A Chess Master’s Views on Finance (1/12/19)
Thanks to one of our readers, Ryan DuBiel, for this week’s interesting find – a podcast featuring Adam Robinson – author, educator, hedge fund advisor, co-founder of The Princeton Review, a rated chess master with an undergrad degree from Wharton and a law degree from Oxford. TLDR, this dude’s really smart and I found two points he made to be really interesting:
First, in the world of finance, we talk about trends all the time. But how do we actually define that term? Adam defines it as the spread of ideas. He also references the diffusion of innovation as the method in which ideas spread (aka how trends appear) even within the stock market. I can discuss the diffusion of innovation for days, I’ll save that topic for another week.
Second, there are five groups of traders who express their views of the future in the way they trade – equity, currency, bond, metal, and energy traders – and below are Adam’s most interesting observations –
When bond traders and equity traders disagree about the economy, bond traders are usually right and early.
Bond traders’ views on the economy are expressed by the yield spread between corporate bonds and 10-year treasuries. Corporate bonds should have a higher yield than US treasuries – the smaller the spread, the stronger the economy. In the stock market, the higher the stock prices, the stronger the economy. So when you see a divergence in the views of the economy expressed by bonds and stocks, Adam says that 99% of the time, the views expressed by bonds are correct and early. My two cents – a bond investor’s method for analyzing a company is much more of a science than that of a stock investor’s just given the different risk/reward characteristics of bonds and stocks. Therefore, by default (pun intended), the bond investor’s method for analyzing a company should yield fewer errors that are introduced by various different biases in a stock investor’s method.
Metal traders are better than bond traders at predicting the direction of interest rates.
Metal traders view the economy in terms of how much copper is being sold – higher the copper sales, stronger the economy. Their effective interest rate is the price of copper divided by the price of gold. When we see this effective interest rate moving in the opposite direction of actual interest rates measured by 10-year treasuries, the interest rate directionality predicted by the metal traders’ effective interest rate has not been incorrect in this century. In August, the effective interest rate as shown by metal traders was at a one-year low, indicating interest rates should move down, while 10-year treasuries were indicating interest rates were at five-year highs above 3%. Since then, interest rates on 10-year treasuries have come down to about 2.7% and metal traders’ effective interest rates have maintained their perfect batting average.
The Essentials (1/5/19)
One of my absolute favorite books on investing is One Up on Wall Street by Peter Lynch. Peter Lynch managed the Magellan Fund at Fidelity Investments between 1977 and 1990. He averaged a 29.2% annual return (which is jaw-dropping awesome btw), more than doubling the S&P 500 market index consistently, and was largely regarded as the best mutual fund manager in the world.
For those of you who are really interested, I’d highly recommend reading the book in its entirety – it’s about 280 pages and filled with great lessons for the average investor and plenty of LOL moments. I read this book at least once a year and learn something new every time. Here are some of the biggest takeaways:
- Invest with a long-term view. These lessons are probably my favorite.
- Once you buy the stock, sell it once your reason to own the stock changes, not just because of price reactions in the market. Be patient and let the reason you bought the stock actually play out.
- Buy when everyone is selling (aka when the stock price drops) – take advantage of your stock being on sale! But at the same time, don’t buy a company just because it seems cheap, you should believe in the company and not just blindly follow the numbers.
“If you can’t convince yourself ‘When I’m down 25 percent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 percent, I’m a seller,’ then you’ll never make a decent profit in stocks.”
- Study and notice companies that you come across in your daily life – it’s the best way to identify good stocks, and usually before that information makes it to Wall Street.
- Know what kind of investor you are before you invest in stocks. Know how you’re going to react when the market goes down 25%. And don’t invest with money that you can’t stomach losing.