The Future of Factors

By | 2017-07-18T11:03:45+00:00 June 30th, 2017|Global Market Update|

What is factor investing?     Photo: Kanenori: Source: Pixabay Investment factors are a way to understand why stocks or bonds perform the way they do. Investments are driven by risks of various kinds. Bond returns are driven by duration, credit, prepayments, the yield curve, and – for global portfolios – currency risk. Stock returns are affected by their size, industry, quality, and country. Real estate is impacted by location and property type. And everything impacted by the economy, inflation, liquidity, the capital structure, [...]

Little Problems, Big Problems

By | 2017-07-18T11:05:37+00:00 June 29th, 2017|Global Market Update|

What makes small stocks so volatile? “Breezing Up” By Winslow Homer. Source: National Gallery of Art Small stocks are generally much more volatile than big stocks. They can jump or drop by up to 20% in a day, while it’s big news if a giant firm like Microsoft or Exxon moves 3%. And their aggregate indices are more volatile as well. Over the past decade, large cap monthly volatility has been around 15%, while small cap volatility has averaged almost 20%. The extra jumpiness [...]

Skewed for Success (Part 3)

By | 2017-07-17T12:21:16+00:00 June 28th, 2017|Global Market Update|

Small is beautiful. Illustration: Erin O’Leary Brown. Source: Web-esl.com Positive skewness makes it hard to beat large cap stock indices, especially in bull markets. You have to hitch your wagon to a rising star and keep going—ignoring all those nasty risk-management nannies that say diversify, diversify. The growth darlings seem to defy gravity, and it appears that there is almost nothing that can stop them. So should stock-pickers just give up? Fortunately, large-cap stocks aren’t the only asset-class in town. Other assets display negative [...]

Skewed for Success (Part 2)

By | 2017-07-17T12:21:16+00:00 June 27th, 2017|Global Market Update|

Does skewness affect everything? Illustration: John Chase (1932). Source: Plymouth State University Large cap stocks are skewed to the upside, over the long run. That is, the bulk of their returns are provided by a few successful companies. This makes intuitive sense: these are the largest companies in the world, and their leadership is constantly shifting. But when a small company makes it big, it provides a huge boost to the average return – like EMC or Dell Computers in the late ‘90s, or [...]

Skewed for Success (Part 1)

By | 2017-07-18T11:01:46+00:00 June 26th, 2017|Global Market Update|

Why is it so hard to beat the market? Photo: Skirenn i Trysil. Source: Wikipedia I’m pretty competitive. I grew up ski racing, and kept racing after college. I like the discipline and personal excellence that competition demands. So it’s frustrating when I see the market move up more rapidly than my portfolio. I get buyer’s remorse: why didn’t I just buy the index and forget about it? This has been especially trying over the past five years. Except for a brief period in [...]

Bigger or Beggar?

By | 2017-07-18T23:23:28+00:00 June 23rd, 2017|Global Market Update|

Since they can have so many internal issues, why do we have big companies at all? Pabst Brewery, Milwaukee, Wisconsin. Source: American Gardening It’s not a trivial question. In theory, we could all be independent contractors, offering our labor in a great big market, with no bureaucracy. But we would have to devote a lot of time to finding markets for our work, negotiating prices, and getting paid—administrative tasks that aren’t productive. Those kind of transaction costs are like sand in the gears of [...]

Online Monopoly?

By | 2017-07-17T12:21:17+00:00 June 22nd, 2017|Global Market Update|

Is Amazon a monopoly? Source: Amazon A monopoly exists when there is effectively only one supplier of a good or service. They can set the price, and anyone who wants what they’re selling has to pay it. There’s really no alternative. This was the case with Standard Oil in the late 19th century. They were an innovative oil refinery that bought out competitors in the oil products area, the integrated vertically with exploration and production enterprises to become the largest oil company in the [...]

Cold Blue Steel

By | 2017-07-17T12:21:17+00:00 June 21st, 2017|Global Market Update|

Are restrictions on steel imports a good idea? Photo: Třinecké železárny. Source: Wikipedia The Trump administration is considering restricting steel and aluminum imports for national security reasons. It says that the lack of domestic producers could make it hard for us to provide weapons for our armed forces. After all, there’s a lot of steel in a tank division. The larger issue is for the US to maintain an industrial base, that, in times of war could be shifted to defense production. But at [...]

Getting Smarter?

By | 2017-07-17T12:21:17+00:00 June 20th, 2017|Global Market Update|

Smartphones are everywhere. Photo: Ben Kerckx. Source: Pixabay Whether it’s for making phone calls or getting directions or buying t-shirts or checking whether we left the stove on, smartphones have inserted themselves into more and more of our lives. They’ve been around for only a decade or so, but the computers in our pockets have become indispensable. We use them to buy and sell stuff, entertain ourselves, and to help find our friends. They’ve altered the texture of everyday life almost everywhere. They’re often [...]

Where the Vultures Gather

By | 2017-07-17T12:21:17+00:00 June 19th, 2017|Global Market Update|

Where the Vultures Gather What is vulture investing? Turkey Vulture landing. Photo: Don DeBold. Source: Wikipedia Vulture investing is a way to profit from poor management. A vulture fund typically invests the debt of troubled firms, then seeks to convert that debt into equity. They can also invest in distressed sovereign debt, then use the courts to bring actions against the issuer to force some kind of recovery. The phrase “vulture capital” was originally coined as a derogatory term, meant to criticize investors who [...]