Weekend Reads for Finance Pros: Hedge Funds, Charlie Munger, and the World Cup

Not long ago, I heard someone talk about the process of learning and reading as the “daisy chain” effect, which basically refers to a series of interconnected events, experiences, or activities (like a garland of daisies). You know how it goes: a book, or a question, or an article, leads you to the next, and so on and so forth. That happened to me recently when I discovered that not all baking powders are created equal. (Who knew?)

After hours of research, I emerged feeling a bit like Alice in the scene from Alice in Wonderland where she goes down the rabbit hole (this has become a common metaphor in popular culture for delving into something unknown). A similar thing happened this week on the topic of Charlie Munger, Warren Buffett’s business partner, and his lecture on the psychology of human misjudgment. (This is why I have a lot of Munger references in the “investing” section.) 

As Munger reportedly once said: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none. Zero. You’d be amazed at how much Warren reads — and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” And with that wonderful image now in your mind, here are some interesting weekend reads.

Investing

• For 18 months, Guy Spier — who runs the Aquamarine Fund, which has beaten the S&P 500 by an average of 4.9 percentage points annually, net of fees, since its launch in September 1997 — listened to nothing in his car but Munger’s lecture on human misjudgment. Of the two dozen mental mistakes cited by Munger, “I realized I was guilty of all of them,” Spier says. So what’s an investor to do? Well, as Jason Zweig artfully explains in his column, Spier set about giving himself an investing makeover — something we should all think about doing sometime. (Wall Street Journal)
• Here is Munger’s lecture, if you’d like to listen to it, and the transcript, if you’d prefer to print it out. (Farnam Street)
• Staying on this topic: 20 book recommendations from Munger that will make you smarter. (Farnam Street)
• The surge in investing by conscience: Investment funds incorporating environmental, social and corporate governance criteria in their decisions had net assets of $1 trillion in 2012, up from $202 billion in 2007, according to US SIF. (New York Times)
• “Investors are unequivocally greedy today, and with some perspective it is hard to blame them,” writes Charlie Billelo in “Fearful When Others Are Greedy.” After all, stocks are at all-time highs, risk has become a thing of the past, and volatility is also near record lows. “Why is any of this a problem? Isn’t confidence a good thing which will only lead more and more people to buy in, aka the ‘greater fool’?” What should we make of the current market sentiment? (Pension Partners)
• As Josh Brown a.k.a. @ReformedBroker put it in this tweet:

https://twitter.com/ReformedBroker/status/473821756617015296

• Is investing an art or a science? Seth Klarman and Jack Bogle shed light why beating the market may be close to impossible. (Institutional Investor)
• Sallie Krawcheck, the former president of the Global Wealth & Investment Management division of Bank of America, announced that her organization, Ellevate (formerly 85 Broads), had teamed up with Pax World Management, a fund management company, to offer an index fund focused on companies where women make up a significant portion of officers and directors. The new fund is the Pax Ellevate Global Women’s Index Fund (PXWEX). (The New York Times)
• “To Make a Killing on Wall Street, Start Meditating” (Bloomberg)
• Alternative mutual funds:

'Alternative' mutual funds: Different, yes. Better? Not lately. http://t.co/eIUsZ9giw5 pic.twitter.com/XOoHW9olVh

— Daisy Maxey (@DaisyMaxey) June 3, 2014

Economics

• “Why is macroeconomics one of the great unsolved problems in the history of human science?” asks Noah Smith (@noahpinion), in “What Happens When the Economy Baffles Economists?” “It isn’t because macroeconomists aren’t smart enough, as anyone who has hung around them knows. It’s also not because they’re too politicized; you can find macroeconomists on every end of the spectrum. Nor is it for lack of resources being thrown at the question. The problem is data.” (BloombergView)

Hedge Funds and Private Equity

• Chris Arnade, a physicist who spent 20 years working as a trader on Wall Street, writes that hedge funds are bullies and individual investors should steer clear of them. (The Guardian)
• Cue the comeback: Timothy Spangler, author of the hedge fund explainer book One Step Ahead, responds to Arnade’s critical piece on why regular investors should avoid hedge funds, arguing we don’t have the luxury of hating them. (The Guardian)
• For more on the topic of hedge funds, check out this linkfest of the best reading in fund investing: “Hate Hedge Funds? Pensions Love ‘Em” (Barron’s)
• A wave of affluent do-it-yourselfers are investing in private equity by buying into funds that focus on a sector of the economy or on direct investments in particular companies. (New York Times)
• “The Place of Private Equity in a Diversified Investor’s Portfolio” (Enterprising Investor)

Retirement

• “Fighting the Wrong War: The Real Problems Facing Retirement Plans” (MorningstarAdvisor)
• Wade Pfau discusses the pros and cons of target date funds in the accumulation phase. (AdvisorPerspectives)
• The most valuable assets to leave your heirs? A Roth IRA is often the best inheritance. (Wall Street Journal)
• Remember a few months ago when Buffett said he wanted the trustee of his estate to put 10% of his wife’s cash inheritance in short-term government bonds and 90% in a low-cost S&P index fund — and he tipped his hat specifically to Bogle’s Vanguard? Well, as Elisabeth Kashner of ETF.com points out in “Dear Mrs. Buffett, About That Index Fund,”that Vanguard’s S&P 500 ETF comes with opportunity cost, because it omits mid-caps, small-caps, foreign companies, and firms that have short-term earnings struggles.

Behavioral Finance

• Has push come to shove for a fashionable theory? A rival psychologist has published a book debunking the behavioral economics of Daniel Kahneman and the men behind Nudge, who, along with the authors of Freakonomics, were once the British Prime Minister David Cameron’s pet thinkers. So how do you choose between them? (The Guardian)
• This cartoon was just too good not to share:

I love this fantastic skeptical cartoon from Beatrice the Biologist via @SkepticsGuide #behavioralfinance pic.twitter.com/4dl6uGl2px

— Lauren Foster (@laurenfosternyc) June 4, 2014

Soccer World Cup

• “Chile Dominates World Cup of Slackers as Trading Tumbles” (Bloomberg)

• With an eye on the World Cup, a German coach overhauls Team USA. (Wall Street Journal)

• Who are you rooting for?

https://twitter.com/freakonometrics/status/474340621030006784

https://twitter.com/freakonometrics/status/474400154242781185

And Now For Something Completely Different

• A nugget of wisdom via @freakonomics: “The key to learning is feedback. It is nearly impossible to learn anything without it.”
• Historically, hurricanes with female names have, on average, killed more people than those with male ones. Gender bias or is it a statistical fluke? (National Geographic)
• “In Praise of Idleness: The Productivity Secret Nobody Talks About” (Farnam Street)
• What’s Lost as Handwriting Fades (New York Times)
• “The Case for Treating Sugar Like a Drug” (Vox)
• Is “the most trusted doctor in America” — otherwise known as Dr. Oz of the eponymous television show — doing more harm than good? (The New Yorker)
• On creativity:

Wonderful advice RT @FastCoDesign: 4 tips on creativity from the creator of Calvin & Hobbes: http://t.co/fAr12Y71Rw pic.twitter.com/qEK2TWoa4W

— Lauren Foster (@laurenfosternyc) June 3, 2014

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/JLGutierrez