Good Morning,
This week U.S. stocks climbed to record highs and Treasuries rallied after a core inflation reading slowed, adding to evidence that economic growth continues apace without stoking price increases. The dollar pared losses.
The three major indexes posted slight weekly gains. The S&P 500 and the Dow recorded their fifth consecutive weekly gains, while the Nasdaq has completed three.
Bonds in Europe gained after a report that the European Central Bank may continue asset purchases for at least nine months after it starts tapering in January. The Stoxx Europe 600 Index climbed, led by steelmakers and miners as most industrial metals gained and crude oil rose back above $51 a barrel.
Excluding food and energy, so-called core prices rose 0.5 percent in September, below an estimate of 0.6 percent. At the same time, a Commerce Department report also released Friday showed U.S. retail sales rose in September by the most in more than two years, as Americans replaced storm-damaged cars and paid higher prices at the gasoline pump. Excluding autos and gas, sales still increased at the second-fastest pace since January.
The inflation data bolstered the view that U.S. inflation below the Federal Reserve’s target may be structural rather than transitory, prompting traders to slightly reduce the odds of another rate increase in December. Could the Fed be ignoring actual inflation data?
Our Take
As we’ve suggested in the past, inflation is simply not cooperating but the fundamentals continue to look good. The never-ending crazy going on in Washington simply hasn’t stopped the economic expansion.
The International Monetary Fund, echoing increasingly gloomy sentiment in Washington, has concluded that the Donald Trump administration and Congress probably won't succeed in enacting tax reform or even significant tax cuts. The Republican chairman of the Senate Foreign Relations Committee calls the White House "an adult day care center" and says he fears that the president's reckless bluster may lead us into World War III. The president, meanwhile, says he wants to compare IQ test scores with his secretary of state.
No worries. Investors do not appear to be concerned about any of these things. Earnings season has also gotten off to a good start, with 87 percent of the companies that have reported topping bottom-line expectations. The number of companies currently beating estimates, and the margin by which they are doing so, is running at a clip well above what these same 31 companies have recorded, on average, over the past three years.
Even Buffett thinks that stock valuations make sense with interest rates where they are. You measure laying out money for an asset in relation for what you are going to get back. You get 2.30% on the ten year. Seems fair to say that stocks will do better over the long term. In case you missed it Warren Buffett’s full interview on CNBC.
But what of the concept of Ben Graham's “margin of safety” in this "bull market in everything" environment? The idea that the price paid for an asset (stock, bond, real estate etc.) should allow for human error, bad luck or, indeed, many things going wrong at once.
In a problematic world of trade tariffs, nuclear braggadocio, nationalism and inequality such a concept is more prescient than ever. Rarely have so many asset classes -from stocks, to bonds, to gold, to real estate to bitcoins, to wine, to classic cars- exhibited such a sense of invulnerability. And all at the same time to boot! Listen to the temperature of this market. Listen for the all too familiar refrains of “this time it’s different” as they roll in. Timing markets is a fool’s game, but remaining alert to the concept of “margin of safety” is not. It may ensure survival.
Musings
Many great investors suggest that generating above average investment results necessitates above average temperament.
As warren Buffett has stated: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Over the last few weeks in particular I’ve observed this on numerous occasions. Individuals with seemingly above average intelligence making poor decision after poor decision, blinded by ego and jealousy. Weakened by insecurity and contempt. Burdened by an inability to move forward after failure. Influenced by “opinions” when they reach “decisions”. Led astray by their own faulty temperaments.
This week I came across an interesting piece in the Economist that made me think deeply about temperament. Management gurus have poured over a related topic endlessly: is a knack for entrepreneurship something that you are born with, or something that can be taught? In a break with those gurus’ traditions, a group of economists and researchers from the World Bank, the National University of Singapore and Leuphana University in Germany decided that rather than simply concoct a theory, they would conduct a controlled experiment.
Moreover, instead of choosing subjects from the boardrooms of powerful corporations or among the latest crop of young entrepreneurs in Silicon Valley, Francisco Campos and his fellow researchers chose to monitor 1,500 people running small businesses in Togo in West Africa.
As they reported in Science, the researchers split the businesses into three groups of 500. One group served as the control. Another received a conventional business training in subjects such as accounting and financial management, marketing and human resources. They were also given tips on how to formalise a business. The syllabus came from a course called Business Edge, developed by the International Finance Corporation.
The final group was given a course inspired by psychological research, designed to teach personal initiative—things like setting goals, dealing with feedback and persistence in the face of setbacks, all of which are thought to be useful traits in a business owner. The researchers then followed their subjects’ fortunes for the next two-and-a-half years (the experiment began in 2014).
An earlier, smaller trial in Uganda had suggested that the psychological training was likely to work well. It did: monthly sales rose by 17% compared with the control group, while profits were up by 30%. It also boosted innovation: recipients came up with more new products than the control group. That suggests that entrepreneurship, or at least some mental habits useful for it, can indeed be taught. More surprising was how poorly the conventional training performed: as far as the researchers could tell, it had no effect at all. Temperament was the determinate factor. Superior mental habits lead to outperformance.
Focusing on the theme of temperament for our own decision making at Logos LP we’ve made a conscious effort to record instances in which poor temperament has lead to poor outcomes. A record of instances when either we or those around us have let poor temperament wreak havoc upon output. The journal gets re-visited on a monthly basis in order to develop an awareness of trends or patterns. Action items are them developed to alter behaviour.
For the next six months try and keep track of all of your major decisions and thoughts in a journal. This will help to build an awareness of the way your decisions are made and their associated outcomes. What you may find is that you develop more control over yourself and your decision making. Education comes from within; you get it by personal struggle, effort and thought. Live in the process…
Thought of the Week
"If you do not conquer self, you will be conquered by self.” - Napoleon Hill
Articles and Ideas of Interest
- There’s nothing old about this bull market. Claims that it’s the second-longest ever don’t hold up. Barry Ritholtz makes a convincing case that the current bull market is only four and a half years years old. The best starting date of a new bull market is when the prior bull-market highs are eclipsed. That is how we get a date like 1982 as the start of the last secular long-term bull market. And it is also how we get to March 2013 as the start date of this bull market, when the S&P 500 topped the earlier high of 1,565 set in October 2007. Could we just be approaching the middle of the run?
- Debt keeps rising and nothing bad happens. Economists are stumped. As the Republicans prepare for their big tax reform push, the issue of deficits and debt is once more coming to the fore. Many economists realize that tax cuts, especially income tax cuts, tend to increase deficits, which over time lead to increases in the national debt. The GOP plan, if adopted, probably would pump up both deficits and debt. So the question is: Is more debt good, bad or does it even matter? But if it’s bad, how serious a problem is it?
- Ideas aren’t running out, but they are getting more expensive to find. The rate of productivity growth in advanced economies has been falling. Optimists hope for a fourth industrial revolution, while pessimists lament that most potential productivity growth has already occurred. This must read piece argues that data on the research effort across all industries shows the costs of extracting ideas have increased sharply over time. This suggests that unless research inputs are continuously raised, economic growth will continue to slow in advanced nations.
Bitcoin resumed its climb. After tearing past $5,000 on Thursday, the cryptocurrency soared above $5,800 on Friday. JPMorgan CEO Jamie Dimon, who told investors last month that bitcoin was a bubble “worse than tulip bulbs,” said Thursday he doesn’t want to talk about it anymore. But on Friday, Dimon responded to a question about bitcoin by saying if people are "stupid enough to buy it," they will pay the price for it in the future. The craze rolls on with hedge funds flipping ICOs and receiving preferential discounts and terms. Here’s the deal with an ICO: You can buy entry in a computer ledger issued by a start-up company on the basis on an unregulated prospectus. It is called an ICO (“Initial Coin Offering”) but though the ledger entry is called a coin, you cannot spend it at any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on the stockmarket, coin ownership does not necessarily get you equity in the company concerned. The Economist points out that this is the kind of bargain that would only appeal to people who reply to emails from Nigerian princes offering to transfer millions to their accounts. There is a serious side to the craze as there was with the dotcom boom. The technology that underpins digital currencies- the blockchain- is an important development. The problem is that it is not easy to draw a line between financial innovation and reckless speculation.
- Dating apps are reshaping society. There’s been a big uptick in interracial and same-sex partners who find each other online. Interesting research presented in the MIT Tech Review which tends to support that there is some evidence that married couples who meet online have lower rates of marital breakup than those who meet traditionally. That has the potential to significantly benefit society. And it’s exactly what new data models predicts. Perhaps online dating isn’t all bad. Important to think about as Berkshire Hathaway CEO Warren Buffett recently stated that making money means nothing without having another person, such as a spouse, to share the wealth with. Who you marry, which is the ultimate partnership, is enormously important in determining the happiness in your life and your success. A study published by Carnegie Mellon University found that people with supportive spouses are "more likely to give themselves the chance to succeed."
- The loneliness epidemic. This may not surprise you. Chances are, you or someone you know has been struggling with loneliness. And that can be a serious problem. Loneliness and weak social connections are associated with a reduction in lifespan similar to that caused by smoking 15 cigarettes a day and even greater than that associated with obesity. But we haven’t focused nearly as much effort on strengthening connections between people as we have on curbing tobacco use or obesity. Loneliness is also associated with a greater risk of cardiovascular disease, dementia, depression, and anxiety. At work, loneliness reduces task performance, limits creativity, and impairs other aspects of executive function such as reasoning and decision making. For our health and our work, it is imperative that we address the loneliness epidemic quickly.
Our best wishes for a fulfilling week,
Logos LP
