Global climate change is always a hotly debated subject (pardon the pun). The broad and deep consensus of scientists is clear that the change is real, man-made and dangerous. A few critics — largely funded by industries that would be most impacted by the policy changes required to deal effectively with climate change — disagree. My view is clear. That said, I readily acknowledge that, while it seems unlikely, the scientific community might be wrong. However, because the magnitude of the stakes are so enormous, it seems obvious to me that we ought to take serious steps to try to mitigate the problem even if the likelihood of error is high. Simply put, if I think that there is even a 10 percent chance that my car would blow up while driving home tonight, I’m not driving the car home.
On the other hand, some activists trying to stop climate change remain wildly unrealistic. It isn’t likely that many of us will be anxious dramatically to change our standards of living for a nebulous and seemingly far-off consequence. In my view, the most promising possibility for dealing with climate change is technological advance that makes carbon emissions obsolete.
The current issue of The New Yorkerexamines, in great depth, the challenges, difficulties, prospects and frustrations of the International Thermonuclear Experimental Reactor project, a 35-nation effort that is perhaps our best opportunity to “change the game” technologically. I encourage you to read it. A taste follows.
With an Apollo-like commitment, Janeschitz told me, fusion’s remaining problems could be worked out within a lifetime. But the funding would need to come in significant amounts, and mostly at once, not dribbled over decades. As he sketched out his vision, he alluded to an aphorism by an early Soviet tokamak pioneer, a quote that practically echoes among the halls of ITER’s headquarters: “Fusion will be ready when society needs it.”
I have two pieces to highlight today. The first is Eddy Elfenbein‘s wonderful synopsis of Sir John Templeton’s life and work. It’s sad that so few today aspire to be like Sir John’s. As Eddy puts it, the trend today is toward “crassness and institutionalized grift” rather than industry, charity and thrift. The other is Barry Riholtz’s annual mea culpa: My motto: ‘Fresh mistakes, every year,’ by which he intends to learn from his mistakes and to remind himself that we know a lot less than we think we do. Both are great. I recommend them heartily.
As I have written before, my personal productivity — both in terms of quantity and quality of work — increased dramatically when I set aside specific time to think and contemplate. Sometimes I do so with a particular subject or problem in mind. Sometimes I don’t. But, if I’m disciplined about it at all, it’s very useful time. I encourage you to read Shane’s excellent post and Ms. Cain’s worthy book.
As I have noted any number of times, every piece of marketing in the investment world includes a disclaimer of this sort: Past performance is not indicative of future results. Meanwhile, if it is in any way remotely positive, every sales pitch for the products which are the subject of the disclaimer puts enormous emphasis on past performance. This bit of cognitive dissonance is put into sharp relief by the issuance of the most recent S&P Persistance Scorecard. This Scorecard is released twice per year to track the consistency of top mutual fund performers over yearly consecutive periods and to measure performance persistence through various transition matrices. As usual, this new edition confirms the accuracy of the disclaimer as opposed to the sales pitch.
While I heartily recommend that you read the entire report, some highlights follow.
Of the 692 funds that were in the top quartile as of September 2011, only 7.23 percent managed to stay in the top quartile at the end of September 2013. Similarly, 5.28 percent of the large-cap funds, 10.31 percent of the mid-cap funds and 8.15 percent of the small-cap funds remain in the top quartile.
For the three years ended September 2013, 19.25 percent of large-cap funds, 20.1 percent of mid-cap funds and 26.8 percent of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. It should be noted that random expectations would suggest a rate of 25 percent and small-cap funds was the only category to exceed the repeat rate.
Looking at longer-term performance, only 7.71 percent of large-cap funds, 0.88 percent of mid-cap funds and 9.9 percent of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25 percent.
While top-quartile and top-half repeat rates have been at or below the levels one expects based on chance, there is consistency in the death rate of bottom-quartile funds. Across all market-cap categories and all periods studied, fourth-quartile funds had a much higher rate of being merged and liquidated.
He was my favorite player. He was the greatest right-handed pitcher of the modern baseball era: twelve-time All Star; three-time Cy Young Award winner; 311-game winner; 2.86 career ERA; more than 3,000 strikeouts; recipient of the highest-ever percentage of votes, 98.84, of any Hall of Fame member. I proudly own many of his baseball cards (I used to own his rookie card — thanks, Mom), including one that is autographed. Take some time and read this wonderful and insightful article on Tom Seaver by Pat Jordan. A few morsels are offered below.
“When Tom was pitching for the White Sox, as he was approaching his 300th win, he was warming up in the bullpen before a game. Dave Duncan, the pitching coach, watched him throw. He shook his head and said, ‘Tom, you don’t have shit.’ Tom said, ‘Yeah, so what?’ Tom pointed to the other team’s dugout and said, ‘They don’t know that! So what’s the problem? By the time they find out, it’ll be too late.'”
I especially love this one.
“Big Willie McCovey, waiting at the plate, the bat on his shoulder. Tom said, ‘This is my all-time favorite moment in baseball. I managed to get 3-2 on Willie, and all of a sudden, it came to me. I’m in my stretch, and I keep checking the runner on first. Now, everyone knows the runner can’t go anywhere, the fucking bases are loaded, so what is Seaver doing? I keep checking him, refusing to make eye contact with Willie, throwing him a little birdseed, getting him to think, “What the fuck is Seaver doing?” I wanted him to be anxious, confused.’
“He stopped talking. I blurted out, ‘So what happened!’
“‘I struck him out on a changeup. Twenty years later, we’re at the Hall of Fame, and Willie says to me, “Tom, why the hell did you throw me a changeup in that game?'”
“‘Why did you?’ I said. ‘You broke your own rule.’
“‘That’s the point, big boy. Everyone knew how methodical I was. How this pitch had to be a fastball. I was Tom Seaver. So this time, I went on instinct.’ He looked at me with a grin. ‘Even Tom Seaver has to acknowledge mystery in life.'”
I wrote about probability earlier this week within the context of the unlikely and astonishing conclusion to this past Sunday’s Vikings v. Ravens NFL game. Such probability questions are looked at again here, with the added bonus of showing how a poker hand with similarly unlikely outcomes could have played out. Enjoy.
Today I offer four fantastic articles for your careful examination, perhaps over the week-end. All are worth your time and attention.
I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” Somehow simplicity has become the exception while complexity is now the rule.
I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity. That’s not to say that it’s easy, just less complex. A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks. We all know hope is not an investment strategy.
The world of investing is infinitely complex. It feels like we need complex strategies to generate returns. The problem is that as Adams says complicated systems are more likely to lead to “opportunities for failure.” We cannot control what the markets do. We can however control our own actions. For the vast majority of investors a simple system that we can follow over time will in all likelihood lead to better outcomes.
How many people here think that this bull market, wonderful as it is, is built on a foundation of robust and impressive macroeconomic growth and policy choices that are laying a foundation for impressive growth in the years that lie ahead? And how many think that it’s [built on the Federal Reserve’s] printing press? I prefer to play in markets that are priced attractively, priced to offer strong, long-term returns, not ones that are expensive.
Modern day investment management resembles, sadly, another old profession – and I’m not thinking of the oldest one, although there may be parallels there as well. Rather, I’m thinking of ancient alchemy with its near constant promises to turn lead into gold, just as investment managers repeatedly offer to transform low returns into high returns. This raises the question as to why investors/people keep falling for the stories offered up by investment managers/alchemists.
As regulars are well aware, I don’t provide linkfests, largely because others do it so well (such as Tadas Viskanta at Abnormal Returns, Joe Calhoun at Real Clear Markets, Barry Ritholtz at The Big Picture and Josh Brown at The Reformed Broker). But once in a while I highlight a piece that I haven’t seen elsewhere — though I could have missed it — that I think is particularly good.
This interview from a week ago with the always terrific Michael Mauboussin at Compounding My Interests is outstanding. I encourage you to read it all, check out the links embedded therein, and then read it again. Here’s a snippet.
So as I think about the synergies between the worldviews, a few thoughts come to mind. First, it’s essential to provide your mind with good raw material. That means exposing yourself to a lot of disciplines and learning the key tenets. It also means spending time with people who think differently than you do.
Second, you have to be willing and able to make connections. What are the similarities between disease and idea propagation? What can an ant colony teach me about innovation? What do physical phenomena, such as earthquakes, tell us about social phenomena, such as stock market crashes? You need good raw material to make connections, but you also have to be careful to avoid superficial links.
Finally is the idea of thinking backwards. Munger is a big advocate for this. You observe that something is where it is: How did it get there? Why did it get there? There are some fascinating challenges in this regard right now. We know, for example, that the sizes of cities and companies follow power laws. Why? By what mechanism does this happen? No one really knows, and the prospect of solving those kinds of challenges is exciting.
“For those who are convinced that any particular IPO will be ‘the one’ (after all, it might be), I encourage them to understand both the risks and the odds before they buy, and that they only buy with money they can afford to lose,” Seawright says. “It’s like going to Vegas. The lavishness of the casinos demonstrates that the odds favor the house. But, if you only play with money you can lose (perhaps out of your entertainment budget), it’s not quite so bad.”
Don McLean’s American Pie was a great song in my youth.
Now the halftime air was sweet perfume
While sergeants played a marching tune
We all got up to dance
Oh, but we never got the chance
‘Cause the players tried to take the field
The marching band refused to yield
Do you recall what was revealed
The day the music died?
The song played out in real life last week in Annandale, Virginia. Apparently Annandale High School football coach Mike Scott thought the band was taking too long at halftime of the Senior Night football game Friday night and tried to get them off the field mid-show in a pretty unattractive way. Perhaps indicative of nothing, the band seems to be quite good, with lots of awards and honors, while the football team is 1-9 and lost that evening 55-14. Boorish behavior by “football people” is hardly news of the dog bites man variety, obviously. But one would think that a teacher and coach might be smart enough to exhibit a little bit of common sense. Band members deserve some public recognition just like football players. One would think this should be a no-brainer, right?