Practical analysis for investment professionals
15 April 2016

Weekend Reads for Investors: The Let It Be Edition

Posted In: Weekend Reads

I have read many interesting things over the past month so my commentary for this edition of Weekend Reads is brief. I do want to highlight an observation that I consider to be the story since the Great Recession of eight (!) years ago. We are headed into another earnings season globally, and what is remarkable is the disappearance of business news from business publications. Instead of news about individual companies and their performance or discussions about particular industries, we have central bank watching and stories about geopolitics. Pay attention to this quarter’s results and see if you observe the same phenomenon occurring. Most of the news in business publications is not about businesses.

Investing

To my point about the growing importance of central banks when it comes to the performance of financial markets, there’s this remarkable story — so far, my story of the year — about research from GMO that demonstrates that 25% of stock market gains going back to the 1980s have occurred on US Federal Reserve announcement days! As if that was not interesting enough, this piece demonstrates that stock buybacks on the part of earnings-managing companies dwarfs all other activity in US stock markets. Want some proof of how stock buybacks create the mirage that companies are making progress toward their financial goals? Check out this story about Yahoo! as a case study. And finally on this subject, I am resuscitating an important piece of research from several years ago that shows the odd relationship between equity issuance and stock buybacks. Please, please, can we let markets be?! (MarketWatch, Bloomberg, The New York Times, Bank for International Settlements)

In miscellaneous investing news, here is a story that surprises no investment veteran: “Investment Bank Analysts Stayed Bullish as Valeant Struggled.” Last, China is trying to create greater accountability for its municipalities and their spending at the local level. They are doing this by allowing more cities to raise funds directly from investors: “China’s Muni Bond Market Launches with a Bang” (Financial Times)

Risks

All of the risks highlighted in previous Weekend Reads are still present, in my opinion: Namely, declining revenue growth on the part of businesses globally; the lack of capital investment in new high-growth projects; the dearth of fiscal policy to complement and check monetary policy; declining demographic tailwinds in the developed and largest economies; and geopolitical uncertainty. However, here are some additional stories to add to your risk mosaic. First, increasingly monies are being raised in initial public offerings (IPOs) for companies whose sole purpose is to turn around and re-invest that capital in other businesses. I am not sure if this is an innovation or an abomination, but it feels risky to me and is likely a sign that investment bankers have idle hands. Moreover, the sanctity of statistics themselves may be at risk as well. Remember your stats courses from college, graduate school, or the CFA program and their p-values? Well, it turns out that these p-values are so manipulated by academic researchers starving to get published that the American Statistical Association released a statement on statistical significance and p-values warning those who depend on the research about its potential unreliability. (Reuters, American Statistical Association).

Technology

Those of you who follow either my Weekend Reads pieces or my other writings know that I appreciate philosophical deep dives. Here is a fascinating thought piece about how technology has changed the planet and fulfilled its promise, and that the new challenge is to change capitalism so that it becomes a vehicle for greater good. The following story shows how technology — usually considered a great good — can ruin lives due to its sometimes robotic, perpetual-motion-machine-set-on-a-path nature: “How an Internet Mapping Glitch Turned a Random Kansas Farm into a Digital Hell.” Doubtless by now you have heard that AlphaGo defeated perhaps the world’s top player in the super complex game of Go, but this story illustrates just why this artificial intelligence (AI) success is very different from previous successes, like Watson’s famous Jeopardy victory. One of the big investing stories of the last two years is the rapid rise of financial technology (fintech), but could this movement be fizzling? (Medium, Fusion, Financial TimesWall Street Journal)

Environmental, Social, and Governance (ESG)

Friends of mine with a very established and amazing big data technology have been trying to raise money from Silicon Valley for the last several years. They report back to me about the arrogance at the heart of the world’s venture capital hub. I consider this to be a good stewards of capital/governance issue. Here, again, this point of view about SV VC is affirmed by another insider. Speaking of governance issues, activist investors are getting a bit of a comeuppance as they start to receive criticism for their short-termism. The financial crisis led to enormous disruptions in economies, among them the huge number of people in Italy who now essentially work outside the formal economy. (Medium, Financial Times, ANSA)

Wealth Management

If you missed the recent 2016 CFA Wealth Management Conference in Minneapolis, there were a number of insightful programs presented. Among them: Tom Brakke, CFA, shared his insights on due diligence and Ritholtz Wealth Management CEO Josh Brown offered his advice on how financial firms can best leverage social media.

Fun Stuff

Before sharing the following story, I need to make my point of view about science very clear. I believe that for those things in life that adhere to replicability, science is an appropriate pursuit. I am a lover of the scientific method as a conceptual framework for pursuing the truth. But I also recognize the limits of science. Most obviously, not everything is replicable: There are unique events, such as the Big Bang.

One limitation of science is that scientists currently have a blind faith in the existence of dark matter, though nobody has any way of measuring its existence. Why the blind faith? Because they need it to make their models of gravity describe what they observe through telescopes. However, the “dark matter” plug is about a 90% plug. If this were done in finance — say if financial statements were 90% guesses designed to make management assumptions about EPS true — then there would be criminal charges. Here “Physicists Present [a] New Model for What Dark Matter Might Be.” (R&D Magazine)

Finally, I found this video absolutely fascinating and proof that I do appreciate science: A researcher in metal foams (yes, you read that correctly) has created a spectacular bullet-proof armor. (R&D Magazine)

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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.

Photo credit: ©iStockphoto.com/Photoevent

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

1 thought on “Weekend Reads for Investors: The Let It Be Edition”

  1. shrikant says:

    Dear sir,

    After going thru your site, I tempt to enter in the world of equity research Analysts . Pl share the details of Equity Research Analysts course/training/
    duration/delivery mode/fees and possibility of getting assignments.
    .I am Ex Bank official from India and worked in credits – retail banking-assets/liabilities and passionate about cap market.
    Awaiting for your reply,
    Regards,

    Shrikant

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