2018 Investment Outlook

2018 Outlook 01In a nutshell…

The world is a big and complicated place.

If you want to find reasons why it might collapse, and soon, they are easy to find. We are terribly loss averse, after all, and there is always bad news to report. The stock market goes down on roughly 47 percent of all days. Valuations are high. Bonds are rich too. The rally has been a long one and, in historical terms, we are overdue for a correction.

Worse than that, and more importantly, we could go to war with North Korea (or some other country). The Middle East could explode. We could face a monumental environmental crisis. We could suffer a major terrorist attack. The economy could dramatically underperform or simply run out of steam. We could experience some hitherto unknown problem.

The world is a big and complicated place.

However, the markets and the economy are in pretty good shape. In fact, pretty much the world over, markets and economies are in pretty good shape. There is no obvious impediment to that trend continuing (not that there needs to be for markets to get crushed) and things still seem to be improving.

Moreover, betting against the markets is dangerous business indeed. Over the past 90 years, as Ben Carlson has shown, the S&P 500 has seen 66 calendar-year gains to just 24 losses, making money nearly three out of every four years, with an average annualized return of 9.6 percent and topping 20 percent one-third of the time. In the 66 fat years, the average return was over 20 percent; 51 of those 66 years saw double-digit returns. In the good years, the gain was in the 8-12 percent range only four times.

Although longer-term expected returns are well below trend, largely due to high valuations, I remain constructive on stocks and very constructive on foreign stocks. I am neutral to slightly negative on bonds. Since getting there is at least half the fun, since the details and the rationales are crucial, and since understanding the limitations of this sort of Outlook are imperative, I trust you will stick with me for this, my annual Investment Outlook for 2018. Continue reading


Prone to Wander

My latest column in Research magazine is now available. I called it “Prone to Wander.” Here’s a taste.

Human nature and human behavior are not likely to change anytime soon.

Most fundamentally, our brains, our networks and even our social media accounts all conspire to put us and leave us in echo chambers rather than in places where we might find helpful correction.

We find what we’re looking for most of the time, but we’re not looking for the right things.

This general problem manifests itself most often in three ways, victimizing advisors and their clients alike. Oh, and it applies to life in general, too.

  1. We do what is easy instead of what is right.
  2. We feed our short-term impulses rather than our long-term interests.
  3. We do what we want to the detriment of what we need.

There are no easy remedies for our shortsightedness.

However, as Nobel laureate Daniel Kahneman said, “You are going to be more accurate and produce more accuracy by leaning against the biases.”

I hope you will read it all as well as the entire issue. Happy New Year!

How to Lean Against the Biases in 2018

Meaning is Expensive


Source: xkcd

On the morning of January 20, 2015, Stephen Pasceri, a 55-year old accountant, called in sick to work and left his suburban home without saying goodbye to his wife. He left behind a thumb-drive filled with medical “research” and drove to Brigham and Women’s Hospital in Boston.

The previous fall, Pasceri’s mother had undergone surgery there, performed by Dr. Michael Davidson, the hospital’s director of endovascular cardiac surgery, a professor at Harvard Medical School, a specialist in high-risk patients, and the father of three children (with a fourth on the way). However, Marguerite Pasceri died some weeks later at another hospital. Her death certificate listed her cause of death as “cardiovascular collapse” caused by her preexisting illnesses, including multiple heart surgeries, and exacerbated by a lifetime of Newports.

Stephen Pasceri knew better.

After much internet surfing, Pasceri decided that amiodarone, a commonly prescribed post-operative medication for patients suffering from an irregular heartbeat, had killed his mother. Dr. Davidson had prescribed that medication. “It’s very unlikely that she died of amiodarone,” said Dr. Philip Newman, a board-certified cardiologist and long-time practitioner who is an associate professor of medicine at the University of California–Irvine. “[Dr. Davidson] did everything right.” Notwithstanding expert opinion, Pasceri was “certain” that Dr. Davidson was responsible for his mother’s death.

On that brisk winter morning, Pasceri arrived at the hospital unannounced, wandered aimlessly for about an hour, and then demanded to see Dr. Davidson. “I’m not leaving without seeing him,” he said, over and over. Despite a busy schedule that had to be rearranged, the doctor – well known for his patience and good bedside manner – sat with Pasceri to listen to a grieving son and to explain what he had done and why.

Almost immediately, Pasceri referenced his internet study and accusingly asked, “Are you aware that this drug is extremely toxic?” When Dr. Davidson explained that he was well aware of the side effects and that his mother had been monitored carefully, Pasceri did not seem to hear and repeated his accusations, again and again. “Well, my mother died because of this,” he said.

The last half of the conversation was unwitnessed, but after meeting for nearly 40 minutes in total, two blasts from a .40-caliber pistol rang out. Dr. Davidson burst from the room, clutching his wounds and yelling, “Run. Run. He’s shooting, he’s shooting!” Meanwhile, Pasceri shoved the gun into his mouth and pulled the trigger. Pasceri died at the scene. After more than eight hours of emergency surgery, Dr. Davidson was pronounced dead.

Pasceri’s thumb-drive, full of internet “research,” had starkly announced his intentions: “The doctor is dead. I am dead. There is nothing more anyone can do.” Continue reading

“I’m Joining a Cult!” (said nobody, ever)

Tribalism 01

George Orwell famously defined the tribal mindset as extreme identification with one’s tribe, “placing it beyond good and evil and recognising no other duty than that of advancing its interests.” In today’s world, that sounds like what passes for normal. As George Johnson wrote in The New York Times: “Viewed from afar, the world seems almost on the brink of conceding that there are no truths, only competing ideologies — narratives fighting narratives. In this epistemological warfare, those with the most power are accused of imposing their version of reality — the ‘dominant paradigm’ — on the rest, leaving the weaker to fight back with formulations of their own. Everything becomes a version” – what Robin Ince calls a “reality tunnel.”1 As Andrew Sullivan has reminded us, tribalism is not just “one aspect of human experience. It’s the default human experience.”

The Berlin stationmaster and spy, Alec Leamas (played by the great Richard Burton in the movie, excerpted below), is asked about his beliefs within the context of the Cold War – that great tribal conflict – in John le Carré’s classic novel, The Spy Who Came in from the Cold. His reply is both sarcastic and poignant: “I reserve the right to be ignorant. That’s the Western way of life.”

Examples of tribalism run amok are ubiquitous throughout history and especially so today. War. The president versus the press. The Two Cultures. ISIS. Active versus passive investing. Tastes great/less filling. Syria. Republicans and Democrats. The Buddhas of Bamiyan. The American Civil War. Catholics and Protestants. Facebook groups. Nazism. Bridgewater Associates. Twitter wars. Communism versus capitalism. PC versus Mac. Racism. Factor investing. Yankees and Red Sox. “Alternative facts.”  Abortion. Duke-Carolina. Red state/blue state. Urban versus rural. Segregation. Fox News versus MSNBC.2 Sharks and Jets. Fake news. Believers and atheists. Nationalism. The Montagues and the Capulets.

Tribalism is everywhere and permeates everything. “Journalistic integrity is dead,” declares Breitbart News Washington editor Matt Boyle. “There is no such thing anymore. So everything is about weaponization of information.” In a recent column, former Wisconsin Democratic Senator Russ Feingold made clear what is usually only implied; he thinks Republicans are Nazis. To oppose his political agenda is an act of bigotry and hate. Eric Trump says his father’s critics are “not even people.” Hollywood heavily criticized Donald Trump over the Access Hollywood scandal but was largely silent about decades of sexual abuse by Harvey Weinstein, one of its own, while those who defended (or failed to criticize) the now-President over his own abuses couldn’t wait to attack Weinstein.

Brendan Eich was hounded out of Mozilla, a major company he founded, simply because he once opposed marriage equality. A CBS executive in the wake of the recent Las Vegas massacre that killed nearly 60 and wounded 500 said that she had no sympathy for the victims, since the shooting took place at a country music concert and the dead and wounded were most likely Republican Trump voters. Tribalism is turning Aung San Suu Kyi, winner of the Nobel Peace Prize, into an enabler of ethnic cleansing in Myanmar. These tribal identities, terrifying though their outputs may be, offer us a powerful sense of belonging.3

“There’s a southern accent where I come from,” sang the newly and dearly departed Tom Petty, perhaps the best writer of opening lines in rock ‘n roll history. “The young ‘uns call it country; the Yankees call it dumb.”

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Navigating Uncertain Rewards and Certain Risks

Great White Swami'sPhoto source: Gary Elliot, San Diego Union Tribune

My latest Research magazine column is now available online. Here’s a taste.

September 1, 2011, was a beautiful day. Photographer Gary Elliot was taking pictures at Swami’s, a popular surfing beach in Encinitas, California. The surf was high that day, but nothing else seemed out of the ordinary.

When reviewing his photographs later, Elliot noticed a large shark fin in a cresting wave near several surfers. There had been no reports of sharks. As confirmed later by experts, the size and shape of the fin indicated a great white shark, about 12 feet long and weighing roughly 1,000 pounds.

This remarkable happenstance is a powerful metaphor for investing in stocks. Equity investing offers uncertain rewards but certain risks, no matter how beautiful the weather or how calm the seas. These risks are often opaque to us. There is no way to know if and when those risks will bite and what the extent of the damage will be.

I hope you will read the column (and the issue) in full.

Navigating Uncertain Rewards and Certain Risks


The Relentless Now

PresentismIn philosophy, presentism is the idea only the present exists. More loosely, it refers to a narrow focus on the conditions of the moment. Philosophy aside, anyone with even a bit of experience in the financial world will recognize presentism as an apt description of an affliction with which most humans suffer. We do not learn adequately from our past mistakes. We do not plan sufficiently for the future. Instead, we remain excessively fixated on the present and its incessant demands and distractions. Our focus, dangerous though it is, is understandable because, as Nobel laureate Daniel Kahneman has explained, “the long-term is not where life is lived.”

Because of a vicious circle involving tribalismherdingexcessive certainty, overconfidenceself-serving bias, our ideological nature, our propensity for confirming what we already believe as well as our general inability to see that which disconfirms it, and social proof, exacerbated by incessant noise (literal and figurative), this presentism is exceedingly hard to escape. In our lives and world, the relentless now may not be all that matters, but it matters far more than it should.

As Keri Russell’s character, Russian spy Elizabeth Jennings, in television’s best show, The Americans, told her teenaged daughter in the season three finale, after admitting that she had lied to her for her entire life, “Everybody lies, Paige — it’s a part of life. But we’re telling each other the truth now. That’s what’s important.” Elizabeth cannot dwell on her blood-soaked past or focus on the doomsday clock that counts down toward her future. She merely wants, as best she can, to get through today. Carpe diem indeed.

Everybody Lies

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Horrid Facts, Stubborn Facts

September 11.

Two words. Sixteen years. Powerful emotions. Searing memories. Evocative stories.

Sixteen years ago, on Tuesday, September 11, 2001, I was sitting in front of a Bloomberg terminal when the first, cryptic hints about trouble at the World Trade Center crawled across the bottom of my screens (I think). I had been scheduled to fly to New York the day before and had reservations at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed. Instead, I decided to stay home and go to a “Back to School Night” presentation at my kids’ school. As the day’s events unfolded, I recalled having been on the Merrill Lynch fixed income trading floor at the World Financial Center doing a STRIPS trade when I heard and felt the February 26, 1993 World Trade Center bombing. I was really glad I didn’t get on that plane to New York.

My little, not so evocative story is insignificant within the context of the tragic losses, horrible evil and incredible heroism of the “American epic” to which that day bore inexorable witness. But it is what happened to me. It provides context and a framing device to help me remember and think about what transpired and what it means. It is emotional to think about still. But many other stories are far more important.

The image reproduced below is central to several other converging stories from that dreadful day.


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“Hooray for Our Side”

HoorayLast night I went to a concert by Stephen Stills and Judy Collins, one-time lovers and long-time friends, but never before collaborators (except for Stills’ uncredited guitar backing Collins’ sixth album). They have a new recording coming out this month, supported by a tour of which last night’s event is a part. Stills was romantically involved with Collins when Crosby, Stills, and Nash began in 1968, but they split before the recording of CSN’s 1969 debut album. That record’s opening song, “Suite: Judy Blue Eyes,” the final encore last night, was Stills’ bittersweet look back at the relationship. The fledgling group’s performance of it is a highlight of the iconic Woodstock documentary and lives on as an evergreen classic-rock radio regular.

That they perform together now is remarkable. They cannot sing like they once did (and Stills cannot really sing at all anymore even though he can still shred on guitar), but it was still(s) great to see these old masters continue to work their magic after all these years. For me, the highlight of the evening was the iconic Stills protest song, For What It’s Worth (yes, that’s Stills, Jim Messina, David Crosby and Neil Young – The Buffalo Springfield – introduced in 1967 by Peter Tork of The Monkees in the video below).1

Stills and Collins both spoke last evening about certain songs regularly resurfacing due to societal need and argued that this song is one of them. Last night’s rendition was much less haunting and much more aggressive than the original, like the Stills solo version below.

The focus of the song is on the “battle lines being drawn … young people speaking their minds getting so much resistance from behind” while presumably speaking truth to power. That is a crucial part of the standard 60s narrative (along with peace, protest, love, and rock ‘n’ roll), even though it was also the most prolific period of domestic terrorism in our history. We have pretty much erased that from our collective memory. Continue reading

The Missing Ingredients

Within the art of storytelling, how important characters meet is often significant and portentous, laying the groundwork for and foreshadowing what is to come. For example, Florentino Ariza and Fermina Daza in Love in the Time of Cholera, by Gabriel García Márquez: “…that casual glance was the beginning of a cataclysm of love that still had not ended a half a century later.” A corollary to this general trope is the “meet cute” construct in various sorts of movies, most typically with love stories. For example, in Silver Linings Playbook, Pat (Bradley Cooper) has just been released from a mental hospital and is invited by a friend for dinner. Joining them will be Tiffany (Jennifer Lawrence), a woman with issues of her own. The host tells Pat not to ask Tiffany about her dead husband, Tommy. Yet almost immediately after she walks in the door, Pat says, “How did Tommy die?”

One of literature’s iconic first meetings takes place in Sir Arthur Conan Doyle’s A Study in Scarlet, wherein Sherlock Holmes and his soon-to-be partner, Dr. John Watson, meet cute (in an intellectual way) at the chemical laboratory of a hospital where Holmes was conducting experiments. They are brought together by a mutual acquaintance because they both are looking for affordable accommodations, which turn out to be the famous apartment on Baker Street. Holmes proceeds to astonish Watson with his observational and critical thinking skills by ascertaining much about the good doctor’s life and experience from seemingly scant evidence. Below is that famous scene in the BBC’s modern retelling of the Sherlock Holmes stories, starring Benedict Cumberbatch as Holmes and Martin Freeman as his stalwart sidekick, wherein this first Holmes story is re-imagined as A Study in Pink.

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