Weekend Reads for Investors: Caveat Emptor Edition

My most recent iteration of “Weekend Reads for Investors: The Pessimism Issue” attracted a particularly pessimistic comment that was direct and succinct: “Reading this article was a waste of time.” Presumably he wants a caution that his time investment may not bear fruit. In other words, he likely would benefit from that ancient admonition — caveat emptor — or buyer (née reader) beware!

As I endeavor to be direct and succinct, and certainly not a waste of investors’ precious time, let me try again to present this curated list of reads I found particularly interesting over the last several weeks. Caveat emptor.

“I Feel the Need, the Need for Speed”

• Manufacturing efficiency gains wrought from finding new uses of the nearly infinite sea of information made available by the Internet is the subject of this read. Specifically, how the Industrial Internet is gaining scale. Here there is a marriage of the Cloud, with mobile computing, with “big data” analytics, with manufacturing information technologies, equipment with sensors, and people armed with all of the preceding. I find very interesting a point that product life cycles are being shortened. This reminds me of one of my favorite investing anecdotes courtesy of Bob Wayman, former CFO of Hewlett-Packard. We asked him once if he could do his career over again would he do it the same way, and his answer was very surprising. Bob said something to the effect of, “I would never choose to work in technology again. To invent a new multi-billion dollar business every 18 months is almost impossible.” And that was then — years ago in the pre-Industrial Internet era. Caveat emptor. (R&D)

Signs of the Times

• Speaking of anecdotes, there are a number of catchy phrases that codify supposed investment wisdom about emotions and investing. Among them are, “Fear and greed drive equity markets,” and “Stock prices climb a wall of worry.” Everyone has heard these phrases before. But rarely do you hear fear of dread acknowledged by monetary policy authorities, such as the Bank of England’s Andrew Haldane. To me this is interesting because it indicates that policy makers clearly include the “mood of the market” in executing their mandates, and not just inflation targets. Caveat emptor. (Financial Times)
• Last year, I published a list of my favorite anecdotal signs of a market bubble. On that list was “covenant creep” and “new issue time to market massively reduced.” What I was highlighting with these two signs is that the underwriting of financial risks tends to fall by the wayside when things get frothy market-(un)wise. Add into this same scheme the return of “liar loans” — these are loans made without verifying the finances of the borrower. They’re baaaaaack, and making their way into AAA-rated securities again. Caveat emptor. (Bloomberg)
• Another sign of the times is the growth of high-frequency trading (HFT). For the record, I am largely an advocate of HFT. What many people object to is the perception that HFT is all about edging out slower traders and also about market manipulation. Ever since market makers started using carrier pigeons to help relay trade information, there has been HFT, so this does not worry me. But what I abhor is market manipulation. Among the malign practices is spoofing, which this piece helps illuminate. Caveat emptor. (Bloomberg)
• In China, the government is trying to put its state-owned enterprises (SOEs) on a diet. Not surprisingly, the effort is largely designed to further privatize the SOEs. Doubtless this effort is in response to critics of Chinese quasi-capitalism who were practically shouting from the rooftops during the country’s recent stock market turmoil. Caveat emptor. (FinanceAsia)

Energy Shocks

• Many investors believe official Chinese government data is unreliable and exaggerated to meet mandated quotas. But no one to my knowledge has discussed what an audit by the US Energy Information Administration (EIA) found: For more than 10 years, China consumed as much as 14% more coal than previously reported. Ouch! This big reveal has far-reaching ramifications for a number of parties, ranging from climate activists, to anyone investing in commodities, to accounting standard setters, to shippers. Caveat emptor. (Wall Street Journal)
• Speaking of energy shocks, do you know anything about Kardashev’s classification system for potentially advanced alien civilizations? Me neither, and I spent a good portion of my investment management career as an energy analyst. Despite China’s huge coal burn, it is far from the most advanced user of energy — that would be a Type III civilization, according to Kardashev. Here a culture is capable of using all the stellar energy in their home galaxy, and likely they can wipe all of us out with a mere glance. Caveat emptor! (R&D)
• Returning now to planet Earth, if you are searching for an indication of future oil prices, you likely look intimately at supply data. After all, marginal supply drives marginal price changes. But did you include stripper wells in your calculations? These wells, typically owned by mom-and-pop producers, compose around 10% of total production in the United States, and they are poorly understood and counted by official production sources. Caveat emptor. (Wall Street Journal)

Now for Something Completely Different — At the Very Least, No Caveat Emptor

• Did you know that p-values in statistics are increasingly criticized by statisticians and scientists alike? This is because they are often interpreted in misleading ways. For example, causality is often inferred from a very low p-value/high statistical significance. Yet interpretation needs to also consider the relationship between different factors, as well as the actual effect size of “significance.” Here is a primer on Cohen’s d — a measure of effect size — that I find beneficial for interpreting statistical data. (R Psychologist)
• Last, if you follow my writing you know that I have many esoteric pursuits. One of these predilections is nonlinear mathematics, of which knots and folds are a part. Here is a super interesting piece about the mechanics of knots that has implications for many endeavors — and not just whether or not you receive a scout’s merit badge for a snug square knot. (R&D)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller