Carolina Crazy

Tonight Duke University and the University of North Carolina will play a basketball game on the Duke campus (ESPN, 8pm ET) and thus renew the best rivalry in all of sports. As ESPN reports, for the 78th time, both teams will be ranked while over the last 96 meetings, each team has won 48 games and scored exactly 7,437 points.

As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said, “I’m going to beat you like a rented mule.” Even so, that comment was astonishingly mild as these things go. Every Duke home game, irrespective of opponent, includes multiple iterations of a single chant cascading down from the rafters of venerable, old Cameron Indoor Stadium: “Go to hell, Carolina, go to hell! [Clap. clap].”

That’s about as close and as serious as it gets.

CraziesI first sat in Cameron as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke. Every game was special – and wild. NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely. The “Cameron Crazies” will be fired up tonight, of course. As legendary Hall of Fame Duke coach Mike Krzyzewski puts it, the game is a “national treasure.” Continue reading

2017 Investment Outlook

2016 brought many wild surprises. The biggest and most obvious is summed up perfectly in two words: President Trump. Donald J. Trump, despite no political or military experience, overcame long odds and became the 45th President of the United States in what many called the biggest upset in American political history.

Almost as surprising was that an avowed Socialist who had honeymooned in the Soviet Union – by choicenearly achieved a major party nomination for president. Indeed, without the fix having been put in by the Democratic establishment, he may well have won it. Across the pond, the United Kingdom shocked political experts and voted to leave the European Union.

In more prosaic matters, the Chicago Cubs won the World Series after 108 years of futility. After 111 years and 29 consecutive losses, Ireland beat World Cup champion New Zealand in rugby. LeBron James led the Cavaliers to the team’s first NBA championship and brought Cleveland its first championship of any sort in 52 years by upsetting the defending champion Golden State Warriors, who had the best regular season record in league history and who led the Finals series 3-1. In Great Britain, Leicester City came from out of nowhere to win the English Premier League championship despite preseason odds against them of an astounding 5000-to-1. And in perhaps the biggest surprise of all, the film Bridget Jones’s Baby made over $200 million.

From a markets perspective, 2016 started off dismally. In fact, it was the worst start to a year ever. Things looked so bad that many alleged experts were proclaiming doom and gloom, led by RBS urging clients to “sell everything” except high-quality bonds and warning of a “ fairly cataclysmic year ahead“ that “all looks similar to 2008.” Later, legendary bond manager Jeff Gundlach offered the same advice. “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” Legendary investors Stan Druckenmiller, Bill Gross, George Soros, Jeremy Grantham and Carl Icahn (among many others1) were also prominent members of the “sell everything” club.

But they were all dead wrong. The markets in 2016 were much more mundane than most expected. By the time the calendar had turned from 2016 to 2017, from the time of the initial “sell everything” call, the S&P 500 was up more than 20 percent, emerging markets stocks were up more than 25 percent and oil was up nearly 60 percent. But before we look head to the future, we should review 2016 to make sure we understand the position we’re in.  Continue reading

Nice Press

Above the Market has gotten some very nice press of late, most of it of the “best of” variety. I am grateful for the honor and for the attention. Many other fine publications are included so I hope you’ll check out the links below.

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Hoping for a Regulatory Miracle

res-0117-coverThe newest issue of Research magazine in out and my column is now available online. I hope you’ll read the excerpt below and then give the entire piece, as well as the full issue, a careful read.

In a variety of contexts, the DOL has suggested that it doesn’t think this change to a fiduciary standard for retirement assets is all that big of a deal. And conceptually, it isn’t. It needn’t be a big deal to replace a suitability standard — whereby recommendations must be suitable but not necessarily in a client’s best interest — with a fiduciary standard.

The problem, Santa, is that the DOL, through 1,000-plus pages of regulatory requirements, set up a complex framework that must be followed whenever retirement asset investments are involved. This framework touches every aspect of the BD business and requires a complete overhaul of everything that happens therein: paperwork, systems, technology, operations, oversight and supervision, surveillance, training, compliance and more.

Every BD I’m familiar with has spent enormous amounts of time and money to try to comply with the new rule (which, again, isn’t altogether bad because advisors should be fiduciaries), but almost none of that spending relates directly to client care.

Hoping for a Regulatory Miracle

Climate Change Is Real: The Investing Implications

socal-wildfires

Southern California Wildfires (2007)

My latest ThinkAdvisor article is now available. You can find it at the link below. Here’s a taste.

With the possible exception of the inverting demographic pyramid, I expect climate change to be the dominant investment challenge and opportunity of our time over the long term. But I don’t expect it to play out quickly. For most traders, an actionable item is one that can and should be undertaken right now and is expected to pay off essentially right away. But no matter how often I point out that lunch tomorrow is not a long-range plan, I don’t seem to get heard all that often on this point. What I offer is an action item that will almost surely pay off in the longer term for those with the necessary patience based upon any reasonable interpretation of the available data. The climate is changing and those changes will have to be dealt with sooner or later.

The “skeptics” and even governmental opposition conceptually do not trouble me in the least. As Bruce Chadwick put it, “if your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it.”

Climate Change Is Real: The Investing Implications

A Call for Kintsugi Portfolios

Slate advice columnist, Dear Prudence, received this sad and poignant letter seeking guidance earlier this year.

“I keep making terrible decisions and can’t seem to stop.

“Last year I left my home, my family, my friends, a 20-year secure (if uninspired) career, to move 2,000 miles away to be with my first love. I’m 50 and I was his first love as well. He’s married and his wife invited me to their home. We decided to share him, although his wife and I were not interested in one another like that.

“My job here fell through. My dog died. The romance flopped spectacularly. I still love him desperately. And when he told me that it was over and that he didn’t love me and never had, I begged him to reconsider, only to have his wife come in and start screaming at me to keep my f***ing hands off her f***ing husband.

“I snapped. I tried to kill myself. I ended up in a coma and then went to the psych ward. I have been out for only a week. I’m back at work. I’m freshly diagnosed as Bipolar I. I’m on new meds I don’t think are helping. Of course I had to move out and I’m living a very lonely life. I do not feel stable and I cry for hours every night. The loneliness is killing me. I have psychiatric follow-up and intend to do what I can to survive and thrive.

“My former boyfriend is now making noises about wanting to be ‘friends with benefits’ with me once I am ‘well again,’ which sounds more like he wants a self-supporting mistress that he can come and have sex with and then leave at will. I still love him but I realize this is a gross affront to my worth as a human being. I just don’t trust myself to say ‘no.’ Counselling may help but I still don’t trust myself to make good, healthy decisions. Everything I do blows up in my face.

“Any advice?”

We humans are shockingly prone to bad ideas, ideas that routinely grow into poor decisions and then metastasize into behavior that may undermine, severely damage or even ruin our lives and futures (see, e.g., Weiner, Anthony). In the words of Kant, “Out of the crooked timber of humanity no straight thing was ever made.” We share a pitiable and cracked nature desperately in need of a repair job nobody seems qualified to perform. We’d all like to think that we’re a lot better off than the letter-writer above, and most of us probably are (if not nearly so self-aware), but vanishingly few of us has a consistently good track record of decision-making and none of us is as good as we think we are. We’re all too much like the party girl in the Busby Berkeley movie musical Gold Diggers of 1935’s surrealist closing number, “Lullaby of Broadway,” who ends up dancing herself right out of a skyscraper window to her death.

Accordingly, the idea that we act in our own rational self-interest with any degree of regularity is, quite obviously, ludicrous and falsified every single day by our choices and our lives. Worst of all, we readily recognize such self-destructive behavior in others but consistently and tragically lack the ability even to see it in ourselves. As legendary physicist and Nobel laureate Richard Feynman warned , “The first principle is that you must not fool yourself – and you are the easiest person to fool.” The Apostle Paul also (an odd pair for agreement if ever there was one) made the same point (Romans 7:15): “What I don’t understand about myself is that I decide one way, but then I act another, doing things I absolutely despise.” We just can’t seem to help ourselves.

Despite the enormity of this problem, the investment portfolios we design, recommend and manage routinely discount or even effectively deny the overwhelming evidence of our cognitive and behavioral weaknesses and how they impact our financial decision-making and well-being in favor of technocratic attempts at efficiency and optimization. In the immortal words of Pogo, “we [may] have met the enemy and he is us,” but we don’t seem very willing to try to do very much about it.

William Goldman is an Academy Award winning screenwriter, novelist and playwright. He wrote Butch Cassidy and the Sundance Kid, All the President’s Men and The Princess Bride and some other excellent films. He famously said the following about the movies, but it applies much more broadly.

“Nobody knows anything…… Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”

Josh Brown stated why perfectly: “People can’t be accurately modeled. And it’s people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.”

This dangerous reality implicit in our portfolio construction choices ignores an irrefutable fact: no matter how fantastic the financial plan or how perfect the portfolio, they don’t do a bit of good if the plan isn’t followed and the portfolio maintained when times, markets, situations and feelings change…as they inevitably do. Or, to turn the problem on its head, as Josh would have it: “You can boil down whether or not a financial advisor is adding value into a single metric, you might even say it’s the only metric that matters: Retention. Do clients stay?” Therefore, a “Mary Poppins” portfolio – “practically perfect in every way” (when the “every way” means analytically and not behaviorally) – won’t usually be good enough, to the extent it even exists.

Our lives change. Our goals change. Our outlooks change. Our situations change. Our risk tolerances and profiles change. Emotions run high. Life gets messy. Are our financial plans and investment portfolios robust enough from a behavioral perspective to cope when that (inevitably) happens?

In my experience the answer is, “Usually not.” For example, we (clients and advisors alike) are always prone to performance chasing – buying what has been working well recently and selling what hasn’t been working and thus buying high and selling low – which inevitably leads to losses when mean reversion sets in and to excess trading generally. “In hot markets, money flows in,” says Professor Ilia Dichev of Emory. “In down markets, people get scared and leave.” As a result, stock investors lagged behind the stock market itself by 1.3 percentage points annually between 1926 and 2002, according to Dichev’s research. Even pension plans and other institutional investors earn an average of at least three percentage points less than the funds they buy. In other words, “past performance is indicative of future beliefs.”

How we might strengthen portfolios so as to withstand the weaknesses of human behavior is thus the enormous challenge this analysis sets out to explore. Continue reading

Birthday Luck

birthday-luckI had been fitfully and uncomfortably sleeping, dreaming of a small dog licking my leg and stealing my snack. I awoke to find an escaped boxer with a cute face avoiding my eyes and licking her lips. Once the flight attendant found her rightful owner, who was not nearly as embarrassed as she should have been, I reassess my situation.

I’m still more than an hour behind schedule and said to be losing even more ground on account of intense headwinds. I’m still scrunched into a long metal tube with the seat-back in front of me compressing my kneecaps into my hips while hurtling cross-country, still several hours from arrival home in San Diego. I’m tired from lots of planes and being away from home for too long. I’m not in the most conducive spot I can imagine for counting my blessings.

But count them I shall, as part of this birthday reflection. “Birthday luck” describes a nuclear explosion of luck that is supposed to happen inside you on that day, giving you the ability to do anything. I don’t really have birthday luck, of course, but my luck is so good that it’s hard to tell the difference.

We are self-serving creatures to the core, of course, and self-serving bias is our ongoing tendency to attribute our successes to skill and our failures to very bad luck. Being an early investor in tech stocks was really smart while being long and wrong in 2001 was really unfortunate. But the reality is that luck (and, if you have a spiritual bent, grace) plays an enormous role in our lives – both good and bad – just as luck plays an enormous role in many specific endeavors, from investing to poker to winning a Nobel Prize. In fact, if we’re honest, we’ll recognize that many of the best things in our lives required absolutely nothing of us and what we count as our greatest successes usually require great skill and even more luck.

That my birth, which I celebrate tomorrow, was into a loving and stable family that valued education and industry was not my doing. That I was born into a land of freedom and opportunity that would allow and even provide the means for a child of working class parents with just one high school diploma between them to pursue and secure a world-class education was not my doing. I merely had to provide sufficient effort. That I was blessed with some ability and interest in a field that provides a good living and constant stimulation was not my doing. I merely had to provide sufficient industry. That I have a boss who supports and encourages me in work I love is not my doing. That I married extremely well and have three terrific and productive children who have also married extremely well is only partly my doing (and surely less my doing than I’d like to think). The wonder of delightful grandchildren is grace personified.

I could have been born in the 7th Century. I could have been born in North Korea. I could have been born into a family that abused me. I could have had to struggle for even minor educational advancement. My boss could be a jerk. My children could be disdainful. My wife could be a little less wonderful (though I doubt it). My grandchildren might never visit. As the great Frederick Buechner puts it, “all moments are key moments and life itself is grace.”

So truly – happy birthday to me. For much of it – verily, for most of what’s happy about it – I have luck (and grace) to thank.

__________

This post initially ran on October 14, 2013.

A Time of ‘Financial Repression’

res-1016-coverMy latest column for Research magazine is now available online. Here’s a snippit. I hope you will read it and the entire issue.

“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.”

A Time of ‘Financial Repression’