October 2021

ONE MORE THING...

  • Hyperinflation??

  • Taking sides

  • Maybe I’ll dress up as Investing for Halloween


Quick Hits: Inflation

Inflation is structural:  Transitory inflation seems less likely (NYSE:BAC)

No, inflation is transitory:  Inflation will plunge in 2022: Goldman Sachs 

No, the post-COVID economy is permanently changed:  Summers and Roubini on inflation: The bottlenecks are not going away 

No, inflationary pressures will normalize soon enough:  JPMorgan's Dimon says supply chain hiccups will soon ease, points to extraordinary consumer demand

No, inflation will cripple this fragile recovery:  How Inflation Threatens the Recovery 

No, some inflation is good: Inflation fears get downplayed by market bull Jim Paulsen

No, hedge against inflation right now: Inflation Surge: Where To Put Your Money According to Experts 

No, buy the dips: Investors should buy any dip driven by inflation because the trend of rising prices will be short lived, Goldman Sachs says 

No, hyperinflation is coming: Twitter CEO Jack Dorsey's dire warning: 'Hyperinflation' will soon 'change everything' 


Enough already.  The Federal Reserve has something that all of these commentators lack: policy tools.  The Fed not only expects a return to normal but also has the tools, particularly through the Federal Funds Rate but other tools as well, to make that happen.  In addition, it is not at all obvious whether a Fed decision to increase rates sooner would actually be bad for equities - the increased certainty of Fed policy in tempering inflation could very well be positive for equities.  

The bottom line: Jerome Powell is on-the-beat.  

In August I wrote:

“Until further notice, I am with the guy who has substantial control over inflation inputs.”  

This is not that notice.  




Less is More

Less of a good thing is bad, seems self-evident.  But less of a bad thing is good?  Apparently that’s not-so-self-evident.

Previously I wrote this about Blackjack strategy:

Now for some real fun.  Assume that you are willing to gamble.  No counting cards, just playing basic strategy and ceding its 0.5% house edge.  What is the optimal strategy to double your money before you go broke?  

Henry Tamburin has the answer:

“You stand the best chance of doubling your bankroll by making a minimum number of large-size bets in relation to the size of your bankroll.  (Ideally, the best bet is to wager your entire bankroll on one hand, but few blackjack players would want to play that way.)”


When you have a losing expected value, as is the case when playing Blackjack against the casino (without card-counting of course), the best way to avoid losses is to play zero times - just stay home.  The next-best option is to reduce your number of plays as much as possible, say to one play.  But what fun is that?!!  Not fun, but doing so will limit your losses.

The same argument applies to stock picking.  Earlier this month, CNBC’s Bob Pisani led a fabulous interview with Robin Wigglesworth, author of “Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever”, and Simeon Hyman, head of investment strategy at ProShares.  Not surprisingly, they discussed stock picking’s underperformance relative to passive indexing, including this apropos segment:

Pisani: The evidence that active managers are pretty poor stock pickers really goes back into the 1930s with the Cowles Commission here, but the evidence really started mounting up in the 1970s and the 1980s. And yet active stock picking is still popular as ever. How do you explain that anomaly despite the evidence?

Wigglesworth: Hope springs eternal. I mean, it’s kind of in our nature that nobody wants to settle for mediocrity, really. This was one of the most potent attack lines of people in the ’70s and ’80s when indexing first started to set roots, that who wants to be operated on by a mediocre surgeon? Who wants a mediocre lawyer? You want the best, right? And you want to be the best. So this wasn’t just seen as lazy and passive, it was kind of seen as giving up. I think for a lot of people, it’s still this boring thing. It’s not exciting to say you’re invested in a low-cost, well-diversified Vanguard index fund. That’s not the kind of thing you roll out at parties and you’re the coolest person there. No, you want to talk about the individual stocks you’ve picked, the derivatives you’re trading, the fund manager that’s managing your family’s money. That’s the kind of stuff that’s cool. And that’s, sadly, human nature.

For the vast majority of stock pickers - despite an irrational conviction that their strategy will actually perform - their stock picking strategy is a losing game relative to beating low-cost passive index funds.  By increasing the number of trades that they make, they increase the Likelyhood of realizing the long-term negative expected value of their stock picking strategy.  

Less stock picking is more.

You may also know that women have higher investment returns than men.  CNBC’s Alicia Adamczyk has the story in Women get better returns on their investments than men—here’s why:

Women’s investment returns were 0.4% higher than men’s, on average, according to the report, which analyzed the annual performance of 5.2 million customer accounts from January 2011 to December 2020. 

Why, you might wonder?

The first is that they trade less, allowing them to ride out market lows and avoid extra fees. They also tend to invest more consistently, which means they aren’t trying to time the market.

The Fidelity Investment Survey, with these findings and more, is here: Who's the Better Investor, Men or Women - Fidelity .

Women trade less than men, thereby avoiding selling at lows and incurring additional trading fees.  Less trading is more.

Finally, if you check your investment balances at least once daily, you are not alone: A survey by CNBC Select and Dynata found that 49% of investors check their portfolios at least once a day.  Nothing surprising here, you care about your money and want to track progress toward meeting your investment goals.  

BUT no!  CNBC reports Nearly half of investors check their performance at least once a day — here’s why that’s a problem

Excessive monitoring of short-term returns can lead to knee-jerk reactions and impulsive decision-making that doesn’t lend itself to letting your money grow over time.

Research shows that the more frequently investors monitor their portfolio, the riskier they perceive investing to be, says Egan. This is also known as myopic loss aversion: When investors constantly check their investments, they become more sensitive to losses than to gains.

I write often around here about loss aversion, the decision-making bias derived from the sense that losses are more painful than equivalent gains.  It doesn’t help that gloom-and-doom forecasters get disproportionate TV time, and upon the rare moment that one such gloom-and-doom prediction becomes reality, they achieve celebrity status and a lifetime guest pass on all the shows.  Like it or not, all of this attention both feeds and preys upon viewers’ loss averse biases.  

Here’s Bloomberg’s Matt Levine

One stylized fact is that if every month you put out a client note saying “THE MARKET WILL CRASH,” and for like 10 years the market does not crash, and then at the end of the 10 years there’s a huge crash, then for the next, like, 30 years you will be able to go on television above the chyron “GUY WHO CALLED THE MARKET CRASH HAS THOUGHTS,” which is nice for you. For some reason being right about a crash once outweighs being wrong about it any number of times. “Being early is the same as being wrong,” is a thing that people in financial markets sometimes say, but rarely to TV bookers.

One approach to sensible, independent investment management is to identify the causes of loss aversion and then proactively suppress them.  Myopic loss aversion is no different:

Research on myopic loss aversion and stock performance shows that an investor who checks his or her portfolio quarterly instead of daily reduces the chance of seeing a moderate loss (of -2% or more) from 25% to 12%. “And that means he or she is less likely to feel emotional stress and/or change allocation,” Egan says.

Less portfolio checking is more.

Now I will admit, it is strange for an investment manager to write about and advise monitoring one’s investments less often.  If investors can train themselves to suppress the causes of loss aversion, including through education, self-reflection, and deliberate practice over many years and market cycles, then those investors Likely can monitor their investments more frequently without incurring the negative effects of myopic loss aversion.  

This is the approach I have taken in managing my own investments since 2014, and is the same approach I now employ with Likely Capital Management.  This is the Likely way.

ONE MORE THING…

The information and opinions contained in this newsletter are for background and informational/educational purposes only.  The information herein is not personalized investment advice nor an investment recommendation on the part of Likely Capital Management, LLC (“Likely Capital”).  No portion of the commentary included herein is to be construed as an offer or a solicitation to effect any transaction in securities.  No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.  

Past performance is not indicative of future performance.  There can be no assurance that any investment described herein will replicate its past performance or achieve its current objectives.

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