Stocks for the (very) long run


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Interesting data from the Credit Suisse Global Investment Returns Yearbook 2017, compiled by London Business School professors (authors of this book). It shows the real rates of returns of world equities over various periods.

The data is based on an all-country world equity index denominated in USD, in which each of the 23 countries is weighted by its starting-year market capitalization.

It clearly confirms that equities offer attractive returns in the (very) long run. If you started investing on 1 January 2000 (not a great entry point…), you suffered negative real returns in your first decade but you are now nicely in profit territory. If you started on 1 January 1970 (not a great time either…), you made 5.2% per year on average.

At a time when assets are expensive, geopolitical risks abundant, monetary policy less supportive… it’s encouraging to look at stocks as (very) long term investments.

Warren Buffett’s 2016 annual letter



I summarize below the insights of Warren Buffett’s from his 2016 Berkshire Hathaway letter published today, around 3 topics: stocks for the long term, active vs. passive investing, and share buybacks. It would be foolish to paraphrase Buffett so I simply quote some key parts from his letter.

On stocks for the long term.

“American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively financed American businesses will almost certainly do well.”

On active vs. passive investing.

Buffett’s 10-year bet that a S&P 500 tracker will outperform 5 selected funds of hedge funds is looking good (see details here). According to Buffett: “the disappointing results for hedge-fund investors that this bet exposed are almost certain to recur in the future”.

“There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat. There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible.

There are three connected realities that cause investing success to breed failure. First, a good record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless seek new money because of their personal equation – namely, the more funds they have under management, the more their fees.”

On share buybacks.

“The question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent. It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. What is smart at one price is stupid at another.”

How to monitor funds and ETFs


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For the private investor, there are plenty of tools to monitor stocks (e.g., Google Finance, Yahoo Finance). Following up on mutual funds or exchange traded funds (ETFs) is a bit more difficult.

To do so, check out the Portfolio section of the Morningstar web site (of your country). You can easily construct portfolios of funds and other instruments, which I find very useful.

As an example, I put together a list of global equity funds I like to follow, as well as a MSCI World ETF.

Morningstar portfolio

Over the past 5 years, it’s not been easy to beat this $#& tracker…

Book review: Investing through the looking glass


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In this book, Tim Price starts by explaining the problems the investing world faces. The backdrop of these problems is diverse:

  • Banks failed in their traditional role of prudently accepting deposits and extending loans; we should let banks fail.
  • Central banks are compounding financial crises by implementing flawed monetary policies: QE, ZIRP, NIRP, etc.
  • Economists and financial theorists provide no useful scientific advice.
  • Fund managers are by and large asset gatherers and marketing machines.
  • The financial media exists to monetise airtime and column inches.
  • Bonds are uninvestible and you need an edge to do well with stocks.

Throughout the book, the author challenges a number of misconceptions and replaces them by more relevant alternatives.

Misconception Better alternative
Keynes’ metaphor of the economy as a machine The Austrian School sees entrepreneurial trial and error as essential; economic planning is virtually impossible
Risk = volatility Risk = permanent loss of capital
Markowitz’ Portfolio Selection Mandelbrot: markets are riskier, misleading and follow a power law
Asset gatherers, who aim to maximise assets by keeping funds open and constantly experimenting with new funds, represent smart money Look for boutique asset managers who limit their AuM to protect performance, invest their own money, and are owner managed
Financial media provide new, up-to-date, useful narrative in real time to explain the prevailing situation Jason Zweig: “My role is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think that I am repeating myself.”

In the second part of the book, Tim Price offers 3 solutions for private investors: value investing, trend-following strategies, and gold.

1. Value investing. The author builds on classic Graham metrics that work, as analysed by O’Shaughnessy. A look at the VT Price Value Portfolio shows that Price currently sees value in Japan and Vietnam (together they account for over 50% of the fund). A large part of the Japanese investments are done through Samarang Capital. Holdings like Fairfax (Prem Watsa) and Loews (Tisch family) are also well represented.

2. Trend-following strategies. Tim Price is fond of systematic trend-following, as it offers both performance (see page 182 for examples of successful firms) and de-correlation. The strategy has not performed well recently but the author remains confident in its merits. For more info, see here.

3. Gold. Given his criticism of monetary policies, it is not surprising that Tim Price likes gold and doesn’t view it as a “barbarous relic”. According to Price, “Gold is an insurance policy against both monetary and fiscal recklessness”.

In summary, the book gives a good overview of what’s wrong with the current state of investing, and offers 3 interesting solutions. As a lot of criticism is directed towards recent policies, I wonder how the views of the author are evolving in the era of Trumponomics.


Book review: Value Investing Makes Sense



Jean-Marie Eveillard is the legendary international value investor who managed the First Eagle Global fund from 1979 till 2009. He has a stellar track record, and avoided Japan in the late 1980s, TMT stocks in the late 1990s, and bank stocks prior to 2008. So I was excited when I found out that he’s sharing his thoughts in a new short book (available in English and in French here).

The book contains a mix of biographical episodes and investing wisdom, illustrated by concrete stock examples (e.g., Shimano, Sodexo, Richemont, Essilor, Buderus, Kohler, Kuhne & Nagel). The key points that the author wants to make are simple: value investing makes sense and it works over time.

After explaining some classic value stuff – both the Graham and Buffett approaches – the author writes an interesting (unfortunately too short) chapter on special situations:

  • Preferred stock
  • Holding companies (to benefit from the double discount)
  • Spinoffs
  • Closed-end funds (again, the double discount)
  • High-yield bonds (when they offer equity type returns)

He also covers topics like Gold (in depth) and the Austrian School of economics.

A Frenchman who has been living in the U.S. for several decades, Eveillard’s style is direct (“nonsense”, “stupid”, “idiot”) but with a strong sense of humility. Indeed, he describes many mistakes he has made throughout his career (most of these “mistakes” like selling Richemont were still quite profitable…). His humility transpires especially when acknowledging the contributions of colleagues and other managers (e.g., Charles de Lardemelle, Omar Musa, the folks at Varenne Capital).

Some interesting quotes from the book:

  • On Swissair: “In general, I have tended to avoid investing in businesses run – directly or indirectly – by former or current consultants.”
  • On small, inexpensive in absolute terms, luxury goods: “How much Lindt chocolates or Champagne can one buy for the price of a BMW?”
  • “It’s best to stay away from investing in a company with too much debt, especially in a cyclical business.”

At times the book feels like a transcript of interviews (don’t expect the prose of a Howard Marks or Warren Buffett), which would benefit from further editing. Nevertheless, I’m happy to have Jean-Marie Eveillard as a new companion on my bookshelf.


Book review: Misbehaving



I enjoyed Richard Thaler’s Misbehaving very much because (1) it’s a fun read, (2) it’s an interesting account of the development of economics, and (3) it includes deep investment insights.

A fun read

The book is full of anecdotes and funny stories. The author advised readers early on to stop reading the book when it is no longer fun (that would be misbehaving). I didn’t stop.

To illustrate the tone of the book, here is how Thaler explains the difference between the “sophisticated” rational models used by classical economists like Harvard’s Robert Barro, and his own “simple” models. “When Robert Barro and I where at a conference together years ago, I said that the difference between our models was that he assumed that the agents in his model were as smart as he was, and I assumed they were as dumb as I am. Barro agreed.”

Another one on the late Amos Tversky (the research partner of Daniel Kahneman), “who made possible a one-item IQ test: the sooner you realized Amos was smarter than you, the smarter you were.”

And on the “no trade theorem” or Groucho Marx theorem: “If everyone believes that every stock was correctly priced already – and always would be correctly priced – there would not be very much point in trading.”

Economics evolution

Thaler clearly explains the evolution in economic thinking, for instance with respect to the consumption function. Keynes used the marginal propensity to consume, Friedman proposed the permanent income hypothesis, Modigliani developed the life-cycle hypothesis, Barro established the Ricardian equivalence. Economists prefer “clever” models and hence adopted the most “sophisticated” versions, which assume that economic agents are extremely smart and fully conversant in economic theory and fiscal policy.

Through a variety of ingenious experiments and research, Thaler and other behavioral economists convincingly showed that Humans are not Econs (home economicus), that markets are not always efficient, and that nudging can be effective in public policy and elsewhere.

Investment insights

When behind, investors are more likely to gamble in an effort to break even.

The closed-end fund puzzle is perplexing, and creates interesting investment opportunities. See here for a paper Thaler co-authored on this anomaly.

Stockmarkets tend to overreact, as documented in a well-known paper by Thaler and De Bondt.

Arbitrage opportunities sometimes arise. In “Can the Market Add and Subtract” Lamont and Thaler document cases of equity carve-outs where the implied price of the “stub” is a large negative number (e.g., 3COM/Palm).


Brexit – selected resources after the vote




The Economist: Divided we fall

Financial Times: Britain should vote to stay in the EU

Hugo Dixon: Why I’m voting for Remain

John Foley: Stay in, don’t stay still

Edward Chancellor: Why I vote for Brexit

The Times: Remaking Europe

Paul Krugman: Fear, loathing and Brexit

Anatole Kaletsky: Brexit’s impact on the world economy

Philippe Legrain: The economic consequences of Brexit



10 highlights from the Berkshire Hathaway 2016 annual meeting


I always wanted to attend the Woodstock for Capitalists in Omaha but it never worked out. This year I could at least watch many hours of the event remotely, thanks to the webcast.

I summarize below my personal highlights, focusing on investments, and leaving aside other great pieces of wisdom on politics, science and broadly on life.

1. Investors are better off owning the S&P 500 than a portfolio of funds of hedge funds. The details of Buffett’s long-term bet can be found here. He’s happy to restart the bet today.

2. Beware of investing fads, the Wall Street marketing machine (e.g., IPOs). “You don’t want to play a stupid game just because it’s available”.

3. Stay away from flawed business models and from people with doubtful integrity. “If you’re looking for a manager, find someone who is intelligent, energetic and has integrity. If he doesn’t have the last, make sure he lacks the first two.”

4. Seek business with pricing power and little need for capital (e.g., See’s Candies, Moody’s) . I believe that some of the companies on my watchlist pass the test. Berkshire has been investing in capital-heavy business (railroads, utilities) because it needs to deploy huge amounts of capital.

5. Seek businesses with captive customers and exceptional managers (e.g., Precision Castparts).

6. Ask yourself how Amazon will disrupt your industry, especially if you’re a retailer. “You cannot out-Bezos Bezos”.

7. There is a potential floor in Berkshire’s share price as Buffett is ready to buy back a lot of shares if the price reaches 1.2x book value. Operationally, the reinsurance business is becoming tougher due to low yields and surplus capacity.

8. Berkshire sticks with its Big Four investments amid recent disappointments and criticism: Coca Cola has an enormous range of products; Wells Fargo is very well-managed and will benefit from rising rates; IBM has “certain strengths and certain weaknesses” ; American Express. “We can’t make a portfolio change every time something is a little less advantaged than it used to be.”

9. Buffett doesn’t have the faintest clue about long-term oil prices!!! Munger: “I’m even more ignorant than you are.”

10. Cash is an important asset but “a full wallet is like a full bladder, the urge is to very quickly pee it away.”