Practical analysis for investment professionals
07 October 2016

Weekend Reads for Investors: Autumnal Edition

Posted In: Weekend Reads

In the Northern Hemisphere it is the autumnal season and we are entering the fourth quarter of 2016. There is an analogy here. Namely, leaves turning from green into gold, money into . . . ah, heck. Let’s get to the Weekend Reads for Investors, enough of the analogies!

Investing

Early in my career, I was a ranked (by Thomson Reuters) buy-side energy research analyst. The key ratio in natural resource investing is the reserve replacement ratio. That is, if you produce a finite resource for revenue, you must replace that resource. In energy, the reserve replacement ratio is typically around seven to nine times. Too low, and a company is in danger of paying too much for discoveries down the road. Too high, and a company has stranded capital. But here is a shocking story: Oil discoveries are at a 70-year low. (Bloomberg)

Are you confused by negative interest rates? I was, but now not so much. In part, because of the increasing journalistic attention paid to the twisted logic of this post-Great Recession phenomenon. (Enterprising Investor, Financial Times)

Behavioral Finance

As a finance professional do you find financial communications unnecessarily obscure and non-communicative? The good news is that UBS hired a team of psychologists and other professionals to overhaul their research reports so that they communicate rather than obscure the quality work of their teams. I think this is a spectacular — yes, spectacular — choice. Note: Read the comments section to see just how afraid the financial industry is of psychologists. (Financial Times)

This next story troubles me. It is about research that finds subject matter experts are twice as likely to have false memories about facts and data. To me, this is a bias unidentified by the behavioral economics community, though it involves confirmation bias, representativeness, and other biases, all rolled into one. (R&D Magazine)

Several years ago, I described Essentia Analytics as a game changer for gaining transparency into your own biases. Their software analyzes your trading data and highlights, among other things, your underlying, unrealized biases. Wow! This piece comes from their blog, and is about how to win a gold medal in fund management. (Enterprising Investor, Essentia Analytics)

Here’s another good one: An article shared with me by my colleague, Elaine Cheng, that reviews scientific research to show it is not knowledge that is key to overcoming bias, rather it is curiosity. (BBC)

I want to point out that cutting-edge work done by neuroscientists demonstrates that meditation — not an in-born trait, but a skill that can be developed — also helps people overcome their behavioral biases. This meditation overcoming biases work is featured in a recent Beyond Analysis series of video presentations created to help investment managers perform better. (CFA Institute)

Ethics

You must have read about the Wells Fargo cross-selling scandal, yes? Despicable. This is the last thing the industry needed. But alas, there are several other stories about financial and corporate shenanigans this past month, including this one about the shell game behind a very large market. (Wall Street Journal, Bloomberg)

Back in the halcyon days of 2011, one company was the darling of an entire generation. Yes, that’s right, Apple. Proof that its influence is on the wane? A growing backlash against the company as evidenced by this interesting piece describing Theranos, another corporate wrongdoer, as suffering from Apple disease. As an industry, what are we doing to protect ourselves from ourselves? This frustrates me to no end. One possibility: Rather than use machine intelligence to develop faster trading algorithms, perhaps Wall Street firms should use it to find financial professionals who are better behaved. (NewCo Shift, Financial Times)

Technology

Fintech is rapidly changing our industry. Its ultimate effects are unknown, but you must pay attention to the developments, I promise! Here is news of a venture that takes on hedge funds with earnings estimates derived from big data. This is just one of thousands of possible applications for this technology. But it isn’t just big data that makes digitization of vast information powerful, it is also machine intelligence. Kudos to Amazon, Google, Facebook, and IBM for forming a nonprofit artificial intelligence (AI) partnership to benefit people and society. Well done. (The Japan Times, VentureBeat)

Another technology receiving lots of attention, even from regulators, is distributed ledger/blockchain. A company can now use its own technology to raise its own capital, with no intermediaries. This will have a huge effect on how financing is done. (VentureBeat)

Environment, Social, and Governance (ESG)

The United Nations recently hosted a major climate summit that led to a number of climate stories. For example, I mentioned how I began my research career covering energy: Notice that I did not say “oil and natural gas.” Why not? Because I have watched the development of new energy technologies with great interest for many years. Some of these are becoming exceptionally viable, except for one problem: Power storage that does not use batteries. Here is an excellent piece discussing some of the many alternatives to battery technologies . . . So practical, so smart. (Bloomberg)

One of the alternative energy technologies I have long supported is wave technology. Buoys are anchored offshore, and the tides lift and drop a slider that generates energy that is then transmitted onshore. In other words, this technology turns gravity into electricity. Amazing. Sadly, this technology has been around for a loooooong time, but is only recently available. (The Japan Times)

One of the reasons for a lack of actual progress in mitigating the effects of climate change is the close-knit network that the anti-climate action powers have created to support each other. Wouldn’t it be nice to have a network map showing these interconnections? Indeed it would. Climate Advisers is piloting a program that does this very thing. (Climate Advisers)

Where are the true global warming hot spots, the places most likely to suffer because of climate change? Der Spiegel, as it often does, published an excellent interactive infographic that highlights the places most likely to be swallowed by the sea and or consumed by other catastrophes. (Der Spiegel)

Lest you think I am entirely one-sided on the climate change discussion, know that I believe renewable energy also entails risks. Find out how you might calculate some of these risks. (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.

Image credit: ©iStockphoto.com/JLGutierrez

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. Jason also ran a successful blog titled What My Intuition Tells Me Now. Previously, Voss was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. He 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

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