Restoring Your Faith In Humanity

Living our lives day to day, it is hard to notice the progress being made around the world.  Twenty-five years from now there will be technologies improving our lives that we can’t even dream of today.  Just think, how many of you thought in 1990 that we would be walking around with computers in our pockets?  Twenty years later this smartphone technology has literally changed how people live their lives.  As a child, I remember using Encyclopedia Britanica for research…today Google allows us to find almost any piece of information in a moment’s notice.

I came across a great slide deck, that Business Insider named “31 Charts That Restore Your Faith in Humanity”.  Here are some of my favorite takeaways:

  • Illiteracy in America- in 1900 over 10% of the population was illiterate.  Today that number is closer to 1%.
  • Life Expectancy- from 1900 to 1998 life expectancy soared from 47 to 77 years old
  • Gun deaths in America- from 1981 to 2010 gun deaths dropped from 6.6 per 100K to 3.6, a 45% decrease
  • Percentage of global population in poverty- from 1980 to 2005 the percentage of the world in poverty dropped from 40% to around 20%
  • The cost of a coast-to-coast flight- from 1930 to 1997 the cost of a coast-to-coast flight dropped from $4,780 to $209

These charts remind us of the power of human ingenuity.  They also remind us that although the economy and stock market can go through rough patches, the basic human default is to make things better, and that translates into investment and economic opportunities for the future.

Click over to view the great presentation:  31 Charts That Will Restore Your Faith In Humanity

The Great Rotation?

For over 30 years, the bond market has been on a huge bull run, with the yield on the 10 year treasury bond going from 15% to 2% and the price soaring (yield is inversely related to price).  Over the past few years, money has consistently flowed into bond funds, with the idea that this asset class is a “safe” place to park money for investors who have been spooked by the stock and real estate market crash.  Don’t look now, but the popular treasury bond has been getting beat up pretty bad over the last month:

Chart foriShares Barclays 20+ Year Treas Bond (TLT)

The chart shows the 20 year treasury bond (blue line) compared against a short-term corporate bond fund (green line) and the S&P 500 (red line).  Long-term treasuries have lost about 8% over the past month.  Not exactly what you would expect from a “safe” investment.  At the same time, short term corporate bonds have been flat, while the US stock market has gained about 5%.  So what is happening here?  

First, the economy is continuing to get better.  When this happens people who had been getting less than 2% in a treasury bond start pulling their money and investing in the stock market.  This trend of money flowing from bonds to stocks has picked up its pace recently.  Second, the Fed is starting to give some hints that they may soon pull the punchbowl from the economy.  If the Fed buys less bonds in the open market many investors are concerned that rates may rise.

Whatever the reason bonds have been selling off, we believe this just reinforces the notion that you must be adequately diversified to control risk.  Even the safest investments can go bad from time-to-time, so spreading out your investments into non-correlated assets is essential.  In addition, we also believe investors should play the odds.  With interest rates at historic lows and the economy recovering, there is significant risk that rates will continue to rise.  We have been keenly aware of this risk at Greenspring and have positioned client’s bond exposure in short-term corporate bonds (green line in chart) which are more immune from loss in a rising interest rate environment. 

Politics Are Hazardous To Your Wealth

There are many investors that seem to let politics effect their investment strategy.  I can’t tell you how many times over the past few years I have heard investors and some pundits say how they wouldn’t touch this market…the country is on the wrong path and is headed towards bankruptcy.  Conversely, back in the 1980s Democrats had similar thoughts about the economy as Reagan put the final nail in the coffin of labor unions and lowered taxes on the wealthy. 

The truth that most market pundits won’t tell you is that politics has very little impact on the economy or the stock market.  Take a look at this job creation chart by president for government workers (via Calculated Risk):

Public Presidents

Obama’s administration has been cutting government jobs since the beginning of his presidency, while both Bush presidents had huge increases in government employment under their watch.  Does this mean that Obama is anti-government and Bush 1 and 2 were both closet big government supporters?  No, it just shows that different presidents presided over different periods in our country which had different economic cycles.  Obama has had to deal with a major recession and painful balancing of state budgets, while both Bush presidents (and Clinton) presided over economic expansions. 

The point here is not that one party has a better economic track record than another, it’s that what political party holds office has little bearing on the economy or stock market.  The next time someone is espousing advice that is using politics as the basis for a strategy, please avoid at all costs.

Play The Odds

 There are so many factors against you when you invest.  Investment costs, taxes, “super computers” trying to earn a fraction of a cent from your trade, professionals looking for an edge, and probably hundreds of other factors that you can’t even think up.  Rather than worrying about all the things you can’t control, we tell our clients to focus on the things that have a proven impact on investment returns.  Two of the most compelling factors that you can focus on when buying stocks are valuation and size of the company.  This chart from DFA shows the odds of outperformance when you look at these two factors:

When you pay a cheaper price for companies, you tend to have a better return.  In this chart that means that value companies tends to outperform growth companies, especially over longer periods.  The same can be said when you compare small companies to large companies.  We always prefer to play the odds and focus on things we have control over.  These are two factors that cannot be overlooked when designing an investment portfolio.  In a future post we’ll talk about why these two factors have historically had such a positive impact on returns.

 

Everyone Talks Their Book

I do a lot of reading.  When I consume articles, blogs and papers on financial topics, there one thing I always do first.  Check out who the author is.  The most important thing to understand when reading an article is the biases the author may have.  For example, over the past few years, I’ve had several clients read the book “Aftershock:  Protect Yourself and Profit From The Next Global Meltdown”.   Here is an excerpt:

America’s Bubble Economy (John Wiley & Sons), accurately predicted the popping of the housing bubble, the collapse of the private debt bubble, the fall of the stock market bubble, the decline of consumer spending, and the widespread pain all this was about to inflict on the rest of our vulnerable, multi-bubble economy. We also predicted the eventual bursting of the dollar bubble and the government debt bubble, which are still ahead. In 2006, these and our many other predictions were largely ignored. Two years later, it started coming true.

When you read the book and look at the author’s credentials, it is hard not to get scared.  So when I had clients call me about this and the eventual 90% correction in the stock market that the book was predicting, I decided to take a look in more depth.  I immediately found that the authors were providing consulting work to companies around this very topic (global bubble bursting), and they were partners in a firm called Absolute Investment Management.  This firm touted a strategy that could earn absolute returns in any market and would be able to go through another collapse unscathed. 

So let’s rewind.  We have a book that was written about a coming global economic collapse by authors who own a money management firm that would profit from investors believing a global economic collapse was imminent.  In the business,we call this “talking your book”, or touting a strategy or investment that you already own.  I am not saying that their thesis will be right or wrong (up until now they have been spectacularly wrong), what I am saying, is that you have to understand the author and their motivations before you take what they say as gospel.

 

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.