“As far as I’m concerned, it’s a damned shame that a field as potentially dynamic and vital as journalism should be overrun with dullards, bums, and hacks, hag-ridden with myopia, apathy, and complacence, and generally stuck in a bog of stagnant mediocrity.”
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Designed by the Frenchman Frederic-Auguste Bartholdi and weighing over 200 metric tonnes, the Statue of Liberty measures 93 metres from her base to the tip of her torch. She has a 35-foot waistline, and if you could find enough leather to make it, she takes a size 879 shoe. 300 different types of hammer were used to make her external copper structure; Lady Liberty’s infrastructure is made of iron.
Dedicated on October 28, 1886, the Statue of Liberty (or strictly, ‘Liberty Enlightening the World’) was a gift from France to the United States, which came to be irrevocably associated with immigration during the second half of the nineteenth century. For over 9 million immigrants to the United States, she was often the very first thing they saw as they approached New York by boat.
At least two people have committed suicide by jumping off the statue. When she was first erected in 1886 she was the tallest iron structure ever built. And on April 8, 1983, the magician David Copperfield, in front of an invited audience including Morgan Fairchild, and a TV audience of millions, made her disappear.
Just how do you make a well-lit, iconic, 93 metre-tall statue vanish into thin air? [Spoiler alert.] It seems that the following accounts for the act. Copperfield had erected two towers on his stage, supporting an arch to hold the huge curtain that temporarily fell, briefly obscuring the audience’s view of the statue while he conducted his trick.
The TV cameras and the live audience could only see Lady Liberty through this arch. When the curtain was dropped, Copperfield started a prepared speech, to music, while the stage was slowly and indiscernibly rotated. When the curtain was finally lifted, the statue was obscured by one of Copperfield’s giant towers, and the audience was looking out into a blank nightscape. A helicopter with an arc light helped with the illusion.
The secret to all ‘magic’ is misdirection. Admittedly, diverting people’s attention during a card trick is a lot easier than when they’re in front of a gigantic statue, but it comes down to misdirection all the same, just on a much bigger scale. Don’t look over here, look over there.
Ever since the first tremors of the global financial crisis back in 2007, we’ve been nursing a fear that we are all in danger of falling victim to a similar kind of misdirection.
What the media report on a daily basis: coverage of the latest Wall Street research; brokerage firm updates on the latest glamour stocks; an unending circus of analysts, economic commentators and financial promoters of one type or another; breathless anticipation of the latest Fed monetary policy decision… It’s all misdirection.
THE FOUR MYTHS OF MODERN FINANCE
Open a financial newspaper or visit any financial website and what will you see? Chances are, it will be melodramatic features on the fast-evolving strategies of ‘exciting’ companies and their ‘glamorous’ management; breathless reports of the latest product launches; giddy coverage of the next, hotly anticipated IPO… An endless stream of financial promotions and hucksterism, with the stock market as the Circus Maximus and gravitational hub to all financial things.
To add gravitas, you’ll also find feverish analysis of current economic trends and worrisome reports hinting archly at the prospects for a slowing economy. There will be four key subtexts:
- Consumption is all. Our society and economy requires ever-expanding consumption;
- To attain wealth, you must make risky bets in the wild casino of the stock market;
- Growth is everything. The economy must grow at all cost. Without perpetual economic growth we will all perish;
- The monetary system is too important to be left to free market forces – only wise central bankers should be entrusted to ‘guide’ interest rates, currencies and the stock and bond markets.
All of which, of course, is complete nonsense – but these subtexts constitute the prism through which almost all financial journalists and investment commentators view the world.
Perpetual growth is taken utterly for granted, as if the business cycle were some quaint memory from a bygone age. The impossibility or even desirability of perpetual growth and consumption in a finite world is never questioned. And the idea that interest rates – the most important price in the entire market, the price of money itself – should be left to the tender mercies of central bankers is never disputed for a moment.
The growth and consumption canard was refuted powerfully by the late Albert Allen Bartlett, emeritus Professor of Physics at the University of Colorado at Boulder. During his lifetime Dr. Bartlett gave literally thousands of presentations on the seemingly dull topic of ‘Arithmetic, Population and Energy’. Over five million people have watched his presentation on YouTube, which you can see here.
But the essence of Bartlett’s argument is extremely simple.
First, mankind’s biggest weakness is our inability to understand the power of the exponential function – the extraordinary future growth inherent in anything growing at a fixed rate over time. Einstein made exactly the same point when he described compound interest as the eighth wonder of the world.
Second, Bartlett asked the question:
“Can you think of any problem in any area of human endeavour on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?”
To put it in an even broader context than population alone, Bartlett made another observation; that for any entity, beyond a certain level, further growth equates to either obesity, or cancer.
This latter observation gets to the heart of the financial crisis. The financial system itself has metastasised. Freed from any last vestige of restraint by President Nixon’s suspension of US dollar convertibility into gold in 1971, the growth of credit has become uncontrollable.
This accounts for the investment world and media’s focus on constant economic growth: only constant economic growth can allow the US government to even attempt to service otherwise utterly unpayable debts (the $34 trillion US national debt is merely the tip of the iceberg above the waterline – once you factor in the off-balance sheet debts, unfunded liabilities like Social Security and Medicare, the real total rises to well over one hundred trillion dollars).
The collapse of Lehman Brothers in 2008 was the moment at which we saw that the Emperor wore no clothes. Which, in due course, is why central banks throughout the indebted West have been so accommodating to their client national treasuries: interest rates have been forced to all-time lows to try and ensure that deflation does not bring down the entire government debt edifice. (In a true deflation, the real cost of servicing government debt rises.)
But actions have consequences. In their increasingly desperate attempts to keep the government bond bandwagon on the road, central banks have impoverished savers and all those on fixed incomes, like pensioners.
With bond yields at all-time lows, despite the grotesque surge in the supply of the stuff, desperate investors have, in turn, stampeded into the one asset class where they feel they can earn a decent real return: stocks.
Investment bank dealing rooms once resonated with one specific piece of advice: don’t fight the Fed. No investor, whatever his size, has a chance against the firepower and the unlimited ability to print money possessed by the US Federal Reserve. When the Fed is easing monetary policy, don’t resist the trend.
But now the market environment is that much more perilous. Just as the “Greenspan put” was developed as a theory to account for boundless optimism when it came to stock market investing (the Fed has your back, in other words, and will act swiftly to support the market, come what may), so the “Bernanke put” and now the “Powell put” have persuaded a whole new generation of investors that the stock market only ever rises. In a Battle Royale between the capital markets and the State, does the State always win? We are about to find out.
Rather than throw up our hands in disgust at the financial repression being conducted throughout the ‘developed’ economies of the West, as investors it makes sense to try and make the best of our situation.
Bond markets are clearly a bug in search of a windshield. Traditional asset allocation holds that investment grade bonds represent the risk-free rate of return. But traditional asset allocation has been turned on its head by over a decade of emergency monetary stimulus.
In short, the cynical answer as to why bond yields reached their lowest level in history even as the US national debt reached its highest level in history, would be: because the central bank rigged the market. So-called quantitative easing (QE) involves the Fed creating money out of thin air and using it to buy Treasury bonds and other debt securities.
The theory – based on the flimsiest logic – has it that the banks holding US Treasuries that are bought by the Fed will be increasingly willing to lend out their sudden cash windfalls; and that investors suddenly enriched by this money creation and its attendant spur to asset prices will go on a spending spree that will ignite the economy.
Economic data would tend to suggest otherwise. But it is undeniable that QE has been a huge boon to financial asset prices, notably stocks. So what happens to asset prices, notably stocks, when the Fed’s stimulus turns to repression ?
Our suspicion is that the Fed has now entirely lost control of the bond market. And since the size of the bond market completely dwarfs the value of listed stocks, this is a market you don’t want to lose control of.
In any event, there is one thing close to an iron law in financial markets: if interest rates rise, bond prices fall. This is entirely logical, since conventional bonds carry a fixed coupon or interest rate. If official interest rates, such as the Fed Funds Rate, go up, they make the fixed coupons on bonds comparatively less attractive, so bond prices fall to compensate the investor.
So by a process of elimination, we end up scouring the equity market for opportunities instead. But equity prices have also been distorted by QE, and it is anybody’s guess how Fed tapering – if it conclusively terminates official purchases of government debt – will impact an already frothy stock market. Which is why ‘value’ equity investing, for us, is now the only game in town.
THE MEANING OF VALUE
When we use the phrase ‘value investing’, we are essentially referring to the style of investing first described in detail by the veteran investor Benjamin Graham, mentor to Warren Buffett, in his classic book on the subject, ‘The Intelligent Investor’, first published in 1949. If you don’t already have a copy, buy one. It will transform your outlook on equity investing. And don’t worry about its apparent age – its message is timeless. Human nature doesn’t change, and neither do successful investment principles.
Graham warned that:
“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes – in fact very frequently – they make mistakes by buying good stocks in the upper reaches of bull markets.”
There you have it. There is no crime in “buying good stocks at fair prices”. The risk is in buying garbage (one might cite any number of candidates in the social media space here), or in simply overpaying (“buying good stocks in the upper reaches of bull markets”). And the risk of overpaying today is high. We know that bonds are expensive. But stocks are hardly cheap.
The beauty of a classic ‘value’ approach to stocks is that it forces us not to overpay. Following Ben Graham’s advice, we are not interested in buying junk. And we’re not interested in paying over the odds. But a quality business at a fair or very fair price – that’s a different proposition entirely.
But how to find them ? In the modern media world there is overmuch noise and not enough signal. Somebody wise noted recently that whereas, say, 20 years ago, investors needed a big funnel to help them assess market information and commentary, now those same investors need a big filter, in order to sort the wheat from the chaff. Thanks to the digital economy we are now drowning in information. But that is not, of course, the same thing as drowning in knowledge. To spot the difference, try watching any television news or simply opening a newspaper.
Up until now, we have had a number of go-to pieces that we continually use to highlight the extent to which the journalism – and, of course, financial journalism – served up by the mainstream media has become simply unfit for purpose. Unless the deliberate purpose was to make its consumers markedly more stupid, opinionated and ill-informed. The first is from the American journalist and author Michael Lewis, indisputably one of the finest writers in English today. The piece, shockingly, is over 30 years old. It is titled ‘J-School Confidential; Columbia – the inside story’, and you can read it in full here. Some selected highlights:
“As you walk through the front door of the Columbia School of Journalism, the first thing you see is this paragraph, cast on a bronze plaque:
“OUR REPUBLIC AND ITS PRESS WILL RISE OR FALL TOGETHER. AN ABLE, DISINTERESTED, PUBLIC-SPIRITED PRESS, WITH TRAINED INTELLIGENCE TO KNOW THE RIGHT AND COURAGE TO DO IT CAN PRESERVE THAT PUBLIC VIRTUE WITHOUT WHICH POPULAR GOVERNMENT IS A SHAM AND A MOCKERY. A CYNICAL, MERCENARY, DEMAGOGIC PRESS WILL PRODUCE IN TIME A PEOPLE AS BASE AS ITSELF. THE POWER TO MOULD THE FUTURE OF THE REPUBLIC WILL BE IN THE HANDS OF THE JOURNALISTS OF FUTURE GENERATIONS.
“These four sentences are about as close to the intellectual origins of the American journalism school as you can get. They are taken from an article by Joseph Pulitzer in the May 1904 issue of the North American Review, the only serious defence he offered of his plan to fund the first journalism school at Columbia..
“And, by way of conclusion,
“Journalism schools are not alone in their attempts to dignify a trade by tacking onto it the idea of professionalism and laying over it a body of dubious theory. After all, McDonald’s Hamburger U. now trains Beverage Technicians. But the journalist’s role is precisely to cut through this sort of obfuscation, not to create more of it. The best journalists are almost the antithesis of professionals. The horror of disrepute, the preternatural respect for authority and the fear of controversy that so benefit the professional are absolute handicaps for a journalist. I doff my cap to those who have survived the experience of journalism school and still write good journalism. They deserve every Distinguished Alumni Award they receive, and more.
“The first sentence on the bronze plaque that you see when you walk through the front door of the Columbia Journalism School may or may not be true, but it sets a fittingly autocratic, unreflective tone. The second sentence is ungrammatical. The last two sentences offer the sort of grandiose vision of journalism entertained mainly by retired journalists or those assigned to deliver speeches before handing out journalism awards. Highly flattering to all of us, of course, but it would be more true to flip the statement to read: “a cynical, mercenary, demagogic people will produce in time a press as base as itself …” There’s also a small problem: when the journalism school cemented the bronze plaque on the wall in 1962, to commemorate its fiftieth anniversary, it misquoted the text as it appeared in its final, pamphlet form. Those nits! The details! Flaubert! A word of Joseph Pulitzer’s is missing, between demagogic and press. The word is CORRUPT.”
The second is Rolf Dobelli’s essay, Avoid News. An adapted version is available here. Again, some brief snippets to whet the reader’s appetite:
“..At core, human beings are cavemen in suits and dresses. Our brains are optimized for our original hunter-gatherer environment where we lived in small bands of 25 to 100 individuals with limited sources of food and information. Our brains (and our bodies) now live in a world that is the opposite of what we are designed to handle. This leads to great risk and to inappropriate, outright dangerous behaviour.
“In the past few decades, the fortunate among us have recognized the hazards of living with an overabundance of food (obesity, diabetes) and have started to shift our diets. But most of us do not yet understand that news is to the mind what sugar is to the body. News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. Unlike reading books and long, deep magazine articles (which requires thinking), we can swallow limitless quantities of newsflashes, like bright-coloured candies for the mind.
“Today, we have reached the same point in relation to information overload that we faced 20 years ago in regard to food intake. We are beginning to recognize how toxic news can be and we are learning to take the first steps toward an information diet.
“This is my attempt to clarify the toxic dangers of news –and to recommend some ways to deal with it. I have now gone without news for a year, so I can see, feel and report the effects of this freedom first hand: less disruption, more time, less anxiety, deeper thinking, more insights. It’s not easy, but it’s worth it..”
We’ve now stumbled upon another fine essay to bolster the citadel of the mind against the various onslaughts of the MSM. It is the work of Rob Wijnberg, founder of the Dutch online subscription journal ‘De Correspondent’, and its title is The Problem with Real News. Again, some tasty morsels follow:
“News is all about sensational, exceptional, negative, and current events.
“And those five words capture precisely the problem with news.
“The news is: one crazy unrelated event after another
“To start off with the sensational: news is generally that which is shocking, scandalous, or appalling enough to evoke comment. It often revolves around what’s most visible — one might even say explosive. That is why terrorist attacks are often news, says Guardian journalist Joris Luyendijk, but occupations of foreign lands are not. Attacks are shocking, highly visible events, occupation much less so. Put another way: it’s easy to capture a bus exploding, yet very hard to film the suppression of everyday freedoms.
“Extending this idea, the news also mostly revolves around the highly exceptional..
“Not only does this skew our view of other human beings, news also makes us blind to the influential that is not exceptional at all. That’s why we often don’t hear about major developments until something highly improbable happens (events the Lebanese-American philosopher Nassim Taleb dubbed “black swans”).
“The 2008 financial crisis, for example, didn’t become huge news until the Lehman Brothers investment bank filed for bankruptcy — a highly unusual event. But the lead up to this event — banks that kept piling risk on top of risk, little by little, day by day — never made it to the front page because of the fundamental mismatch between what was happening (gradual risk increase) and the way news commonly signals what is happening (event-driven sensationalism).
“The news is also, almost without exception, negative. “If it bleeds, it leads” is a journalism catchphrase. In other words: good news is no news. People who keep up with the news are thus quick to think the world is getting ever more dangerous — though in fact the opposite is true. What’s more, the news constantly gives us the feeling that people can’t be trusted: they commit fraud, they’re corrupt, they steal from one another, they blow themselves up. The reality is that the overwhelming majority of people are good and want to do right by others. But that’s not news, is it?
“The news is also obsessed by what’s recent. Almost everything that’s news must be something that has just now taken place. But the most recent thing isn’t by definition the most influential one. Everything in the world has a history. And that history determines in large part why something happens. Because the news usually keeps its eye trained on today, it blinds us to the longer term, both past and future. Informing us about power structures that have grown over time, like the historical roots of racism, or alerting us to gradual societal changes, like the financialization of our economy, is simply not natural to the forms and rhythms of daily news.
“And the reason for that, lastly, is that the news revolves mainly around events. News has to have a hook, to use journalism jargon: a reason to report it now instead of later. That sounds logical, but it means that trends rarely make the evening news. For trends aren’t instances; they progress over time. That’s why the nightly news always ends with the weather, but never with the climate. You can’t say: “Today the climate changed”, even though it actually did..”
This correspondent is endeavouring to emulate the example of Jason Zweig, personal finance correspondent for The Wall Street Journal and, coincidentally, editor of the revised edition of Benjamin Graham’s magnum opus, The Intelligent Investor. Zweig himself is something of an outlier within the profession. He was once asked at a journalism conference how he defined his job. His response: “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Zweig sees his role as betting on regression to the mean while most investors, and financial journalists, are betting against it. Zweig tries to discourage his readers from chasing the latest hot trend and to think instead about investing in what is unpopular. “Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
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…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
“As far as I’m concerned, it’s a damned shame that a field as potentially dynamic and vital as journalism should be overrun with dullards, bums, and hacks, hag-ridden with myopia, apathy, and complacence, and generally stuck in a bog of stagnant mediocrity.”
Get your Free
financial review
Designed by the Frenchman Frederic-Auguste Bartholdi and weighing over 200 metric tonnes, the Statue of Liberty measures 93 metres from her base to the tip of her torch. She has a 35-foot waistline, and if you could find enough leather to make it, she takes a size 879 shoe. 300 different types of hammer were used to make her external copper structure; Lady Liberty’s infrastructure is made of iron.
Dedicated on October 28, 1886, the Statue of Liberty (or strictly, ‘Liberty Enlightening the World’) was a gift from France to the United States, which came to be irrevocably associated with immigration during the second half of the nineteenth century. For over 9 million immigrants to the United States, she was often the very first thing they saw as they approached New York by boat.
At least two people have committed suicide by jumping off the statue. When she was first erected in 1886 she was the tallest iron structure ever built. And on April 8, 1983, the magician David Copperfield, in front of an invited audience including Morgan Fairchild, and a TV audience of millions, made her disappear.
Just how do you make a well-lit, iconic, 93 metre-tall statue vanish into thin air? [Spoiler alert.] It seems that the following accounts for the act. Copperfield had erected two towers on his stage, supporting an arch to hold the huge curtain that temporarily fell, briefly obscuring the audience’s view of the statue while he conducted his trick.
The TV cameras and the live audience could only see Lady Liberty through this arch. When the curtain was dropped, Copperfield started a prepared speech, to music, while the stage was slowly and indiscernibly rotated. When the curtain was finally lifted, the statue was obscured by one of Copperfield’s giant towers, and the audience was looking out into a blank nightscape. A helicopter with an arc light helped with the illusion.
The secret to all ‘magic’ is misdirection. Admittedly, diverting people’s attention during a card trick is a lot easier than when they’re in front of a gigantic statue, but it comes down to misdirection all the same, just on a much bigger scale. Don’t look over here, look over there.
Ever since the first tremors of the global financial crisis back in 2007, we’ve been nursing a fear that we are all in danger of falling victim to a similar kind of misdirection.
What the media report on a daily basis: coverage of the latest Wall Street research; brokerage firm updates on the latest glamour stocks; an unending circus of analysts, economic commentators and financial promoters of one type or another; breathless anticipation of the latest Fed monetary policy decision… It’s all misdirection.
THE FOUR MYTHS OF MODERN FINANCE
Open a financial newspaper or visit any financial website and what will you see? Chances are, it will be melodramatic features on the fast-evolving strategies of ‘exciting’ companies and their ‘glamorous’ management; breathless reports of the latest product launches; giddy coverage of the next, hotly anticipated IPO… An endless stream of financial promotions and hucksterism, with the stock market as the Circus Maximus and gravitational hub to all financial things.
To add gravitas, you’ll also find feverish analysis of current economic trends and worrisome reports hinting archly at the prospects for a slowing economy. There will be four key subtexts:
All of which, of course, is complete nonsense – but these subtexts constitute the prism through which almost all financial journalists and investment commentators view the world.
Perpetual growth is taken utterly for granted, as if the business cycle were some quaint memory from a bygone age. The impossibility or even desirability of perpetual growth and consumption in a finite world is never questioned. And the idea that interest rates – the most important price in the entire market, the price of money itself – should be left to the tender mercies of central bankers is never disputed for a moment.
The growth and consumption canard was refuted powerfully by the late Albert Allen Bartlett, emeritus Professor of Physics at the University of Colorado at Boulder. During his lifetime Dr. Bartlett gave literally thousands of presentations on the seemingly dull topic of ‘Arithmetic, Population and Energy’. Over five million people have watched his presentation on YouTube, which you can see here.
But the essence of Bartlett’s argument is extremely simple.
First, mankind’s biggest weakness is our inability to understand the power of the exponential function – the extraordinary future growth inherent in anything growing at a fixed rate over time. Einstein made exactly the same point when he described compound interest as the eighth wonder of the world.
Second, Bartlett asked the question:
“Can you think of any problem in any area of human endeavour on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?”
To put it in an even broader context than population alone, Bartlett made another observation; that for any entity, beyond a certain level, further growth equates to either obesity, or cancer.
This latter observation gets to the heart of the financial crisis. The financial system itself has metastasised. Freed from any last vestige of restraint by President Nixon’s suspension of US dollar convertibility into gold in 1971, the growth of credit has become uncontrollable.
This accounts for the investment world and media’s focus on constant economic growth: only constant economic growth can allow the US government to even attempt to service otherwise utterly unpayable debts (the $34 trillion US national debt is merely the tip of the iceberg above the waterline – once you factor in the off-balance sheet debts, unfunded liabilities like Social Security and Medicare, the real total rises to well over one hundred trillion dollars).
The collapse of Lehman Brothers in 2008 was the moment at which we saw that the Emperor wore no clothes. Which, in due course, is why central banks throughout the indebted West have been so accommodating to their client national treasuries: interest rates have been forced to all-time lows to try and ensure that deflation does not bring down the entire government debt edifice. (In a true deflation, the real cost of servicing government debt rises.)
But actions have consequences. In their increasingly desperate attempts to keep the government bond bandwagon on the road, central banks have impoverished savers and all those on fixed incomes, like pensioners.
With bond yields at all-time lows, despite the grotesque surge in the supply of the stuff, desperate investors have, in turn, stampeded into the one asset class where they feel they can earn a decent real return: stocks.
Investment bank dealing rooms once resonated with one specific piece of advice: don’t fight the Fed. No investor, whatever his size, has a chance against the firepower and the unlimited ability to print money possessed by the US Federal Reserve. When the Fed is easing monetary policy, don’t resist the trend.
But now the market environment is that much more perilous. Just as the “Greenspan put” was developed as a theory to account for boundless optimism when it came to stock market investing (the Fed has your back, in other words, and will act swiftly to support the market, come what may), so the “Bernanke put” and now the “Powell put” have persuaded a whole new generation of investors that the stock market only ever rises. In a Battle Royale between the capital markets and the State, does the State always win? We are about to find out.
Rather than throw up our hands in disgust at the financial repression being conducted throughout the ‘developed’ economies of the West, as investors it makes sense to try and make the best of our situation.
Bond markets are clearly a bug in search of a windshield. Traditional asset allocation holds that investment grade bonds represent the risk-free rate of return. But traditional asset allocation has been turned on its head by over a decade of emergency monetary stimulus.
In short, the cynical answer as to why bond yields reached their lowest level in history even as the US national debt reached its highest level in history, would be: because the central bank rigged the market. So-called quantitative easing (QE) involves the Fed creating money out of thin air and using it to buy Treasury bonds and other debt securities.
The theory – based on the flimsiest logic – has it that the banks holding US Treasuries that are bought by the Fed will be increasingly willing to lend out their sudden cash windfalls; and that investors suddenly enriched by this money creation and its attendant spur to asset prices will go on a spending spree that will ignite the economy.
Economic data would tend to suggest otherwise. But it is undeniable that QE has been a huge boon to financial asset prices, notably stocks. So what happens to asset prices, notably stocks, when the Fed’s stimulus turns to repression ?
Our suspicion is that the Fed has now entirely lost control of the bond market. And since the size of the bond market completely dwarfs the value of listed stocks, this is a market you don’t want to lose control of.
In any event, there is one thing close to an iron law in financial markets: if interest rates rise, bond prices fall. This is entirely logical, since conventional bonds carry a fixed coupon or interest rate. If official interest rates, such as the Fed Funds Rate, go up, they make the fixed coupons on bonds comparatively less attractive, so bond prices fall to compensate the investor.
So by a process of elimination, we end up scouring the equity market for opportunities instead. But equity prices have also been distorted by QE, and it is anybody’s guess how Fed tapering – if it conclusively terminates official purchases of government debt – will impact an already frothy stock market. Which is why ‘value’ equity investing, for us, is now the only game in town.
THE MEANING OF VALUE
When we use the phrase ‘value investing’, we are essentially referring to the style of investing first described in detail by the veteran investor Benjamin Graham, mentor to Warren Buffett, in his classic book on the subject, ‘The Intelligent Investor’, first published in 1949. If you don’t already have a copy, buy one. It will transform your outlook on equity investing. And don’t worry about its apparent age – its message is timeless. Human nature doesn’t change, and neither do successful investment principles.
Graham warned that:
“Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes – in fact very frequently – they make mistakes by buying good stocks in the upper reaches of bull markets.”
There you have it. There is no crime in “buying good stocks at fair prices”. The risk is in buying garbage (one might cite any number of candidates in the social media space here), or in simply overpaying (“buying good stocks in the upper reaches of bull markets”). And the risk of overpaying today is high. We know that bonds are expensive. But stocks are hardly cheap.
The beauty of a classic ‘value’ approach to stocks is that it forces us not to overpay. Following Ben Graham’s advice, we are not interested in buying junk. And we’re not interested in paying over the odds. But a quality business at a fair or very fair price – that’s a different proposition entirely.
But how to find them ? In the modern media world there is overmuch noise and not enough signal. Somebody wise noted recently that whereas, say, 20 years ago, investors needed a big funnel to help them assess market information and commentary, now those same investors need a big filter, in order to sort the wheat from the chaff. Thanks to the digital economy we are now drowning in information. But that is not, of course, the same thing as drowning in knowledge. To spot the difference, try watching any television news or simply opening a newspaper.
Up until now, we have had a number of go-to pieces that we continually use to highlight the extent to which the journalism – and, of course, financial journalism – served up by the mainstream media has become simply unfit for purpose. Unless the deliberate purpose was to make its consumers markedly more stupid, opinionated and ill-informed. The first is from the American journalist and author Michael Lewis, indisputably one of the finest writers in English today. The piece, shockingly, is over 30 years old. It is titled ‘J-School Confidential; Columbia – the inside story’, and you can read it in full here. Some selected highlights:
“As you walk through the front door of the Columbia School of Journalism, the first thing you see is this paragraph, cast on a bronze plaque:
“OUR REPUBLIC AND ITS PRESS WILL RISE OR FALL TOGETHER. AN ABLE, DISINTERESTED, PUBLIC-SPIRITED PRESS, WITH TRAINED INTELLIGENCE TO KNOW THE RIGHT AND COURAGE TO DO IT CAN PRESERVE THAT PUBLIC VIRTUE WITHOUT WHICH POPULAR GOVERNMENT IS A SHAM AND A MOCKERY. A CYNICAL, MERCENARY, DEMAGOGIC PRESS WILL PRODUCE IN TIME A PEOPLE AS BASE AS ITSELF. THE POWER TO MOULD THE FUTURE OF THE REPUBLIC WILL BE IN THE HANDS OF THE JOURNALISTS OF FUTURE GENERATIONS.
“These four sentences are about as close to the intellectual origins of the American journalism school as you can get. They are taken from an article by Joseph Pulitzer in the May 1904 issue of the North American Review, the only serious defence he offered of his plan to fund the first journalism school at Columbia..
“And, by way of conclusion,
“Journalism schools are not alone in their attempts to dignify a trade by tacking onto it the idea of professionalism and laying over it a body of dubious theory. After all, McDonald’s Hamburger U. now trains Beverage Technicians. But the journalist’s role is precisely to cut through this sort of obfuscation, not to create more of it. The best journalists are almost the antithesis of professionals. The horror of disrepute, the preternatural respect for authority and the fear of controversy that so benefit the professional are absolute handicaps for a journalist. I doff my cap to those who have survived the experience of journalism school and still write good journalism. They deserve every Distinguished Alumni Award they receive, and more.
“The first sentence on the bronze plaque that you see when you walk through the front door of the Columbia Journalism School may or may not be true, but it sets a fittingly autocratic, unreflective tone. The second sentence is ungrammatical. The last two sentences offer the sort of grandiose vision of journalism entertained mainly by retired journalists or those assigned to deliver speeches before handing out journalism awards. Highly flattering to all of us, of course, but it would be more true to flip the statement to read: “a cynical, mercenary, demagogic people will produce in time a press as base as itself …” There’s also a small problem: when the journalism school cemented the bronze plaque on the wall in 1962, to commemorate its fiftieth anniversary, it misquoted the text as it appeared in its final, pamphlet form. Those nits! The details! Flaubert! A word of Joseph Pulitzer’s is missing, between demagogic and press. The word is CORRUPT.”
The second is Rolf Dobelli’s essay, Avoid News. An adapted version is available here. Again, some brief snippets to whet the reader’s appetite:
“..At core, human beings are cavemen in suits and dresses. Our brains are optimized for our original hunter-gatherer environment where we lived in small bands of 25 to 100 individuals with limited sources of food and information. Our brains (and our bodies) now live in a world that is the opposite of what we are designed to handle. This leads to great risk and to inappropriate, outright dangerous behaviour.
“In the past few decades, the fortunate among us have recognized the hazards of living with an overabundance of food (obesity, diabetes) and have started to shift our diets. But most of us do not yet understand that news is to the mind what sugar is to the body. News is easy to digest. The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking. That’s why we experience almost no saturation. Unlike reading books and long, deep magazine articles (which requires thinking), we can swallow limitless quantities of newsflashes, like bright-coloured candies for the mind.
“Today, we have reached the same point in relation to information overload that we faced 20 years ago in regard to food intake. We are beginning to recognize how toxic news can be and we are learning to take the first steps toward an information diet.
“This is my attempt to clarify the toxic dangers of news –and to recommend some ways to deal with it. I have now gone without news for a year, so I can see, feel and report the effects of this freedom first hand: less disruption, more time, less anxiety, deeper thinking, more insights. It’s not easy, but it’s worth it..”
We’ve now stumbled upon another fine essay to bolster the citadel of the mind against the various onslaughts of the MSM. It is the work of Rob Wijnberg, founder of the Dutch online subscription journal ‘De Correspondent’, and its title is The Problem with Real News. Again, some tasty morsels follow:
“News is all about sensational, exceptional, negative, and current events.
“And those five words capture precisely the problem with news.
“The news is: one crazy unrelated event after another
“To start off with the sensational: news is generally that which is shocking, scandalous, or appalling enough to evoke comment. It often revolves around what’s most visible — one might even say explosive. That is why terrorist attacks are often news, says Guardian journalist Joris Luyendijk, but occupations of foreign lands are not. Attacks are shocking, highly visible events, occupation much less so. Put another way: it’s easy to capture a bus exploding, yet very hard to film the suppression of everyday freedoms.
“Extending this idea, the news also mostly revolves around the highly exceptional..
“Not only does this skew our view of other human beings, news also makes us blind to the influential that is not exceptional at all. That’s why we often don’t hear about major developments until something highly improbable happens (events the Lebanese-American philosopher Nassim Taleb dubbed “black swans”).
“The 2008 financial crisis, for example, didn’t become huge news until the Lehman Brothers investment bank filed for bankruptcy — a highly unusual event. But the lead up to this event — banks that kept piling risk on top of risk, little by little, day by day — never made it to the front page because of the fundamental mismatch between what was happening (gradual risk increase) and the way news commonly signals what is happening (event-driven sensationalism).
“The news is also, almost without exception, negative. “If it bleeds, it leads” is a journalism catchphrase. In other words: good news is no news. People who keep up with the news are thus quick to think the world is getting ever more dangerous — though in fact the opposite is true. What’s more, the news constantly gives us the feeling that people can’t be trusted: they commit fraud, they’re corrupt, they steal from one another, they blow themselves up. The reality is that the overwhelming majority of people are good and want to do right by others. But that’s not news, is it?
“The news is also obsessed by what’s recent. Almost everything that’s news must be something that has just now taken place. But the most recent thing isn’t by definition the most influential one. Everything in the world has a history. And that history determines in large part why something happens. Because the news usually keeps its eye trained on today, it blinds us to the longer term, both past and future. Informing us about power structures that have grown over time, like the historical roots of racism, or alerting us to gradual societal changes, like the financialization of our economy, is simply not natural to the forms and rhythms of daily news.
“And the reason for that, lastly, is that the news revolves mainly around events. News has to have a hook, to use journalism jargon: a reason to report it now instead of later. That sounds logical, but it means that trends rarely make the evening news. For trends aren’t instances; they progress over time. That’s why the nightly news always ends with the weather, but never with the climate. You can’t say: “Today the climate changed”, even though it actually did..”
This correspondent is endeavouring to emulate the example of Jason Zweig, personal finance correspondent for The Wall Street Journal and, coincidentally, editor of the revised edition of Benjamin Graham’s magnum opus, The Intelligent Investor. Zweig himself is something of an outlier within the profession. He was once asked at a journalism conference how he defined his job. His response: “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” As Zweig puts it, good advice rarely changes, whereas markets change constantly. “The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Zweig sees his role as betting on regression to the mean while most investors, and financial journalists, are betting against it. Zweig tries to discourage his readers from chasing the latest hot trend and to think instead about investing in what is unpopular. “Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”
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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.
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