirs often fill curious corners of his music. In some ways, it is difficult to think that Washington even has a “sound” since the music stretches to include so many styles and motifs. And yet, there I was certain this song was by Washington and must be something new, rather than a song from his other post-Epic release, Throttle Elevator Music IV (which includes music recorded during the Epic sessions). Of course, he has a sound, a big one, and it is recognizable.
Yet the gist of the review article was a complaint that Washington wasn’t adding anything new to the “jazz canon.” There was, it claimed, no new insights being delivered, just variations on existing themes with the juxtaposition of straight ahead, free jazz and everything in between giving the impression of “new things.” Not to put too fine a point on it, but Washington’s jazz mash-ups are attention-getting because of their sprawling sounds. We do hear old things performed in new ways that sound interesting because of their often odd juxtapositions. I can’t speak to cannons – other than to say their sound might make an interesting punctuation in some of the more aggressive Washington recordings.
The Kamasi Washington Sound.
A comparison of Washington’s rendition of Cherokee with those of widely respected players provides for a striking example of his “sound.” Listen to versions of the Ray Noble jazz standard by sax players Charlie Parker in 1942 (which he remade into KoKo) and Stan Getz in 1960, or from a vocalist like Dee Dee Bridgewater in 1998. Nothing in Washington’s version sounds derivative that I can tell.
Then, right after you play Cherokee, listen to Washington’s Miss Understanding, also from The Epic, and the range of his musical vision is clearly on display. Seemingly, every song needs its own “sound” and Washington strives, and mostly succeeds, in putting a personal touch on every number. Even when that personal touch is at odds with other songs sitting in the same queue.
In a significant way, Kamasi Washington reminds me of Dizzy Gillespie.
For folks outside of the jazz orbit, the image of Dizzy embodied the spirit of jazz. The beret and goatee, the puffed-up cheeks, the boisterous laugh and welcoming personality. Yet even hardcore jazz fans can be challenged by some of his more aggressive music – “jeez, how does he get to a register that high? And why does he play so shrill for so long?” Salt Peanuts was important but is also an acquired taste. People talked about the man, not so much his music.
It now feels like for many Kamasi fills the role of what jazz should look like. A review of The Epic in The Economist and a more recent interview this summer in Monocle, heralded this new savior of jazz: The big man with the big hair and even bigger sound, facing the world head-on and coincidently plays jazz. But Washington’s music doesn’t get much discussion in these conversations. Moments of brilliance, moments of bombast and moments of madness give people a reason to talk about jazz, perhaps so they don’t have to listen to the music.
|Eric Fischl does a fabulous job explaining not just how he goes about the creative process, but how his creative process came to be what it is.|
Eric Fischl’s 2013 autobiography, Bad Boy, is quite the piece of work – literally. His name was familiar to me, though his paintings were not. One of the New Kids that came of age, and fame, in the early 1980’s by putting figurative back into contemporary art. Julian Schnabel and David Salle being his contemporaries. The book is split pretty evenly between his personal history, professional life, thoughts on art, and making for often-uncomfortable reading. Finding some modicum of peace in this world depends on ensuring your personal demons don’t get the upper hand. Mr. Fischl seems to have fought the hard fight and won.
The reason to read this book, though, is the fabulous job Eric Fischl does in explaining not just how he goes about the creative process, but how his creative process came to be what it is. While it has been argued (mostly, it seems, in reviews of the book) his self-introspection borders on navel-gazing in the worst possible sense. That view is completely wrong-headed.
Eric Fischl’s conviction of the artist as a storyteller resonates strongly with me. To hear the artist as a young man was motivated by the works of both Mondrian and Max Beckmann is a testament to his longstanding desire to understand art in all its richness, contrast and complexity. Though disagreeing with, for example, his assessment of artists like Sol Lewitt, Fischl still makes a solid case for how the ideas of what really good minimalist artists were trying to say were hijacked by the intellectually lazy.
In contrast, Fischl is adamant to a degree harmful for many of his personal relationships, that the artist must have something to say. More important, the artist must have something to say that someone else actually wants to hear. The failure of Art to retain its place of pride as a shared cultural touchstone is correctly blamed on hubris. On page 341, Fischl makes the following comment, “I can’t tell you how many times I’ve heard artists saying, ‘Fuck the audience.’ But I thought: Why fuck the audience? Why not involve the audience?”
The many, brilliant passages where Fischl discusses his creative process, for both individual works as well as his overarching philosophies, are illuminating, and oddly familiar. In 1983 the author Umberto Eco published a very small book, Postscript to The Name of the Rose. In the fifth chapter, Eco uses almost identical words to describe almost identical examples of how an author goes about creating an interesting narrative – interesting for both the writer and the audience. A touchstone for the creative process?