Category Archives: Global Market Update

Decisions, Decisions, Decisions (Part 3)

What resources do we need to improve our decisions?

Source: usafacts

We all use facts to make our decisions. We also act on what we know – of ourselves and of the situation. We can look into a problem and we can seek help. Where we look and who we turn to are both resources.

Encyclopedic resources are straightforward and easily accessible. They present humanity’s collective knowledge about a subject. They might answer a question like what symptoms are linked to a disease or the financial performance of a company at the end of a quarter. You might conclude that you have the disease or that you should buy that stock, but the resource itself cannot tell you that.

For confirmation, we turn to a personal resource, someone we trust to use encyclopedic knowledge to help us out. Personal resources also provide support, whether it’s your doctor working with you on a treatment or an organization that sends someone to sit with you while you are alone.

The rise of the internet and the explosion of resources has altered the landscape of decision making. There are so many resources now that we have changed the way we interact with them. Americans used to say they got their information through a specific method: television, newspaper, radio, internet. Now, they are more likely to name a specific source which is accessed across multiple methods: The New York Times, Fox News, Buzzfeed. The pendulum has swung from gathering information to trusting the source to tell you what you need to know.

To be fair, the element of trust has always played a role in using resources. Whether it’s a person, book, or organization, at the end of the day we trust to some extent what is presented before us. We trust that our doctor’s education was rigorous and that they keep up with developments. We trust that the stock quotes reflect the actions in the market that day.

But as Mrs. Weasley admonishes her daughter at the end of Harry Potter and the Chamber of Secrets, “never trust anything that can think for itself if you can’t see where it keeps its brain.” The same can be said of anything with a collective brain.

Veronica Peterson

Decisions, Decisions, Decisions (Part 2)

How can we improve our decision-making?

Source: Quora

Most of us live in “react-mode.” We’re like thermostats – the temperature goes up, and we try to cool things down. It gets a little chilly, and we turn up the heat. We don’t deliberate, we just do something because it makes us feel better. But reacting to circumstances doesn’t change the underlying situation. It just makes us a little more comfortable, for a little while.

One of the best ways to improve our decisions is to slow down. Think about the underlying dynamics of what’s going on. In Thinking Fast and Slow Nobel prize-winner Danny Kahnemann posits that our brains use two cognitive systems. System 1 thinking is fast, intuitive, and emotional. System 2 thinking is slow, deliberative, and logical. System 1 thinking is important for survival. When three deer jump onto the highway 50 feet in front of you, you don’t have much time to figure out what to do. You step on the brakes!

Photo: M Prinke. Source:

But usually we have time to pause and reflect. Not all decisions need patient deliberation, but a lot do. Buying deodorant doesn’t require much planning. But buying a pet does: pets are effectively family members, requiring care and attention. A new puppy or kitten can change many aspects of your life – how you travel when you get home, what kind of vehicle you need. The long-term effects can be profound.

So think about the consequences. It may be emotionally satisfying to yell at someone who cuts you off in traffic, but it’s a good idea to close your windows, first. Successful people and organizations don’t react, they act. They pause and think before they take action. The process of stopping and thinking almost always improves the quality of our responses. United Airlines CEO Oscar Munoz probably wishes he had reflected a little more before writing that first email.

Lord Acton once said that if it is not necessary to decide, then it is necessary not to decide. And if the decision can’t wait, you can at least count to ten.

Douglas R. Tengdin, CFA

Decisions, Decisions, Decisions (Part 1)

How can we make better choices?

Photo: Colin. Source: Wikipedia

Let’s face it: the world is constantly changing, and we face important decisions every day – where to live, what to do, how to show our friends and family that we care. We’ve never been so interconnected, and yet people have never felt so isolated. It’s never been easier to find out who organized the Seneca Falls Convention on women’s rights in 1848 or why the British keep ravens in the Tower of London. But it’s never been harder to order our lives so that the most important things stay on the top of the pile.

But most of us slip into a comfort zone when it comes to making decisions. We fall into familiar patterns and jump to simple conclusions. This is especially important when it comes to investing. We think: “This is a good company. I should buy the stock,” when we ought to consider other factors, and perhaps think, “This is a good company, but everyone else thinks so, too. I don’t think it will be as profitable or grow as quickly as everyone else does, so I should sell the stock.” When we invest, we need to consider both fundamentals and prices.

One critical way to make better decisions is to look at the longer-term effects of what we do and say. At the extremes, a hopeless drug addict will only try to figure out where they can get their next hit. But folks who are second or third-generation wealthy are often intensely future-oriented. They have a perspective that looks decades or even generations forward. There are layers of second and third-order effects that flow from our choices. We can never really do just one thing.

We can’t envision every bounce of the billiard ball across the table, but we need to try. Obviously, some decisions are more important than others. But – like the lion who spared a mouse who later freed him from a snare – sometimes a small kindness can have can have big consequences down the road.

Photo: Charles Hutchins. Source: Wikimedia

This isn’t easy. But as Charlie Munger once said, it’s not supposed to be easy. Anyone who thinks it’s easy … isn’t thinking.

Douglas R. Tengdin, CFA

Putting Fun Into Finance

Can personal finance be fun?

Photo: Melodi2. Source: Morguefile

For most of us, money matters are unpleasant. They involve budget issues and trade-offs and hard choices that frustrate everyone. So we need to encourage ourselves, to set up some kind of incentive program.

For example, estate planners say you should update your will every three years or so. So: think about what would be a special treat—like eating at a favorite restaurant, or going to a special show—and reward yourself when you update your plan. Similarly, you should look at how you are doing against your budget quarterly. Find a special activity that you can look forward to, and treat yourself when you do a review. (Just be sure it doesn’t break the budget.)

This may seem hokey, but it works. We like to do things that are fun for us, and we avoid the stuff that’s unpleasant. If couples fight over money, they tend to avoid dealing with those issues, which usually makes any problem worse. If they can find some way to make money matters less daunting or more enjoyable, they’ll probably address these problems more faithfully.

Photo: Pexels. Source: Pixabay

Not everyone finds balance sheets and cash-flow statements boring or intimidating, (although most folks do). But everyone responds to incentives. By encouraging ourselves to act responsibly, personal finances can change from being a chore to being something to cheer.

Douglas R. Tengdin, CFA

Follow the Leader

Do we suffer from an “expert” bias?

Photo: Christopher Michael. Source: Flikr

We tend to trust the views of experts, especially when it’s about something we haven’t experienced ourselves. If I haven’t travelled to Antarctica, I’ll generally trust someone who’s actually been there – even if they travelled to the islands on the Antarctic Peninsula, and I’m headed for the South Pole – over 1500 miles away.

This is natural. When we’re in unfamiliar territory, we want a guide. We look for someone to give us direction and clarity. It’s a version of the “halo effect”: if we have a good feeling about a person in one area, we put a “halo” around other more ambiguous aspects of their lives. If someone looks good, we may assume that they’re successful as well. We then notice evidence that confirms our outlook. We play “follow the leader.”

Photo: Christopher Michael. Source: Wikipedia

This can be dangerous. Just because someone is an expert in one area doesn’t make them experts everywhere. Linus Pauling received multiple Nobel Prizes (Chemistry, Peace), but then he went off the rails and started advocating mega-doses of Vitamin C for everything from colds to cancer to heart disease. People who followed this medical advice ended up spending time, money, and energy on an approach later shown to have a marginal effect.

It’s also dangerous when it comes to finance. There’s a lot of quantitative work being done today by big firms filled with PhDs that’s accepted by the financial press as the latest key to understanding (and outperforming) the markets. This research can be filled with partial differential equations and multivariate matrices. We often don’t understand the math, but we’re persuaded by the writing style of the author’s picture or the reputation of the site where we find it. We extend a halo around the work, and accept their conclusions. We even invest on these premises. Sometimes it works out.

Black-Scholes Model. Source: Wikipedia

Published research in finance is often like a back-test. It’s rarely published unless it supports the sponsor’s current views or existing products. Thus, Jack Bogle touts indexing, Fidelity encourages using easily accessible mutual funds, and TD and other brokers encourage stock-picking. For my own part, I support an all-of-the-above approach, building portfolios like I would a dinner at a Swedish smorgasbord: a little of this, a little of that. Everyone is human, and entitled to market their own business.

Just be aware of their biases, and don’t believe everything you read. We’re all human. If you don’t understand the process behind something, it never hurts to be a little skeptical.

Douglas R. Tengdin, CFA

Free Education!

Should college be free?

Photo: Kelly Martin. Source: Wikipedia

There is a move, politically, to make college less expensive. And with tuition and fees at private institutions running $60-70 thousand per year, it’s understandable why people get concerned: most of us don’t have half a million dollars just lying around to pay for our kids’ college. Moreover, tuitions that high make the idea of “working your way through school” seem ridiculous. Twenty hours per week at a work-study job pays for less than 20% of a private school.

The college’s usually respond by saying that no one really pays full freight – most of their students get some kind of financial aid. But that often works out to be one more progressive income tax and a penalty on prudence. In the “Expected Family Contribution” formula that financial aid offices use, they calculate that every penny of a student’s accumulated savings will go towards their school’s expenses. And when the schools evaluate the parent’s income, they don’t use taxable income. They use our adjust gross income – line 37 on Form 1040. No deductions are allowed when colleges come calling.

Source: St. Louis Fed

One approach to all this expense and complexity is to chuck the whole thing out, and make college free for everyone – or at least, expand public funding to middle-class families. That’s what New York is doing with its Excelsior Scholarship, which can pay up to $26,000 of tuition per year for public college – if the student stays in New York after graduating. Families that earn less than $100,000 per year are eligible.

This is a bad idea. It layers more complexity onto an already Byzantine system. Completing the FAFSA every year – for families that have students in college – ranks right up there with doing taxes as an unpleasant, tooth-pulling experience. But unlike taxes, the FAFSA calculations are shrouded in secrecy. Presumably, the Excelsior Scholarship will rely on FAFSA forms to determine eligibility.

Also, this approach creates perverse incentives. State schools will now receive applications from more and more students, making them more selective. That may help them in the US News college rankings, but it won’t help poorer students, who are often less well-prepared. They usually can’t afford SAT tutoring services. In addition, mid-range private colleges will now have to compete with “free” public schools. This can push them into a “death spiral” of higher tuition and lower enrollment. We know where that ends: bankruptcy and fewer educational choices. Public funding ends up crowding out private educational diversity.

Really? Source: US News

In addition, there is an endowment effect in education. Not the school’s endowments: we’d all like to have a large asset base to pay some of our operating expenses! No, kids have an endowment effect when they pay to go to school. Students who work to pay even a small percentage of their college expenses are more likely to work hard at their studies and graduate. As the cost of attending college falls to zero, so does the perceived cost of dropping out. But when you put your own cash into your own education, you’re more likely to finish that degree. People value what they pay for.

There’s a network effect where we all benefit from a better-educated populace. But the folks who receive an advanced education benefit the most, in the form or higher lifetime earnings. Why shouldn’t they have some skin in the game?

Douglas R. Tengdin, CFA

As Time Goes By – Technology and Emerging Markets

Technology advances are swift in the emerging markets.

Photo: David Wilson. Source: Wikipedia

The Templeton Emerging Markets Group recently noted the evolving make-up of the emerging market technology sector. In theory, an emerging market is an economy in transition from state controlled to one with increasing economic freedom. Along comes integration in the global marketplace and greater standards of living. A more familiar imagining of the emerging market is one of extraction: both of resources (commodities and labor) and cheap, manufactured goods.

Global investment in emerging markets took off in the 1990s. At that time, technology companies were 3% of the MSCI Emerging Market Index. Now it’s at 23%. Growth in software and services has outstripped that of the production of hardware and components.

In China, Baidu, Alibaba and Tencent are the holy trinity of tech companies (paywall). Although they lack the size of the FANG stocks, they not only dominate their home markets but invest in many of the same lines of business as their American counterparts. Autonomous cars, grocery delivery, drones…

Companies in the emerging markets can innovate in certain areas like mobile payments or fintech that traditional tech companies struggle with because they can adapt and add on to existing technology without the legacies of mainframe or desktop computing or certain consumer expectations.

Many people around the world get online for the first time through their phone. 75% of web pages loaded in India are done on mobile devices. Chinese users rarely use a credit card. Got a tricky bill to split at a restaurant? Each diner need only scan a QR code at their table with their WeChat app and enter the amount they wish to pay the vendor. M-Pesa, a mobile phone based money transfer app was launched in Kenya in 2007 by Vodafone. Users bypass the bank- mobile network operators and retail outlets act as banking agent. In 2016, M-Pesa had 29.5 million active customers, 287,400 agents, and operated in 10 countries. It processes billions of transactions a month, an integral aspect of everyday life for millions of people around the world.

While it is no surprise that companies in emerging markets would increasingly turn to serve their domestic economy and cater to consumers, investors tend to focus on their home markets and developments abroad can pass unnoticed. Who knows? Maybe soon we will see an EM company successfully take on an issue in the American market left unaddressed by our own legacy products.

Veronica Peterson

The Art of Economics

What can art teach us about economics?

Portrait of Joseph Haydn. Source: Royal College of Music

People often discuss the economics of art – how supply and demand can raise the prices of Renaissance or Impressionist works to insane levels, or how ironic it is that great paintings can’t be sold for much while the artists are still alive. But art has something else to tell us about the productive process. There’s a lot that we just don’t understand.

For example, in history we see artistic centers grow and develop – like 5th century BC Athens, or 15th century Florence, or 18th century Vienna – whose artistic achievements have endured for centuries and have had a lasting cultural impact. These communities weren’t highly populous. They had, at their peak, perhaps 100,000 people. But they produced sculpture and paintings and music that billions have enjoyed over the centuries and that have retained an enduring market value.

“Water Lilies” by Claude Monet. Source: Wikipedia

Now, naïve theories of economics say this should not be possible. They didn’t design a more efficient plow or invent anything that improved our economic productivity. Economic value is supposed to reside in the ability to produce a stable and growing cash flow. But there’s something different about the arts where small numbers of highly gifted people can come together in a white-hot center of creativity and innovation that explodes outwards to change the world – arguably more than assembly lines and smart phones.

If we’re trying to figure out what makes Silicon Valley work or how to turn around Detroit or how to maintain London as a financial hub in a post-Brexit UK, we should try to understand Pindar’s Athens or Monet’s Normandy or James Joyce’s Dublin. Because before we can manage wealth, someone has to create it. And creation is a miracle.

Douglas R. Tengdin, CFA

Make Banks Safe Again

Are the big banks finally safe?

Picture: New York Fed

The Financial Crisis put bank safety and soundness fully in view. The serial bailouts or failures of Bear Stearns, AIG, Fannie and Freddie, Lehman, Merrill, and Washington Mutual put the global economy at risk. The problem was systemic: all the big banks were affected, because investors weren’t certain where their money would be safe. Bank stocks fell about 70%, and yields on their bonds rose about 4%.

When this happens, banks cut back on their lending, which slows the economy because businesses can’t borrow the money they need to grow. What the banking system should do at this point is raise more capital so they can keep lending. But there’s little incentive for any company to do this: the economy is weak, levered institutions are more risky, and stock prices are low. Why sell more stock when the price is low? That’s a good way to get your owners angry.

According to Fed data, the banking system is better capitalized than it has been in years. Of course, the data showed that just prior to the financial crisis as well.

Source: St. Louis Fed

If individual banks chose to keep their equity levels high all the time, that would prevent us from having a banking crisis, but there is little incentive to do this. A higher equity level means a lower return on equity, and lower returns for shareholders.

Because of this, Fed officials have considered whether subsidizing equity issuance could help. That is, for every dollar in capital the banks raise, the government would kick in 50 cents of its own money – into bank capital. Such an approach would reduce the chances of another financial crisis and improve future economic growth by as much as 1% per year. That’s a lot of growth: imagine how much better the world would be if we never went through the Great Recession.

But subsidizing bank capital is a non-starter, politically. Bankers aren’t very sympathetic characters. If you cruise the comments section of any prominent newspaper, people still wonder why the executives in charge of the big banks during the Financial Crisis were never put behind bars. The last time a banker was portrayed positively in the movies was George Bailey in “It’s a Wonderful Life” (1946), and he was considering suicide when his capital fell short.

Banks are essential – they provide the capital that the modern world needs to grow. But they are subject to booms, busts, and periodic panics. The only way to have a risk-free banking system would be to regulate their returns. And then you wouldn’t have enough banks – or enough capital to grow.

Douglas R. Tengdin, CFA

Fishing for Value

Is investing like fishing?

Photo: João Pacheco. Source: Picjumbo

In 1653 Izaak Walton published “The Compleat Angler,” a short treatise on fishing. In this little book he explains that fishing is a pursuit that can never be truly mastered. When you go fishing, there’s always a new lure or a new location or some other shiny new toy to try out. “But he that hopes to be a good angler,” Walton continues, “must not only bring an inquiring, searching, observing wit, but he must bring a large measure of hope and patience.” He describes fishing as a perfect combination of contemplation and action.

I would agree. I grew up fishing in Minnesota. Times spent on a lake or stream have been relaxing and contemplative, punctuated by short bursts of energy where quick thinking and decisive action are necessary. Nothing quite matches the thrill of bringing in a “lunker” after a long and careful pursuit.

Photo: Doug Tengdin

It’s the same with investing. Investors need inquiring minds, hopeful dispositions, and patience. It can take some time for a disciplined investment approach to produce results. At the same time, we need to be diligent to make sure that the main idea behind our investment thesis hasn’t changed. We can’t allow ourselves to be whipsawed by every new fad or fashion that appears – but we can’t ignore the fact that circumstances change over time. And nothing quite matches the thrill of buying a “ten-bagger” – a ten-for-one winner.

Good investing is both art and science. It’s a science as it applies to investments, but an art as applied to the investor. Every investor is unique, with unique objectives and limitations. Applying the right investment in the right circumstance at the right time is something that – as Walton would say – is satisfying in the result, but also in its application. Investing, like fishing, is a reward unto itself.

Douglas R. Tengdin, CFA