“As I write this, the yield on the long-bond is roughly 2.25%; the yield on U.S. Treasury 10-year notes is just over 1.5%. That’s a long way from 15.32% and 14.68% [1981 levels]. There isn’t much room for further price appreciation today, and yields are anemic at best.
“Starting from such low yields means that, after adding a reasonable inflation forecast, the real expected return on U.S. Treasury paper is effectively zero. Bond yields, which are roughly equal to their expected nominal return, are so low that the current environment has been characterized as one of ‘financial repression’ by Larry Siegel of the CFA Institute Research Foundation and Tom Coleman of the University of Chicago in that current rates are depriving the economy of one potential growth area via income from savings.”
Al Davis, the late owner and general manager of the Oakland Raiders, had a famous motto for his team, “Just win, baby.” Nothing else mattered, or so he claimed. The Raiders did that on the opening week of the season Sunday, beating the New Orleans Saints, 35-34, when Derek Carr hit Michael Crabtree on a fade route for a two-point conversion in the last minute of the game.1
Two words. Powerful emotions. Searing memories. Evocative stories. Fifteen years.
Fifteen 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.
Please watch the video here (it can’t be embedded) and thank me later.
“Like, I’m listening to what you’re saying but I only hear what I want to.”
Note: I will be attending the terrific Evidence-Based Investing Conference on November 15, 2016 in New York. You should too.There is a new and growing movement in our industry toward so-called evidence-based investing (which has much in common with evidence-based medicine). As Robin Powell puts the problem, “[a]ll too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media.” Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs. It requires good information and solutions that are well supported by good research as well as the demonstrated ability of the proffered solutions actually to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing, but I digress).
The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” Then again, investors of every sort – those with a good process, a bad process, a questionable process, an iffy process, an ad hoc process, a debatable process, a speculative process, a delusional process, or no process at all – all think that they are evidence-based investors already. They may not describe it that way specifically. But they all tend to think that their process is a good one based upon good reasons. Nothing to see here. Move right along.
Nearly as problematic is the nature of evidence itself. The legal profession has been dealing with what good and relevant evidence is for centuries. According to the Federal Rules of Evidence (Rule 401): “Evidence is relevant if: (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action.” That’s a really low bar, which explains why so much more than merely evidence is implicit within the rubric of evidence-based investing.
And therein lies the problem. Committing to an evidence-based approach is a great start, a necessary start even, to sound investing over the long-term. But it’s not enough…not by a longshot. As philosophers would say, it’s necessary but not sufficient. Most fundamentally, that’s because:
- The evidence almost always cuts in multiple directions;
- We don’t see the evidence clearly; and
- We look for the wrong sorts of evidence.
I’ll examine each of these related issues in turn. Continue reading
I have been now been writing Above the Market for five years. Wow. That’s hard to write and harder to believe.
I began on August 1, 2011. I started and still write largely to clarify my own thinking and to force and enforce commitment on my part. Actual readers are a lovely bonus I didn’t expect when I started and that I never take for granted. After many hundreds of thousands of visitors from nearly 200 countries, I remain astonished at the level of interest Above the Market has received — it is far beyond what I thought possible, much less likely. I appreciate each and every reader. Anyone who writes wants to be read most of all.
As always, a few people deserve special mention and thanks.
Tom Brakke (his terrific blog is The Research Puzzle) generously offered outstanding help and guidance before I even had any readers to speak of and continues to offer wise counsel whenever I ask. Tadas Viskanta provided my first distribution (exactly one month in) to the expert community he serves via his blog, Abnormal Returns, which remains the standard for its type. I have now appeared there well over 200 times — essentially once a week — and am extremely grateful for having done so. Joe Calhoun upped my exposure tremendously via Real Clear Markets, in which I have appeared almost as often. I am grateful and humbled to be featured often at these and other excellent sites, including Cullen Roche’s outstanding Pragmatic Capitalism, the indispensable The Big Picture from Barry Ritholtz, Bill Zimmer’s The Prudent Trader, Charles Kirk’s The Kirk Report and Josh Brown’s wonderful The Reformed Broker. Other regular linkers include the CFA Institute, Ben Carlson’s fantastic A Wealth of Common Sense, Michael Kitces (the authority on financial planning), Wade Pfau (the authority on retirement income planning) and the previously mentioned Mr. Brakke. Jason Zweig and Morgan Housel — giants in financial journalism — have provided much help and inspiration. And finally, but in no way least, I greatly appreciate Research magazine publishing my regular columns. Thank you all.
My “top ten” posts this year, based upon reader numbers, follow in order of popularity. I hope you will give them a look (or another look).
- Here We Go Again: Forecasting Follies 2016
- The Great Myths of Investing
- A Hierarchy of Advisor Value
- Complexity, Chaos and Chance
- Mean Reversion, Small Sample Size and the Mets
- Financial Gaslighting
- Alternatives to Being an Evidence-Based Financial Advisor
- Bear Territory
- Chris Rock Explains Bias Blindness
- The Jewelry Effect
My all-time “top ten” posts, again based upon reader numbers, follow in order or popularity. I hope you’ll check them out (or check them out again).
- Investors’ 10 Most Common Behavioral Biases
- Financial Advice: A Top Ten List
- Establishing Your Top 10 Investment Default Settings
- My Investing Checklist
- Math Suckage and Dave Ramsey
- Top Ten Ways to Deal with Behavioral Biases
- Investing Successfully is Really Hard
- Here We Go Again: Forecasting Follies 2016
- Saving Investors From Themselves
- The Great Myths of Investing
Finally, I’d like to focus on the following “not top ten” posts that didn’t get nearly as much attention — sometimes because they appeared before I had many readers — but which I think are worth reading. I encourage you to check them out.
- Beguiled By Narrative
- Financial Products are Sold, Not Bought
- It’s Not You, It’s Me
- Just Put the Ball in Play
- Gaming the System
- The Semmelweis Reflex
- Bias Blindness and Political Polarization
- Demand for Hitmen and Yield
- Luck, Skill and Jim Harbaugh
- Librarius Booker, Confabulation and Choice Blindness
I have enjoyed a nice holiday from blogging this past month and a vacation to boot. Now I’m ready to get back to it. To everyone who has read, supported and helped me with this effort: Thank You! I hope five years leads to many more.
The online version of my July Research magazine column is available today. In it, I take my baby boomer generation to task for failing to live up to the legacy of those who came before us — most specifically the “greatest generation.” Here’s a taste.
America has been left largely in the hands of us baby boomers, more than 75 million strong. And even though we’ll deny it vociferously, the evidence is clear that we’ve made a mess of things pretty much across the board, in large measure due to our unwillingness to put the interests of our children first. In sum, we are selfish, entitled toads who hate our kids.
I hope you will read the full piece as well as the entire issue of the magazine.
The online version of my monthly Research magazine column — from the June issue — is now available. It discusses “a grand conundrum for the world of finance — we desperately need to make forecasts in order to serve our clients but we are remarkably poor at doing so.” I hope you will read it and the entire issue.