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. If you like this collection, consider forwarding it to someone who you think will appreciate it.
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1. Insecurity and envy drives markets
The Fear I see these days is a fear of becoming a relic of the past. A fear of seeing your peers catapult themselves ahead of you. A fear of missing out, which has been well documented and has become the spirit of the times we live in.
The type of fear that now drives most market activity (because it drives most market participants) is something different than the fear we’ve been accustomed to from reading about history. I would label this type of fear Insecurity. The fear of being left behind and looking like a fool. It’s no surprise that Have Fun Staying Poor or #HFSP has become one of the most enduring memes of the moment we’re in now. It’s the anti-Keep Calm and Carry On. Whenever you see people doing inexplicable things with their capital in the markets these days (public or private), the explanation is not as far from your grasp as you might think. Insecurity is probably the answer.
The other driving force in the markets, traditionally, has been Greed. I think we’re witnessing a variation on Greed that I would label Envy.
Envy will make you take wild risks with a portfolio. Especially when all you see around you are so many people you have such little regard for profiting off of things you know they themselves barely understand. The more exposure we have to the way others are investing, the more we begin to look at their returns as though that’s the appropriate benchmark. All sense of reason and perspective is left behind. If that asshole is doing it, I can do it better.
https://thereformedbroker.com/2021/10/21/the-new-fear-and-greed/
2. There's More to Investing Than Just Risk and Return
Investment researchers have created scores of metrics to help depict how well an investment has balanced risk and return: the Sharpe ratio, the Treynor ratio, the Sortino ratio, to name just a few. We also talk about how investments fit on the efficient frontier--how well they've compensated investors for the volatility they've assumed.
Meanwhile, attributes like whether an investment imparts peace of mind or requires minimal oversight can't be quantified because they're inherently subjective. You might derive peace of mind from knowing that your portfolio is positioned for long-term growth, whereas another investor's definition of peace of mind is more conventional. You might be OK with spending five hours a week researching investments; another investor might say that five hours a year is more time than he cares to give.
creating the right portfolio for you should involve some self-reflection on these softer issues, because optimizing your investment choices isn't just about risk and return. It's about creating a portfolio that can get you to your goals without interfering with the rest of your life. It's also likely that your views on these issues have evolved over time, so you may need to course-correct to ensure that your portfolio reflects your current thinking. The individual-stock-heavy portfolio that engaged you when you were younger may seem too complicated and labor-intensive--not to mention too risky--as retirement approaches.
https://www.morningstar.com/articles/1060406/theres-more-to-investing-than-just-risk-and-return
3. Price matters
This surely will sound quaint and stale to a few readers, but – and I’m sorry – the future value of a thing is ultimately based on the dividends the thing will eventually pay you, or someone to whom you are prepared to sell your shares. Whether the proxies for those dividends are cash flows, earnings, margins, sales, or the dividends themselves, alpha happens when expectations of those future dividends change.
That’s it. That’s the stock-picking game. Stocks are not pieces of art. They are not fiat money. Cults of personality do not last forever in the stock market. Narratives break. Eventually, everyone figured out that Galileo was right. Eventually, everyone will figure out that Cathie Wood isn’t. And it won’t take as long either.
But for those making money on big investments in these particular securities as they go from unreasonably overpriced to preposterously overpriced, this is not investing. This is greater-fool speculation. Sure, this is fun (for the longs); but calling it anything else is pulling the wool over the eyes of clients, or perhaps over your own.
What may even have started as a reasonable and strong fundamental reason for ownership must be tempered if the share price of the thing is 10x higher than it was when you first established your thesis. Price matters. There is a difference between a company and its share price. This gravity of this logic has not dropped on many market participants. But it will. It always does.
https://www.albertbridgecapital.com/post/a-memo-to-investors
4. The nothingness of money
Everyone knows that your bank account doesn’t go with you upon death. But for most of life, that knowledge is theoretical, meaning that it’s not real enough to influence your day-to-day behavior. The mere awareness of your mortality isn’t enough to cease your pursuit of wealth.
For most people, the Nothingness of Money strikes when the finish line is a few yards away. In this moment, a pursuit that once seemed all-consuming fades into the background. All that matters are the memories you have, the people you love, and the memories you can still make with them. The use of your finite time to squeeze out an extra dollar is laughable, as no one with a sound mind would expect that of you.
And finally, in this brief section of life, something profound happens. The Nothingness of Money is truly understood.
The core idea of retirement is this: You frontload your attention spent on money to generate wealth. You then offload your wealth to spend your attention on leisure, purpose, or love.
Retirement is our clever way of extending the Nothingness of Money out while we are healthy enough to appreciate it.
https://moretothat.com/the-nothingness-of-money/
5. Automate basic financial actions to avoid the "Ostrich Effect"
In behavioral economics, the "Ostrich Effect" refers to the tendency to avoid negative financial information. From a psychological standpoint, the Ostrich Effect is the result of the conflict between what our rational mind knows to be important and what our emotional mind anticipates will be painful.
The ostrich’s method for solving financial problems is to ignore them for as long as possible, and then to respond in utter panic and agonizing stress when they are finally forced to act. Not only does avoiding uncomfortable truth keep them from solving those problems: It compounds them.
Habits are hard to change. Give yourself grace and start small. Automate just one account. Pay just one bill. You know which baby step is the right one for you. Just do it. Take five minutes and do it now.
https://www.psychologytoday.com/intl/blog/loaded/201904/the-ostrich-effect
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