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Thursday 19 November 2020

Weekend Reading

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. 

I especially try to not post Corona related articles as that is all one gets to read in all traditional media.

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Are economic forecasts any good?
How much stock should you place in the consensus macro forecasts generated by the experts? How much value should you place on the forecasts of an individual macro forecast from an expert?
They find that there is consistent under-reaction in the expectations of the consensus forecasts. The aggregated expectations and the slow revisions of economist means their forecasts are playing catch-up to reality. This conclusion is not new albeit still inconsistent with a rational expectations view of the world. Given this under-reaction to news, the consensus forecast revisions are positively correlated to forecast errors. The conclusion is that investors should discount these forecasts. 
While individuals may over-reaction, the use of different models, different information, and slow updating will lead to an under-reaction in aggregate. So, the investor should fade the forecast of the individual but assume that the group is slow to respond to the market realty. 

The pursuit of luxury products
Luxury consumption used to strictly mean the purchase and display of items from well-known luxury brands. It has now taken on diverse and sometimes unexpected forms – within the traditional luxury domain but also beyond and even outside of it. 
For instance, in the realm of traditional luxury, less experienced consumers (typically from lower socioeconomic status) prefer ‘loud’ luxury products with more prominent brand identifiers such as logos, as they seek a visible affiliation with affluent people. Meanwhile, more experienced luxury buyers, who chiefly aim at dissociating themselves from mainstream consumers, favour less conspicuous luxury products.
For the same purpose of differentiating themselves from the middle class, high-status individuals may mix and match traditional luxury products with non-luxury ones. 
Luxury consumers have also started looking outside of the traditional luxury categories and increasingly invest in education and health. Parents, for instance, face mounting pressure to send their children to elite kindergartens and schools. In Beijing, the fees for such kindergartens can be up to six times the cost of a top university education.

The secondhand clothing market is booming
According to a new report, the US secondhand clothing market is projected to more than triple in value in the next 10 years—from US$28 billion in 2019 to US$80 billion in 2029—in a US market currently worth $379 billion. In 2019, secondhand clothing expanded 21 times faster than conventional apparel retail did.
The secondhand clothing market is composed of two major categories, thrift stores and resale platforms. But it’s the latter that has largely fueled the recent boom. Secondhand clothing has long been perceived as worn out and tainted, mainly sought by bargain or treasure hunters. However, this perception has changed, and now many consumers consider secondhand clothing to be of identical or even superior quality to unworn clothing. A trend of “fashion flipping”—or buying secondhand clothes and reselling them—has also emerged, particularly among young consumers.

The lessons from history
History is full of specific lessons that aren’t relevant to most people, and not fully applicable to future events because things rarely repeat exactly as they did in the past. An imperfect rule of thumb is that the more granular the lesson, the less useful it is to the future.
The second kind of history to learn from are the broad behaviors that show up again and again, in multiple fields and different eras. They are the 30,000-foot takeaways from events that hide layers below the main story, often going ignored.
How do people think about risk? How do they react to surprise? What motivates them, and causes them to be overconfident, or too pessimistic? Those broad lessons are important because we know they’ll be relevant in the future. They’ll apply to nearly everyone, and in many fields. The same rule of thumb works in the other direction: the broader the lesson, the more useful it is for the future.

Is value investing dead?
The performance of value stocks is the worst it’s been in nearly 200 years.
The first problem with the above is that it doesn’t accurately portray the performance of actual value investors. What we are seeing here is the performance of the value ‘factor’. In this case, the value factor is measured using dividend yield between 1825-1871, price-to-earnings between 1871-1938 and book-to-market from 1927-2020. 
In other words, it portrays a simplistic view of how value stocks have actually performed over the last 200 years. It assumes that value stocks all fit into a neat category and by definition have a low p/e, p/b or high dividend.
As you probably know, there is a big difference between factor investing (which seeks to find small edges from financial indicators) to value investing which generally seeks to buy high quality companies for less than their intrinsic value.

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