Unbelievable is all we could say as the week drew to a close. The impact of the headline news was too big to walk away from so much of our review this week looks at things on the front pages. Bitcoin. Flynn. North Korea. But, we’ve curated a group of writings on each of these that we found both informative and a different, perhaps more considered set of perspectives. Finally, we end our list with an academic paper on the behavior of individual investors. This is a longer, but excellent read for us because it points out the flaws of our processes generally. Read it and look back on your year in investing and see if there are things you can improve. Want help or some outside perspective, just ask us!
Here is a curated list of important stories outside the main headlines that caught our attention this week.
Bitcoin – Millennials Fake Gold (Vitaly Katsenelsen on ContrarianEdge.com, 10 minute read) Mr. Katsenelsen is a familiar name to the value-based investor community. In fact, Erik has been both a Value X attendee and presenter (Value X is Katsenelsen’s invite-only annual investor confab). He makes some salient points about the spike in Bitcoin prices relative to the “value” of the cryptocurrency – and fiat currencies in general. Interestingly, Jack Bogle also made some similar comments in an interview this week regarding Bitcoin and the rest of the crypto-coins. All we can say is tread carefully. Generally, governments don’t cede currency control of their economies easily – just ask the Chinese.
Mueller Closes In on White House With Flynn’s Guilty Plea (Bloomberg, 7 min read) – The theatre in our current administration remains unparalleled by anything that Broadway or Hollywood have had on offer. It is hard to see where all this ends with the number of people who’ve had direct contact with Russia growing by the day. Muller now has proof members of the Trump crew were lying to the FBI. The interesting question to us is, “why?”. It is hard for us to believe that Flynn was trying to protect himself from being accused of being a private citizen conducting foreign policy. So, where does this go from here? The markets certainly took a wobble when this story broke. For investors, more volatility is likely on the way thanks to the doggedness of this story.
North Korea’s Latest Missile Test Was Even Scarier Than It Seemed (Lily Hay Newman @ Wired.com, 15 min read) It seems unusual to us how complacent the world has become about the simmering tensions on the Korean peninsula. The North Koreans are provably making leaps and bounds of progress on their missile development program and the nuclear material necessary to weaponize it. Yet the markets and the citizenry of the world seem content to let them proceed unfettered. Are China and the Ruskies likely to be using the DRPK as a pawn. We would lean toward a yes on this as both countries have been actively creating destabilization in the Western dominated status quo for years. It seems highly unlikely that the West will allow this show to proceed much further, but the options to deal with it range from bad to worse.
The Behavior of Individual Investors (Brad Barber, Cal-Davis and Terreance Odean, Cal-Berkeley, 30 minute read followed by a lifetime of self-examination :)) This 2011 academic study looks at the stock trading behavior of individual investors. The results are not pretty. Some short conclusions from the abstract; individual investors underperform standard benchmarks (e.g., a low cost index fund); we tend to sell winning investments while holding losing investments; we are influenced by limited attention and past return performance in their purchase decisions, and tend to hold un-diversified stock portfolios. Ugh. There are a number of behavioral things to be taken from this paper, but the most important one is to read it and stop to examine ourselves! We want to perform well. That’s the objective, but only by studying ourselves can we progress.