The future, in pictures: part I

Today’s letter is a free peak at an issue of The Price Report, my colleague and friend Tim Price’s investment advisory.

The issue was jam-packed with links to additional information worth looking at. Enjoy!


The future, in pictures: part I

Tim Price – 24 May 2018

A few issues ago I cited Rob Kirby’s “Coffee Can” portfolio as an example of the benefits of taking a long-term – and almost inert – approach to investing. Investment adviser Kirby cited the experience of husband and wife clients of his brokerage business.

The wife dutifully followed every “buy”, “sell” and “hold” recommendation issued by his research department. The husband, on the other hand, simply put $5,000 into each of their “buy” recommendations and then stowed the share certificates safely away. When the husband died, it transpired that his portfolio was worth multiple times the value of hers. One holding alone, in Xerox stock, was worth more than $800,000.

Now the US investment writer Morgan Housel goes one better. In what is likely to be the best presentation on investing that you will see this year, he cites the example of Grace Grahner (emphasis added is mine):

Grace was born in 1909, just right outside of Chicago nearby. And she had kind of a hard life. She was orphaned as a child, she began her career in the bottom of the Great Depression. Finally found a career as a secretary, where she worked her entire life. Never married, never had kids, never learned how to drive a car. Lived almost her entire life in a one room house, not far from here.

By all accounts, she was a lovely lady, but lived kind of a sad life. And Grace Grahner died in 2010, she was 100 years old. And everyone who knew her was completely shocked to learn, when she died, that she had seven million dollars to her name, that she left all of it to charity, and that began kind of a search among the people who knew her, that said, “How does this humble secretary accumulate seven million dollars?” And her secret was, she really had no secret at all. She saved what little she could, she put it in the stock market, she let it compound for 80 years and that was it, end of story.

The second investor I want to talk about today is a guy named Richard. Save his last name, because you’re not supposed to criticize people in public. Although I do a lot. Richard had almost the exact opposite background of Grace Grahner. Born into a wealthy family, went to the University of Chicago, got his MBA at Harvard Business School, went to work on Wall Street, worked his way up at some of the biggest investment firms, became the vice chairman of one of the largest investment banks and without exaggerating was one of the most powerful people in global finance.

The day after Grace Grahner died, Richard filed for personal bankruptcy. He told the bankruptcy judge that the financial crisis completely wiped him out, he had no more assets, no more income and he was fighting to save foreclosure on his house. And what’s interesting about these stories, I think, is that in no other industry except finance are those stories possible. There’s no other industry in which someone with no education, no background and no experience can vastly outperform someone with the best background, the best education, the best experience.

It’s unthinkable that Grace Grahner could have performed heart surgery better than a Harvard-educated cardiologist, or built a skyscraper better than the best construction company. It’s completely unthinkable that that could ever happen, but it happens in investing. And what I think it shows is that investing is not necessarily about what you know, it’s about how you behave.

You can read and download the transcript of Morgan Housel’s outstanding presentation here.

I recently came across a story on the MarketWatch website that set me thinking – “This could be the most important chart of the century for investors”. But to be absolutely honest I didn’t find many of the enclosed charts particularly helpful as an investor. The first few simply reiterated something that everybody knows: there’s too much debt in the system and it’s grown so abnormally and to such grotesque levels that it will probably never be repaid.

But it’s difficult to see how we can usefully exploit this “fact”. The later charts highlighted the recent rally in the US dollar – which is admittedly a more intriguing development, and one with particularly negative connotations for (heavily indebted) emerging markets.

But perhaps the most interesting chart came via Tadas Viskanta of the Abnormal Returns blog, pointing out that yields at the front end of the US yield curve (including those available on three-month T-bills and two-year government notes) have now risen above the dividend yield of the S&P 500 stock index. John Authers makes the same point for the Financial Times:

For the first time in a decade, cash is beginning to offer some kind of competition as an asset that might actually make some money. Meanwhile, the “Dividend Aristocrats” of the S&P 500 — the stocks with the highest and most reliable dividend yields — are finding that they now have competition from 2-year Treasury bonds.

This means that the stocks that had most benefited from the “hunt for yield” are no longer as appealing. This is true even though the tough stock market of the past three months has helped to increase their yields considerably…

And if we look at EAFE (the developed markets outside the US) we get the same pattern. There was never that much of a hunt for yield in the first place, but high-dividend stocks are currently brutally out of favour. With cash now offering competition, thanks primarily to the Federal Reserve’s efforts at quantitative tightening, the appeal of “bond substitute” stocks is drastically curtailed, as is the appeal of stocks in general. Normalisation still has a long way to go, but if the Fed wanted more normal conditions then a world in which cash yields more than stocks once more suggests that the central bankers are getting what they want. To use another market axiom that does not seem to have fallen out of date, don’t fight the Fed.

Now we’re getting somewhere. The single most important development in the financial markets this year – in my view – is the trend towards quantitative tightening (QT) on the part of the US Federal Reserve. This has a) driven yields at the front end of the US yield curve sharply higher and, in the process, has b) started to provide genuine competition for so-called “bond proxies” in the stockmarkets, as Viskanta and Authers point out. The subtler message is buried within the first two, but not that deeply: a 35-year bull market in interest rates is starting to reverse.

That doesn’t automatically mean that stockmarkets are heading for a fall, but it does remove a key support that has underpinned the secular rally in risk assets going all the way back to the early 1980s.

With at least one eye on Morgan Housel’s fundamentally upbeat commentary on investing – for the long term – which charts would I then use to underline my own investment thesis for the years to come..?


You’ll discover what these charts are tomorrow.

Don’t go away!

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Economics

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