Weekly Reading for 8/22/22

Irrational Exuberance in the U.S. Equity Market

After watching $BBBY among other meme names make headlines these past few weeks. It inspired me to dig up this old quarterly review from GMO (Jeremy Grantham) 1st quarter of 2000! Even though it gets more attention nowadays with social media and the 24-hour news cycle this type of mania is nothing new. Although some of the analysis and data in the quarterly review is dated, much of the underlying sentiment still holds very true today.

• You could insert any number of names from the past two years into the Puma Technology story and it would sound eerily similar
• In 1936 John Maynard Keynes understood this phenomena of the markets.
• Keynes would describe these irrational market moves using the examples of Old Maid, musical chairs or a beauty contest
  • “A valuation, which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which really do not make much difference . . . since there will be no strong roots of conviction to hold it steady.”
  • “We devote our intelligence to anticipating what average opinion expects the average opinion to be.”
  • You could have the best analysis and valuation in the world, but if public opinion vastly differs it will not matter
• At the time this was written at the turn of the millennium many prominent value shops were pressured into closing up as they continued to underperform relative to the hot tech stocks of the day
• The old adage always holds true, “the market can stay irrational longer than you can stay solvent.”

When Data Fails by Nick Maggiulli

This gives perspective and shows how important it is to not get caught in your own bubble.

• In today’s world having access to data can seem extremely valuable. But using this data incorrectly can lead to common pitfalls. If not checked properly overtime it can have disastrous outcomes
• One common way data fails is focusing on a subset and not analyzing the whole picture
  • For us on the investment team this would be similar to us only looking at our average returns every year and deciding if we performed poorly or well. We would miss the distribution of our returns and what stocks, factors, etc. actually drove these returns. Which allows us to make our process repeatable and successful over time.
• Another way is when patterns change over time. A classic investing example (from the article) talks about Benjamin Graham’s net net approach.
  • Effectively he would try to identify companies that were trading at a market cap below the current value of their assets
  • In his time this was a groundbreaking and difficult analysis. He was handsomely rewarded for his investment success.
  • Today to get that same information would take anyone about 2 minutes of searching on their computer.
  • The access to data (the pattern) has dramatically changed and because of it so must our analysis. Running simple screens for investments is fun and can breed intriguing results. But everyone can run these screens and can run them very easily!
• Last, data fails when it is wrong
  • Just because a source is reliable does not mean it is always right
  • We are all human and mistakes happen. The article cites how a now infamous excel error was discovered in a research paper. Once the error was discovered and fixed, the conclusion from the original findings were drastically different. By that point the damage had been done as this original paper had been cited in over 4,500 other academic research papers!
  • Having access to amazing analytical tools is great and makes us all more efficient. However, mistakes can happen and even seeing something from the most trustworthy news source (definitely not Facebook) should bring you pause to trust but verify!

Republican Censorship Goes for Woke – by Michael R. Bloomberg

With all the back and forth of politics sometimes it is nice to see someone have a logical, well thought out assessment. Whether you like the man or not I believe this opinion piece from Michael Bloomberg is thought provoking and does a great job taking a step back and assessing an issue from a broader point of view.

• Bloomberg points out the hypocrisy of Republicans rightly complaining about the hostility of free exchange on college campuses. While at the same time pushing to enact very similar laws that censor free speech
• The latest iteration is Florida Gov. Ron DeSantis signing the Stop Woke Act
  • This bill targets critical race theory and other divisive topics from the left from being discussed in higher education and businesses as part of affirmative action programs
    • Isn’t a core belief of the Republican party less government control not more?
• Censorship debates are not a new issue and will never go away. As he discusses in the article every generation faces this. For him it was McCarthy’s hunt for communists. Today it is both sides pushing their censorship ideals.
• I believe Bloomberg sums up the idea well with these last few sentences. “The solution to political repression isn’t more political repression. It’s freedom. Truth has nothing to fear from free speech—on college campuses, or anywhere else.”

Pelosi Moved By China’s Spectacular Show Of Military Force Celebrating Her Visit To Asia