Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are eight fascinating ones I read this week.
Shane Parrish of the blog Farnam Street quotes from the book 30 Lessons for Living, which asked a group of elderly Americans for life advice. Here's what they say about money:
No one -- not a single person out of a thousand -- said that to be happy you should try to work as hard as you can to make money to buy the things you want.
No one -- not a single person -- said it's important to be at least as wealthy as the people around you, and if you have more than they do it's real success.
No one -- not a single person -- said you should choose your work based on your desired future earning power.
Justin Fox says shareholders are spoiled:
Let's get this straight. Big banks that emphasize return to shareholders above all else have been shown to be menaces to society. Yet one of the main responses to the problems banks got into has been to ... reaffirm the primacy of shareholders.
Such is the power of the ideology known as shareholder value. This notion that shareholder interests should reign supreme did not always so deeply infuse American business. It became widely accepted only in the 1990s, and since 2000 it has come under increasing fire from business and legal scholars, and from a few others who ought to know (former General Electric CEO Jack Welch declared in 2009, "Shareholder value is the dumbest idea in the world"). But in practice -- in the rhetoric of most executives, in how they are paid and evaluated, in the governance reforms that get proposed and occasionally enacted, and in almost every media depiction of corporate conflict-- we seem utterly stuck on the idea that serving shareholders better will make companies work better. It's so simple and intuitive. Simple, intuitive, and most probably wrong -- not just for banks but for all corporations.
Tide goes out
Everyone from banks to households have been loading up on bonds since 2008. Reuters cites a study by the Bank of International Settlements estimating losses now that interest rates are rising:
The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors -- excluding the Federal Reserve -- of more than $1 trillion, or 8 percent of U.S. gross domestic product.
Buy high sell low
Vanguard looked at five years of customer data to see who performed the best. Unsurprisingly, those who did the least earned the highest returns:
Most investors held their own against these benchmarks, although a majority trailed their Target Retirement Fund benchmark slightly. However, investors who exchanged money between funds or into other funds fared considerably worse. The resulting performance gap is a good reminder that a simple, broad-based investment solution can minimize the chances that an investor will make a mistake that can reduce returns.
Izabella Kaminska asks how low gold can go and answers... a lot lower:
On the subject of gold bottoms, some bottom talk is more compelling than others. Campbell Harvey, from Duke University, for example, has been arguing for a while that in real terms the gold price has been overvalued for some time.
So, on the basis that gold really is the inflation hedge some people think it is, its value should currently more about the ... $800 mark.
Asness's advice: Chill out. The investor says the effect of the Fed on the market has been exaggerated. He expects the recent combined rout of stocks and bonds to be over for now. "There is absolutely no reason for this to continue," says Asness. "There is no liquidity crisis or big unwind. This is not 2008."
Some have said that the market is suffering from excess leverage or the fact that Wall Street dealers, because of new rules, are no longer willing to support the bond market. Asness says he sees no evidence of that. He says some bond market are less liquid than usual, but he sees no signs of the type of market turmoil we saw brewing back in 2008. "Markets are functioning well," says Asness.
Above the Market writes a great post on thinking about outcomes:
Yet the real difficulty -- or so it seems to me -- is the typical mind-set of engineers. In my experience, they have particular difficulty dealing with uncertainty. They tend to think that there is "an answer" out there. They aren't often comfortable with probabilistic solutions.
So I was not surprised last week when I heard an engineer talking about an investment strategy available by computer program (of course) created by another engineer that appears to track over 20 years at about 20 percent annualized. That the approach is deemed proprietary gives it the added caché of "hope and exclusivity," which is great for sales but does nothing for performance.
Without knowing the details, I have no doubt (because I have seen many such programs) that the approach was data-mined based upon historical prices and not based upon actual returns.
Here's an interview with billionaire investor Ray Dalio. It's a year old, but worth watching:
Enjoy your weekend.