Practical analysis for investment professionals
22 December 2017

Weekend Reads for Investors: Holiday Edition

Before proceeding, I send my very best wishes for a prosperous and happy new year to those of you reading this article. To those on a lunar calendar, my wishes extend to you as well — they just come more prematurely. With that, I am going to skip my usual preamble and get straight to the stories as I know you likely have a busy holiday season in front of you.

Investing

First off is a slightly dated but still-compelling story about a list of firms in Europe that are paying for research in the post-MiFID II world. MiFID stands for the Markets in Financial Instruments Directive that provides a unified finance industry regulatory framework across the European Economic Area (EEA) — the EU plus three other nations. One MiFID II provision requires firms to disclose how they pay for their investment research. Most firms are expected to absorb the costs rather than pass them on to clients. Why is this interesting? Because the investment management business is a race to the bottom when it comes to fees charged. This is probably a good thing for end clients. However, if you are an active manager, you want the very best, highest-alpha-earning research staff that you can afford. That also benefits end clients with higher risk-adjusted and goal-adjusted returns.

The nerd in me couldn’t resist the next selection. It describes the rate of return on everything from 1870–2015 as researched and disclosed by the National Bureau of Economic Research (NBER) in the United States. Well done!

For fans of my multiple series on active management, its strengths, and its failings, you will love this exploration of the momentum effects built into market indices. To me, this is a severe disadvantage for active management that has nothing to do with economics — which markets are supposedly evaluating. To the degree that blindly sinking money into a strategy is economic, then so be it. But even if you are a passive investing fan(atic), the momentum effects should disconcert you.

I feature this story in my “Investing” category to tease a new section of my Weekend Reads installments going forward: “Fintech.” I started to cover fintech for Enterprising Investor waaaaaay back in 2012, and I continue to track developments very closely. This piece — see the others below — examines how financial institutions are responding to digital currency and blockchain technologies.

Behavioral Finance

While the following article may seem unrelated to behavioral finance at first, it is — and strongly so to my mind. Its authors did not intend it as a behavioral finance story, but it describes a despicable practice marketing firms have long engaged in: manipulating you into buying things that you otherwise would not. Specifically, it discusses how to use archetypal stories to construct narratives about a brand, the better to separate customers from their money. This reminded me of a conference call hosted by a Pulitzer Prize–winning journalist I listened to several years back that advocated that journalists also cast characters (read: sources) into classic fairy-tale and archetypal frameworks to better connect with readers. For those of you familiar with the multi-decade research of Carl Jung, you understand just how manipulative these practices are. Wouldn’t it be nice if businesses sought to earn a customer’s purchase, rather than trick them into it, by providing high-quality products? <sigh!>

Fintech

Introducing my new category, Fintech, is an article about China’s central bank’s entry into the cryptocurrency game. This may just be a natural extension of China’s interest in ending the US dollar’s reign as the world’s overwhelming reserve currency. I predict that China’s won’t be the last government to explore the power of cryptocurrencies.

Might I disavow you of one fiction about bitcoin? It is not an efficient payment mechanism. Extricate your mind from the transactional context and enter the realm of the energy and natural resource effects of “mining” bitcoin. Did you know that more electricity was expended mining bitcoin in 2017 than was used in 159 countries? I considered this issue several years ago, before it entered the minds of many cryptocurrency fans.

Prediction: At some point in the future, distributed-ledger participants are going to put “archiving” or “vintage” mechanisms in place. That is, at the end of each year, they will all agree to the record in the blockchain and then to lop it off into a secure storage facility, perhaps even with an “air gap” to ensure its sanctity. The consequence of not getting this right will be to embed into a cryptocurrency a lack of efficiency that could eventually doom it.

Environmental, Social, and Governance (ESG)

Many think that ESG is just code for sustainability. No doubt that is true in part, but ESG also holds that an issuer’s governance should be central to investment discussions. The author of this piece says it all starts with the board. Another important question to consider: Where does good governance end? I believe you agree with me that it ought not be in the courts.

Next, another outcome I predicted for years is coming to fruition. Issuers of green bonds are seeing such demand that they can charge a premium. Don’t give me too much credit. My prediction was based on the premium I pay at the grocery store for organic foods.

Fun Stuff

Long-time readers know I love stories about brain research and the functioning of the mind (the two are not the same thing!). Did you know researchers have found the electrical connections that help form memories?

Last is a story-of-the-year candidate in the Fun Stuff category about a Chinese man who repainted road markings to make his commute quicker. I imagine, like me, you agree with the man’s sentiment, if not his ethics. Who has not sat in the middle of a tedious commute and thought about doing all kinds of crazy things to reduce the torture?

Music Listened To

For the first time in some months, I listened to music while authoring this post. Just two records, though: Doo Wop Christmas and The Ronettes — a perfect combination if you ask me.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


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: ©Getty Images/PeterBajoh

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. Previously, Jason 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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