Lots of reading this month! Some of that was cleaning out a bunch of older articles – that either needed to read or passed over. Generally, I have around 200 or so saved articles in my queue. See a bit more on my reading system here.
Also, got through a few books, which is nice. Again, my eyes here tend to be larger than my pace of reading. Check out my latest note: The Go-Go Years
This month was a bit more interesting as well event-wise. The Fed has done exactly what they said they would. Take that for listening to them! And, Congress has embarked on a course of stupidity and political suicide by holding the debt ceiling / default gun to their own heads. Again, no surprise.
Here are my most influential reads for the month – in no particular order:
Read Old Books – “Yet, as sobering as this all may be, there is a silver lining. If the majority of people (and therefore investors) continuously fail to learn from others’ mistakes, shouldn’t there be significant value in being in the minority that does? Of course, but how? One way to start is by reading old books.”
Mohamed El-Erian, Citing Hamilton, Says the Fed Should Talk Less – “I’m more worried about economic contagion than financial contagion—namely, that the banking tremors we’ve had will lead to a reduction in credit to the economy over the course of this year and early next year, increasing the risk not just of recession but stagflation.”
My Most Valuable Season – “Outside of the energy sector, it has been a long time since any part of the economy has truly lost. This means that most 20- and 30- year old’s have never truly felt job insecurity.”
The Phillips Curve is Still Working Just Fine – “The Phillips Curve is a very simple idea and a very powerful model. It simply says that when labor is in short supply, its price goes up”.
Walk with me… – “A short, 20-minute stroll around a friend’s neighborhood at sunset became the highlight of my day.” SMS: We had a very similar experience during the early part of the pandemic.
Why I am not investing in a buyout for a long time to come – “Inflated returns, denial of volatility, high prices and fees, excessive leverage, absence of covenants on buyout debt — all this together represents fantasy thinking. It is what happens when a successful investment model becomes too popular.” SMS: FT continues their critique of private equity.
Why cutting your personal carbon footprint matters – “The most impactful ways to reduce personal emissions are familiar by now: Fly and drive less, eat less meat, switch to electric cars, and install electricity-based home heating.”
The lies we tell ourselves – “It concerns me that it seems like markets, the Fed, and policymakers are operating under the assumption that eventually we’ll get our old economy back. Or after this rather unfortunate hiccup, inflation will fall to below 2% and we’ll go back to near-zero interest rates.”
Taxes – “But we can make a major step toward closing the gap between our spending and our revenue. By actually collecting the taxes we’re owed. The distraction is tax rates; the focus should be the tax code and enforcement.”.
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
“The structure is not genius; even for the exclusive hedge funds, genius turned out to have been a rising market.” – The Go-Go Years (pp. 348)
One of my goals with some additional time is to embark on “learning projects” across a few domains. Capital market history is one of those domains. That is where this book fits in. Expect more notes along similar lines.
Overall, I personally found the writing style of the author to be difficult to follow, in spite of my interest in the content. The story covers the period including the evolution of mutual funds and the stock exchanges, the rise in prominence of conglomerates, and the “Nifty Fifty” growth stocks.
It is possible that I am over-fitting, but history does seem to rhyme.
Three take-aways from the book:
The Cause of Investor Amnesia
“Indeed, by 1969 half of Wall Street’s salesmen and analysts would be persons who had come into the business since 1962, and consequently had never seen a bad market break.” (pp. 113)
This sounds familiar to a theme I hear today. Or maybe a theme I believe in today. Many investors today, if they came of age post-Great Financial Crisis (2007 – 2008) have known mostly good times with few meaningful setbacks. That has been a long period of time; close to 15 years, where any setbacks have quickly been reversed.
Wall Street Crisis
“At the start of December, Wall Street hung by its fingertips. Roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. Forty thousand customer accounts were involved in the thirteen cases of liquidation, and most of them were still tied up, the customers unable to get their cash or securities.” (pp. 341)
“Legislation to create a federal Securities Investor Protection Corporation, on the model of the Federal Deposit Insurance Corporation to protect bank depositors, was before Congress; it had no chance of passage until the present mess in Wall Street was cleared up, and thus, while it might help in future crises, it was powerless against this one.” (pp. 341)
The details on the crisis within Wall Street itself was all new to me. See take-away #1. And, so were the origins of SIPC.
There were brokerage failures during the GFC. The causes of those were mostly characterized based on bad decisions and investments. Whereas, the brokerage failures during the period covered in the book appear to be based more on a bad business model that was not keeping up with the times.
Regardless, the thought of investors losing their securities or not having access to them for an extended period was a “new” risk to consider (https://www.investors.com/etfs-and-funds/sectors/stock-market-schwab-implodes-money-safe/).
Fun With Accounting
“Where a series of corporate mergers is concerned, the current earnings per share of the surviving company lose much of the yardstick quality that the novice investor so trustingly assumes. The simple mathematical fact is that any time a company with a high earnings multiple buys one with a lower multiple, a kind of magic comes into play. Earnings per share of the new, merged company in the first year of its life come out higher than those of the acquiring company in the previous year, even those neither company does any more business than before. There is an apparent growth in earnings that is entirely an optical illusion.” (pp. 157)
“Moreover, under accounting procedures of the late nineteen sixties, a merger could generally be recorded in either of two ways – as a purchase of one company by another, or as a simple pooling of the combined resources. In many cases, the current earnings of the combined company came out quite differently under the two methods, and it was understandable that the company’s accountants were inclined to choose arbitrarily the method that gave the more cheerful result.” (pp. 157)
“The conglomerate game tended to become a form of pyramiding, comparable to the public-utility holding company game that flourished in 1928, crashed in 1929, and was belatedly outlawed in the dark hangover days of 1935. The accountant evaluating the results of a conglomerate merger would apply his creative resources by writing an earnings figure that looked good to investors, they, reacting to the artistry, would buy the company’s stock, thereby forcing its market price up to a high multiple again; the company would then make a new merger, write new higher earnings, and so on. The conglomerate need neither toil nor spin – only keep buying companies and writing up earnings. It was magic, until the pyramid became top-heavy and fell.” (pp. 158)
This is why my favorite financial statement is the Cash Flow Statement; a topic for another post. At least investors during the period were focused on earnings. That seems to be a novel idea for current investors.
And a bonus take-away:
“For example, those familiar old forces so long so helpful to business management in getting the most possible work out of low-level employees – company loyalty and personal competitiveness – scarcely seemed to operate on the new breed of back-office employees at all.” (pp. 196)
Apparently they had millennials back in the 1960s too.
We have decided that 2023 is the Year of Exploring.
Yes, we have a series of trips planned – to the Pacific Northwest, to Colombia, and to UK & Europe.
We also reached a major milestone – exiting my prior business. And I subsequently resigned my role to take a “sabbatical.” So, I plan to use that to do some exploring along some other lines as well.
“If you’re going to panic, panic first.” – Old adage
Well, March was exciting. Inflation and bank failures…a recipe for…the stock market to crush it?
In my first full month of semi (?) retirement, we had a bunch of house guests and made a short trek up to Ketchum, Idaho for some skiing at Sun Valley and skating at Galena Lodge .
Here are my most influential reads for the month – in no particular order:
Dissecting Goldman’s gory $2.25bn SVB equity issue – “Second, the stock offering has to be underwritten. Hard-underwritten. Or already subscribed-for. Investors must assess the equity offering on the basis of a repaired balance sheet. They must know you don’t actually need them.”
The Powell of Positive Thinking – “He clearly signaled (again) that once Fed overnight policy rates reach a peak, they would not be declining for a while. “
Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back? – “It behooves both investors and traders to therefore track movements in risk capital, since it is will determine when long term bets on value will pay off for the former, and the timing of entry into and exit from markets for the latter.”
Free Money Turned Brains to Mush, Now Some Banks Fail – “And when I say “free money” with regards to banks, I mean it literally. Since 2008, banks have been borrowing from depositors at 0% interest or near 0% interest. Even today, even as some banks are trying to attract more deposits by offering higher interest rates, even today when the Fed’s short-term rates are near 5%, the average interest rate on savings accounts is still only 0.4%. Even today, 0.4%.” SMS: This is nuts.
Is Inflation Mean-Reverting? – “What that means – and it is super important – is that inflation has momentum. Keep in mind that during most of the period shown here, the Federal Reserve was actively trying to make inflation mean-revert. And they didn’t succeed, at least on a one-year basis.”
Banking Woes Hark Back to the S&L Crisis of the 1980s – “Former Fed Reserve Chairman Paul Volcker used high rates to squeeze inflation out of the economy four decades ago, and the savings & loan industry was among the unintended victims. “
The easiest way to spot a market bubble – “New Metrics get invented while timeless investing principles become a thing of the past.” See Cash EBITDA. SMS: During the sale of my business last year, the investment bankers wanted me to use “Cash EBITDA”, but they could not even provide a definition.
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
