You Are Not Anonymous

My blog is too boring/academic to get many hecklers (though I still get a few).  And almost always, the hecklers are anonymous (or at least try to be).  You have to have a thick skin to be a writer, and I can’t imagine the inbox of some of my fellow writers like Altucher.

I once used to grab some meals with a fellow professional money manager (AUM > $100mln) when I would visit his city.  At the same time over the course of a few years I would also get consistently harassed by an anonymous commenter on a consistent basis.  It only took about five minutes to figure out who it was, and shockingly, it was the same manager.  (FYI people, you are never, ever, anonymous.)

Also just read a (published) paper that plagiarized, word for word, a lot of my work.  I guess at some point you just take it as a compliment and move on…so, with that, to cheer myself up I read this missive that this is the best time in history to be alive, and, a fun Xmas picture from The Big Picture


Taxes and Inequality

Here is a PPT on inequality from Prof. Hendricks, as well as a table of tax rates from “How Tax Efficient are Equity Styles?” by Israel and Moskowitz.

Click to enlarge:


Real Returns (or, I Remember When a Coke Cost 25 Cents)

The post below is very important, and is something most investors never really grasp. I used to consider writing a book on this topic, and still might, but condensed it into a really short post below.  Let me know what you think.

I remember hearing about the magic of compounding in high school.  The example was that if you started saving now, and compounded your money at 9.4% a year (US returns since 1900), you could retire a millionaire!  Granted, this sounded pretty awesome to all of the students in the class.

In this example, a $100,000 account that had a 9.4% return would be worth $3,600,000 after 40 years! They would then show a chart like the below (although I include the more correct log chart after).  They of course are the exact same chart:    


So what is the problem here?  Well, these returns simply don’t exist.

They are nominal returns, or returns before the effects of inflation.  To demonstrate what I mean, the US experienced about 3% inflation over the period.  So, the returns to an investor were not 9.4% but closer to 6.4%.

This has the effects in our example of reducing the final balance from the $3.6 mln to a more modest $1.2 mln.  Respectable for sure, but a final value that is 70% less than the nominal amount, a big difference!  


The Coke that costs about $1 now will cost over $3 in retirement (funny how this example would have been $0.25 and $1 from my parents generation).    

That is the good news. The bad news is that there was wide variability in the returns for different countries, with some countries performing significantly worse.  Australia and South Africa were the standouts with around 7% real returns, whereas Italy only did about 2% a year.  

All countries experienced big losses at some point, including 90% losses in Germany and the US and 100% losses in China and Russia.

Bonds and bills did even worse.  The BEST real returns per year for bonds was a measly 3% a year in Denmark with the worst being a -1.7% a year in Italy.  Short term bonds (like T-Bills) were even worse at 2.3% for Denmark and -3.6% for Italy.  Losses for bond holders in countries such as Italy, Japan, and Germany ranged from 70-100%. Investing in bonds and bills are certainly not wealth building strategies (ie example in the US now where bills yield zero with inflation ~3%), and can and have exposed investors to very large losses.  

Even investing in a 60/40 portfolio is only expected to return around 3% a year in real terms while STILL exposing investors to 70% losses.  These strategies should all be seen as simply strategies to keep up with inflation.  That is depressing of course, but true.  The worst outcome is the cash under the mattress strategy which will expose the investor to anywhere from 2% to 7% losses per year.  You may not notice the effects, kind of like a boiling frog, but at some point you look back and say, “wow, I remember when a Coke cost 25 cents….”

(Data source:  Triumph of the Optimists / Credit Suisse Sourcebook)

Fireside Chat with Hendry and Drobny

I had a good breakfast with my buddy Steve Drobny the other day here at the beach.  Steve runs Drobny Global and is a macro fund manager/research/writer, and I thought I would repost this great video of an interview with always entertaining hedge fund manager Hugh Hendry of Eclectica.  While I didn’t like  The Gap in the Curtain as much as he did, Hugh is always worth listening to for his insightful commentary and often contrarian analysis.  Not to mention, he is one of the few fund managers having a great year.

Link to Eclectica website public fund performance here and here, and profile on Hedge Fund Letters here.

Hugh Hendry, Eclectica Asset Management and Steven Drobny, Drobny Global Advisors from LSE SU AIC on Vimeo.


Knowledge Tracking

Fun video.  (HT: AF & Sea)

Roger Craig – Knowledge Tracking from Steven Dean on Vimeo.


Biggest Mistakes for Investors

I probably find most of my links from Abnormal Returns, but CXO isn’t far behind.  Found this paper and CXO summary here:

Investing for the Long Run (SSRN) by Ang and Kjaer

Long‐horizon investors have an edge. They can ride out short‐term fluctuations in risk premiums, profit from periods of elevated risk aversions and short‐term mispricing, and they can pursue illiquid investment opportunities. The turmoil we have seen in the capital markets over the last decade has increased the competitive advantage of a long investment horizon. Unfortunately, the two biggest mistakes of long‐horizon investors – procyclical investments and misalignments between asset owners and managers – negate the long‐horizon advantage. Long‐horizon investors should harvest many sources of factor risk premiums, be actively contrarian, and align all stakeholders so that long‐horizon strategies can be successfully implemented. Illiquid assets can, but do not necessarily, play a role for long-horizon investors, but investors should demand high premiums to compensate for bearing illiquidity risk and agency issues.

Curating the Institutions

One of the difficulties I have is that a great deal of my information comes from various sources (blogs, newsletters, academic papers, website, etc).  And while many of those have blog like platforms and thus can be read in google reader, many do not (see a lot of the institutional reads on the sidebar as an example).

I am designing a website, mainly for my own benefit that may even be private, that will likely aggregate most of what I want to read.  If you have experimented with the idea, or know of a better solution, please let me know…

Klarman Interview

I post (and retweet) a lot of good reads on Twitter that never make it onto the blog (usually I forget to repost).  Feel free to follow along here @MebFaber.   Here is a fun video with Seth Klarman:

An Interview with Seth Klarman and Charlie Rose from Facing History and Ourselves on Vimeo.



Happy Thanksgiving and Turkey Reading

I’m headed to Colorado for Thanksgiving (and again likely at Christmas), and while I assume most will be busy with the holidays if you find yourself on Drunken Frenchman on Mary Jane (my home mountain and location for plenty of sutures), feel free to ping me and we can grab a slice of pizza or perhaps some apres microbrews. (Will be in Denver as well for a bit.)

I promised my family no financial reads this Thanksgiving, just football (go Hoos and Broncos!) and snow (fingers crossed).   Although I will be taking this book for a spin on the plane:  Over the Edge of the World: Magellan’s Terrifying Circumnavigation of the Globe .

Since Mom will not be there this year I’m taking the reins and will attempt at cooking a turkey.  Any pointers or recipes fire them over!

Happy Thanksgiving to all!






Re-Thinking Risk (or, Why Isn’t There a Put Write ETF?)

Really interesting new paper from GMO.  We did a lot of the same tests in-house on these option strategies.  I was always curious why a put write ETF hasn’t launched….more later.

GMO link here (requires login).

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