keynote

This week i had to write our newsletter. This was a difficult task for me, as the newsletter is quite limited in space. What started as a exhaustive review of the Morningstar Investment Conference turned into a mention of my train ride and a positive outlook on investing.

When I looked at the line up for the conference, I was excited to see Bill Gross as the keynote speaker. Its not every day that one gets to go hear the manager of $1.2 Trillion speak. Attending the keynote was even better than I expected.

Recently, Bill Gross has sold out of all US Treasuries in PIMCO’s flagship Total Return fund. This is a bit odd for a US bond fund, as treasuries are such a large, unavoidable part of the fixed income market. He attracted a lot of attention (even more than his great track record has) for this bet. The mark of a great thinker, his keynote was essentially him talking about how he could have gone wrong.

Firstly, his thesis for selling out of treasuries is roughly this:

1. Bondholders are “not being adequately compensated for the risk they are taking.” (Interest rate and inflation risk for treasuries, + credit risk for some corporates)
2. The Fed is a major buyer of treasuries right now, to the tune of $100B a month, that is going to be reduced to $16B a month very soon. When the fed stops buying, prices should go down, yields up.

He has expressed the problem of inadequate compensation in his monthly newsletters in many ways. Most clearly, he says that savers are being “pick-pocketed” because the value of their savings are declining in real terms. Basically, if you put money in the bank, the interest rate you earn is not enough to make sure that money has the same purchasing power when you take it out. Savers are losing money to inflation.

People who hold bonds for savings and income needs will see the value of the bonds decline when interest rates rise. At such low levels, the PIMCO consensus is that they must start to go up soon, as soon as the fed stops buying in a few days.

He terms this all ‘financial repression’ and makes the bold prediction that “15 years from not I can 51% guarantee that you will have been financially repressed.”

Seeking real yield, investors and savers have had to turn elsewhere. Bill Gross promoted the foreign sovereign debt markets as a place to avoid financial repression and seek real yield. For those who prefer to keep their money closer to home, the worlds largest bond fund manager gave a shout out to dividend paying stocks. It was noted elsewhere in the conference that it is now “functionally impossible” for a large US company with a good credit rating to default and disappear. Gross suggested that the dividends represented real yield as the stock price of a large company should be at least inflationary over the long term. He even gave a nod to utilities, traditionally stable, high yielding companies which he has disparaged before.

What is going on in the world when a bond manager is promoting stocks?

in an upside down world

part two. Luck

So this morning I sat down and finished James Altucher’s latest book “How To Be The Luckiest Person Alive.” I wonder how many capital letters really belong in that title. As I said, it is a very casual writing style, the book is effectively a compendium of his blog posts. It is entertaining, built around stories of his various jobs/careers/businesses and it is packed with advice.

It is hard to discern a single theme to the book, except possibly “Just get out there and do stuff!” He effectively encourages personal well being and discipline to grow your luck. The personal well being is pretty standard, get enough sleep, exercise somehow, eat healthy and make sure you poo regularly. Discipline in your life is important to him, its another form of exercise. He writes ideas, tens or hundreds of ideas every day. It isn’t that he acts on them, he says most of them are useless, but it is an exercise to keep thinking, to keep the brain working, and creatively. He meditates and studies to reduce stress.

Having started or run so many businesses, he has plenty of advice on how to work with, retain and improve relationships with clients. Part of it is back to discipline. Being consistent in helping clients, anything you can do for them. One of the more interesting ideas he has is to give someone else your ideas. Think of someone you know, or would like to meet, and give them ideas on how to improve their business. He extends this to helping his kids learn to be entrepreneurial. Taking kids around local businesses and letting them come up with ideas for improving their operations. It may be overwhelming for a kid, but a fantastic experience.

About the kids. Altucher is adamantly anti-college. It is a waste of money. The returns are poor. The time would be better spent elsewhere. I don’t agree with him whole heartedly here, but he is right on with the concept. He provides alternatives that would be a richer experience for someone out of high school – world travel or starting a business, for example. This is not really great advice for everyone. Some people do get their money’s worth out of college, some people don’t. He is exactly right that people should try to gain useful experience in other ways though. Structured education is only one dimension of a persons life.

In all, it was a good read. If you read his blog and like it, you will like the book. It is essentially the same thing. It has some good take away messages, and I am trying to incorporate a little more mental discipline in my life – starting with this blog. I have started posting once a week, no matter how uninspired I am (quite, sometimes) I write letters (if you send me an address, you will get a letter), I write down ideas. Am I feeling more lucky? No, not yet, but I’m working real hard on it.

The Tales of Two Hedgies. pt 1

Two hedge fund managers have sent me their latest books.

The first was James Altucher a chronic entrepreneur who has been involved in managing hedge fund money for a while, and it is only somewhat clear that he is still doing that. He writes in a casual, almost careless manner, where broad assertions are not backed by careful study and reasoning but are instead nested in between stories which make the all important context clear. Most of his writing could be described as ‘dropping knowledge’ if you were one to use such a phrase. He emailed a pdf of his new book “How to be the Luckiest Person Alive” (which he self-published via amazon) just because I asked.

The second book is by Joel Greenblatt. Greenblatt is the managing principal of Gotham Asset Management, overseeing about $535 Million in assets. He also has a cameo in “The Big Short” by Michael Lewis. His writing is generally explaining large, fundamental concepts in investing (valuation, asset allocation) in plain language that a sixth grader could understand. A previous book (“The Little Book that Beats the Market”) was written partly to explain valuation to his spinoff (spinoff = children, yes) Matt (alias: Ben). I received a copy of “The Big Secret for the Small Investor” as an advisor attending an investment conference.

I’ll start with Greenblatt’s book, as I read it first (no offense Altucher, its just that I haven’t printed yours yet and I’m too easily distracted reading onscreen – though I am quite excited about it).

I will try not to spoil the “Big Secret” here, yet elaborate a bit more than the dust jacket summary. The general theme of the book is “Here is how an individual can make money in stocks, here is why its not really convenient to do that, so here is an alternative that actually works.”

The book starts by going over (in his remarkably clear style) various methods of selecting individual stocks, including a chapter which fully explains discounted cash flow analysis in language that, yes, a sixth grader could understand. Armed with that valuation tool he mentions places to look for value in individual securities (hint: look where institutional investors cannot fit). He follows this with the explanation of why this might be difficult for individuals without the time and access to information needed. Next up is a common criticism of active mutual fund managers: they generally fail to outperform the market, because they are the market. The common solution to this problem is for people to go with cheap index funds (this is the “If you can’t beat it, join it” strategy). Most people stop here, they throw up their hands and say ‘that is it, index funds are as good as you can get, they are cheap, and they will provide market returns, which is as good as you can hope for’ (according to the efficient market academics).

Greenblatt goes on. Addressing EM simply (again, for the kids) he makes it clear that there are inefficiencies that can be taken advantage of. Of course, this is pretty much the entire premise of value investing, or almost any investing. There is a better way than index investing (though, in all fairness, thats not a bad way. Talk to your investment advisor about this). The last bit of the book sums up how an individual investor can easily take advantage of those inefficiencies.

Ok, I’m sure he won’t mind me spoiling the secret now. Just go to the website he set up just for this (also, to promote his new mutual funds). www.ValueWeightedIndex.com