To market, to market to buy a fat pig. What an amazing day it was yesterday, the rain poured down all day, for some that was a wonderful sign. The ancestors crying tears of joy is another way you could interpret it. President Obama was late, but he made up for it with a superbly delivered speech. Were the selfies a disappointment to you, or rather just a president (and 2 prime ministers) keeping up? If he wants to take a selfie with two besties, then who am I to judge? And then Michelle Obama swapped places with her husband when he went and gave that inspiring speech.
If you are looking for the speech, and want a permalink: Remarks by President Obama at Memorial Service for Former South African President Nelson Mandela. I loved the speech, the delivery overpowered all the other speeches, other than the grandchildren, their speeches were also right up there for me. That opening line:
To the people of South Africa, people of every race and walk of life, the world thanks you for sharing Nelson Mandela with us. His struggle was your struggle. His triumph was your triumph. Your dignity and your hope found expression in his life. And your freedom, your democracy is his cherished legacy.
It was awesome. I cannot find the text of the grandchildren's tribute to their grandfather, but, you can see it on YouTube: Mandela's Grandchildren Pay Tribute to Madiba. Amazing. Well done to all concerned, well done to the people for having turned up in the driving rain, even if those folks were not thanked repeatedly, or at all.
I guess the other talking point was the booing of the current president whenever his picture was shown on the big screen. Do you think that the ruling party is concerned at all? I guess we have around half a year or so to find out, the polls will reflect whether or not there is dissatisfaction, and if so, in which direction. What I mean by that is simple, will the voices be heard on the right or the left of centre.
Markets wait for nobody, great or small. They are open all the time. With electronic markets there is no stopping, giving the forever after trading crowd their liquidity that they crave. And that is good for all of us, good for those big and small. Without liquidity you do not have the ability to execute the necessary trades. Everyone has their different ideas in terms of time frames and investment philosophies. If yours entails stop losses and stop gains and charts, then perhaps I had better be less rude about it. If that works for you, then it works for you.
Markets on Wall Street were mixed, lower at the end, better at the start. We are five years on from the Bernie Madoff Ponzi scheme cracking finally, not withstanding all of the repeated efforts of one whistleblower by the name of Harry Markopolos. Markopolos was an industry peer of Madoff and thought very early on that there was absolutely no way that Madoff's returns were legitimate. He (Harry) repeatedly presented his case to the SEC, over a ten year period, and was shunted from pillar to post by bureaucracy and inefficient SEC employees. If the SEC dug harder they could have saved greedy people a lot of money. Because in so much that there are victims of a Ponzi scheme, there is greed involved when parting with money in order to get steady (outlandishly steady as it turned out) returns. But that was the clever part of it, the "giving" of smaller returns was what kept the illusion going forever.
You can credit Markolopos with the current shakeup at the regulatory body and you can credit people like Markopolos for their efforts to keep the industry clean, his current job title (Harry) is "independent forensic accounting and financial fraud investigator". Madoff is Bureau of Prisons Register number 61727-054. Just a bad number. Madoff, according to his Wiki entry sent a letter to his daughter-in-law to suggest that in prison that he is treated like a mafia don of sorts, but then why should we believe anything that comes out of his mouth? We learnt three things from Madoff. Insiders can be crooks, people are still greedy and the regulatory bodies designed to protect them were not up to the task. #tripleepicfail
What is still true, and this super article from Barry Ritholtz highlights that, is that many people are sitting on piles of cash. Waiting for another event like the last one. Perhaps that is like waiting for the next natural disaster. Maybe. Perhaps it will not happen for another ten years. And then compare the cash returns to the long term equity returns. Read this: Why Is Everybody Sitting on Huge Piles of Cash?. The conclusion that Barry has/had is the same as the one I have, no bubble in equities.
Elevated levels relative to the March 2009 lows, but since the turn of the century the return of the S&P 500, without dividends has been only 24 percent. Hardly exciting. As ever, it depends where you draw a line in the sand, which is why I tend to think that measuring returns on a year by year basis is dumb. In my very humble opinion. But that is the way it works, the scoreboard HAS to say something.
Michael's musings. Buffett's Luck
There is an active debate in academic circles about whether having an active stock portfolio is better than just buying an ETF. On the one side there are those who say that the market is efficient and that there is no way to continually have better returns than the market. On the other side there are those who say that the market is inefficient and as such picking stocks will give you above market returns. These contradicting views were highlighted earlier this year when the Nobel Prize winners in economics this year, each held one side of these conflicting views. Warren Buffett's success is part of the debate, where some say that his success for the last couple decades is proof that it is possible to do better than the market, and where others say it just comes down to luck. The imagery used is that of someone continuously winning a coin toss; Buffett would be the coin toss champion! (no skill involved, just luck).
A paper was published last month looking further into Buffett's success, with the intension to help settle the argument.
The statistic used to measure Buffett's success is the Sharpe ratio. The Sharpe ratio measures returns in relation to the volatility, and the higher the Sharpe ratio the better. An example is you would rather have a consistent return of 15% per year over 10 years than a return where you are up 50% one year then down 30% the next. This is what their research found; " Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years. ". The paper also found that Buffett's Sharpe ratio is almost double that of the overall U.S stock market.
Through doing many fancy statistical things, their conclusion was that Buffett's success came down to the following: "stocks with these characteristics - low risk, cheap, and high quality - tend to perform well in general, not just the ones that Buffett buys". It sounds simple right? The formula is simple enough, which is echoed by Buffett himself, "Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results"
So now that we know the formula, what are the working parts? According to the researches they gave the following characteristics to "low risk, cheap and high quality". Two characteristics of a low risk company were, that they are large companies, you would agree that a blue chip is less risky than a start-up, and then companies that had low Beta's. A companies Beta, is a measurement how closely a company's share price moves with the market. This makes sense because if you are buying quality companies, they should be going up by more than the market in good times, and coming down by less than the market in down times, resulting in the low Beta.
The criteria for a cheap stock is a stock that has a high book value relative to its market value. They are quick to point out though that Buffett has said "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Then lastly and key part of the formula; what is a quality stock? A growing, high-payout and profitable company would be considered a quality company. If a company is not quality then the other two metrics do not matter, so Buffett's success can be put down to buying quality companies and then having patience (sitting on his hands).
Buffett's amazing performance can be seen in that if you invested $1 dollar in Berkshire Hathaway in 1976, it would be worth $1500 in 2011 (the stock is up about 40% since then!!!), so his formula clearly works. Would you have stuck with him though when Berkshire's share price dropped by 44% compared to the market going up by 32% from 1998 to 2000? Few would.
His investment approach is to ignore all the short term noise, invest in quality and then wait for that quality to shine through. We happen to agree with Mr Buffett and follow the same approach.
The paper's conclusion is that Buffett does have investing skills and it is not down to luck (good news for us). You can find the paper here: BUFFETT'S ALPHA, and it is well worth a read.
Home again, home again, jiggety-jog. We have started lower here. I am guessing that it is going to be a wait and see until the Fed meeting in the middle of next week. Yes. These are the worries of the masses, at least there is a budget deal on the table, far ahead of time.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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