Five Years Ago Today

This past week has offered multiple chances for reflection and retrospective as we saw the 150th anniversary of the Gettysburg Address and the 50th anniversary of the JFK assassination.  Five years ago today was significant too, if not nearly at the level of those others.

Five years ago today, the markets were reeling. The most common emotions were fear and dread. Even though no less an authority than Warren Buffet had noticed the buying opportunity just over a month earlier, almost nobody was anxious to buy stocks.

S&P 500 11.25.08

But the Federal Reserve announced an $800 billion stimulus package in an effort to stabilize the financial system that day.  This announcement came on the heels of the federal government’s decision to spend over $300 million to rescue Citigroup by agreeing to shoulder possibly hundreds of billions in losses at the stricken bank and to inject $20 billion into the company.

Things would get worse before they got better (the low would come in March of 2009), but an investor who bought the market five years ago would be very happy indeed today.

S&P 500 11.25.13Taking this sort of look back is a helpful reminder of how our emotions and biases can work against our best interests. Five years ago today, the predominant mood was panic, but buying would have been a very good thing. Today — at much, much higher levels — it’s hard to find many bears. My point here is not that the markets won’t go up from here. They may well go higher and perhaps a lot higher. My point is that market risks are much higher today that they were five years ago. For example, CAPE today is 25.43; it was barely above 15 five years ago. My analytical self tells me to be fearful when others are greedy and to be careful, to hedge, to lighten up or to take profits when others are doubling down.

Even though it feels like I should do exactly the opposite.


I was a Duke student before Coach K came on board. Duke basketball was a big deal on campus then, but its aura was very different.  We weren’t remotely a juggernaut or a national name.  In fact, within just a 25-mile radius, we were well behind both UNC and NC State in terms of basketball history and regard.  But we were very good fans, filling the seats and supporting our team.  We were aggressive too.  Our shtick was not just to be loud and intimidating but also to try to be funny and snide so as to unnerve our opponents.  Sometimes we were even offensive. Imagine that.

We invented the “Airball!” chant in 1979 for an opponent’s shot that misses everything. Thank you, Rich Yonaker. After I graduated it was chanted in German at future NBA star Detlef Schrempf who was, of course, German. We greeted the visiting USC Trojans by throwing condoms on the court in 1978. We always urged NC State’s then coach to “Have a drink, Norm Sloan, have a drink” because he had commented in the press about the alleged insobriety of Duke students in the stands.  We jangled car keys during his free throws in an otherwise silent Cameron Indoor Stadium at State guard Clyde Austin, later imprisoned for a Ponzi scheme, who was being investigated for having no job but two luxury cars, supposedly given to him by his bank teller girlfriend.  Pizzas were delivered to a State huddle because a Wolfpack player was in trouble for hassling a pizza guy.  When Maryland coach Lefty Dreisell (Duke, 1954) and his Terps visited, Lefty was greeted with a big sign and these words: “Richard Nixon [Duke Law, 1937]: Duke’s second biggest mistake. Welcome Lefty!

OverratedA regular chant in our rotation was reserved for when a very highly regarded team or player visited Cameron and didn’t perform up to reputation. “OV-ER-RAT-ED!”  Sadly, and by any reasonable measure, it is impossible to conclude that the financial services industry is anything other than wildly overrated.  Chant away. 
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Why Do We Hate Our Kids?

D-DayIn honor of the 69th anniversary of D-Day, I am repeating this post from a year ago.


We just celebrated the 68th anniversary of D-Day, and well we should.  That day in western France was the pivotal day and the pivotal event of the 20th Century.  As Omar Bradley pointed out, every man who set foot on the beaches of Normandy on June 6, 1944 was a hero – the men who took the cliffs to fight tyranny and took back a continent for freedom. I dare you to try to watch footage of and about that horrible, dreadful, wonderful day with dry eyes or a cold heart.

Here’s to the boys of Pointe du Hoc.  In the words of Stephen Spender, these are men who in their “lives fought for life and left the vivid air signed with [their] honor.” Continue reading

What’s Next?

What's NextHeraclitus is said to have been the first to assert that nothing endures but change.  Yet I doubt that it was original even to him.  In life and in business, a major key to success is anticipating the changes that the future holds and adapting to them. 

Aaron Sorkin gets it, whatever you think of his politics.  In The West Wing (I’m still a big fan – my lovely bride and I just watched a couple of episodes again this week), when President Jed Bartlet asks, often brusquely, “What’s next?,” it means that he has made up his mind and is ready to move on, even if and when his subordinates are not (see below, from Bartlet’s first presidential campaign, as he is getting acquainted with his young staff).

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Fuzzy Political and Investment Math

The great scientist E.O. Wilson created a major stink over the week-end via The Wall Street Journal by arguing (or at least seeming to argue, among other things) that math skills are less important to most scientists than imagination, theory, concept and intuition.  It reminded me of the 1976 SNL send-up of the Gerald Ford-Jimmy Carter Presidential Debate.  In the “debate” (shown below — the noted section is about 6 minutes in), Chevy Chase, as Gerald Ford, responded to a difficult economics question as follows.

President Gerald R. Ford: [ sweating ] It was my understanding that there would be no math… during the debates.

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Investment Illusions

nunbunmorphThere is no getting around it. We are pattern-seeking generalists. The focus of the image to the right is a standard cinnamon roll, but we easily (eagerly!) see something more, perhaps Mother Teresa.  We like to think that we perceive things “as they really are,” but (uh-hem), in reality our perception is highly ambiguous. We often see what we expect to see, want to see, are primed to see or are conditioned to see.  This general problem is also a function of our tendency to seek excessive detail within complex systems. 

My favorite example in this regard is perhaps the famous Virgin Mary grilled cheese sandwich (see below left). Jane RussellVMGCIts story is improved dramatically for me in that it was sold via E-Bay for $28,000 back in 2004 to a casino in order to be displayed in Las Vegas and elsewhere. That alone is a remarkable commentary on modern American culture, but I digress. If you aren’t predisposed to see the Virgin, you might think it’s the late actress Jane Russell (right).

These pattern-seeking perceptual difficulties are especially common to investing.  Continue reading

Size Matters (More)

size mattersMy recent post on the small-cap premium and my tentative hypothesis that sub-linear scaling in companies helps to explain it has received a substantial amount of interest — privately, publicly, and even a bit in the comments. Due to the remarkable response, I wanted to add a few clarifying points.

  1. I don’t suggest that the sub-linear scaling Geoffrey West discovered within companies fully explains the small-cap premium.  There are a number of factors at work (including risk, the standard explanation for the small-cap premium), and these can cut in a variety of ways.
  2. Most of the criticism centers upon the (very tentative) conclusion rather than the data.  If the data is accurate — and I see no reason to doubt it to this point — it suggests that smaller companies, once they have reached something like critical mass, are decidedly more efficient than larger companies.  That added efficiency, if and when fully verified, would indeed support both the existence and the persistence of a small-cap premium.  Those who disagree with the (again — very tentative) conclusion must still account for the data.  To this point, none of the critics has even made an attempt to do so.
  3. Further discussion and (especially) further research will be necessary to see if this idea holds up.  I emphasize that it remains merely a hypothesis to this point. It seems consistent with and supported by the data but remains in need of verification.

As always, comments and criticisms remain welcome.

The Missing Lead

big_butt_chairI’m a big fan of Jake Tapper.  I thought he was terrific at ABC News as the senior White House correspondent and I was disappointed when he wasn’t picked to host This Week both when George Stephanopoulos left in 2010 and when he came back in 2012.  As of 2013, Jake returned to CNN to become Chief Washington Correspondent and anchor of a new weekday television news show, The Lead with Jake TapperThe Lead, which debuted this week to generally good reviews, is the first CNN show to launch since Jeff Zucker took over as president of CNN Worldwide to revitalize the franchise.

I agree with the good reviews, but there’s a “big but” coming. Continue reading

The Price of Safety

The Price of SafetyThe Fed has been using all the tools at its disposal to try to encourage (some would say “force”) equity investment and, by all appearances, has succeeded rather spectacularly.  As Josh Brown pointed out Saturday, the current cyclical rally has now exceeded four years.  Indeed, according to Bespoke Investment Group, the rally has reached 1,460 days, making it the eighth longest of all time and causing to some to question whether we may have entered into a new secular bull market.  Stocks have more than doubled over that period.  Those who have avoided stocks — likely seeking “safety” — have been crushed no less than whose who held on through the March 2009 lows. Continue reading