The nature of bubbles
“…the toughest thing about Bubbles is that they go on longer than most investors would think and, in fact, usually rise at an exponentially faster rate as we get close to the crescendo. Jeremy Grantham (co-founder and chief investment strategist of Grantham, Mayo & van Otterloo) quantified this for us a couple weeks ago at his annual meeting in Boston when he said that the last twenty-one months of a Bubble usually rise 50% (seems impossible, but that is what the data says). By this calculation, the final leg of the [market] Bubble began in March of this year when the [S&P 500 and Dow Industrials] Indexes broke through two standard deviations above Fair Value (2,400 and 21,000), so we could see a continued inflation of the Bubble until the end of 2018 that would take the SPX to 3,600 and the DJIA to 31,500 (seemingly stunning numbers).” – Mark Yusko, founder and chief investment officer of Morgan Creek Capital Management, in his 3rd quarter "Letter to Fellow Investors." Read More [PDF]
Adventures in forecasting
“Forecasting where the stock market will finish a year from now is next to impossible.… Over the past 38 years, the S&P has typically gained +10% per year. This is the average. But the standard deviation from this average is 16%. The standard deviation measures how much any single year typically varies from the average. In other words, it would be normal for the S&P to return anywhere between a loss of -6% to a gain of +26% in any one year. That range captures about 70% of the annual returns since 1980.” – Urban Carmel on his Fat Pitch blog on 12/15/17, arguing that making a precise stock-market forecast is an exercise in futility. Read More
What could go wrong?
“Cyber is just morphing constantly and is probably the No. 1 risk that the whole system faces — not just financials, not just investment firms, not just financial services more broadly, but the entire corporate infrastructure.” – Bill McNabb, outgoing CEO of Vanguard Group, quoted by Bloomberg News on 11/28/17 that his biggest worry isn’t a market correction but “some sort of cyber event.” Read More
Financial lessons are found in unusual places
“Investing is not the study of finance. It’s the study of how humans behave with money. When you realize it’s the study of human behavior, you see that it incorporates the lessons and laws from all kinds of different fields. Psychology. Sociology. Statistics. History. Politics. Rule of thumb: If it looks into how people behave in groups and respond to incentives, it’ll teach you something about investing.” – Morgan Housel, writing on the Collaborative Fund blog about what investors should read. Read More
Sometimes it’s not complicated
“Why have global markets done so well this year? Trump? Interest rates? China? The G8 Summit? It’s all beside the point. Here’s the big thing that mattered most: The 20,000 or so companies representing the world’s stock markets were reporting higher profits. This trend [has] been apparent since the summer of 2016. It’s not complicated.… The longer I’m in the game, the less I pay attention to chatter and the more I respect price and trend.” – Joshua M. Brown, writing in his The Reformed Broker blog, on why investors should focus “solely on what was happening and not on what other people speculated might happen.” Read More
