Book Review - Kings of Capital

From GMO 4Q14 letter

http://www.gmo.com/websitecontent/GMO_Quarterly_Letter_4Q14.pdf

Why GDP isn't the best predictor of EPS growth:
"The biggest reason for this non-intuitive result is that the relationship between GDP growth and earnings per share (EPS) growth that most people assume must be there does not exist in the long run. The two developed countries with the strongest EPS growth between 1980 and 2010 were Sweden and Switzerland, which each had lower than average GDP growth. Canada and Australia, which saw the strongest GDP growth, showed very little aggregate EPS growth. Why? A big reason is dilution. Canada and Australia saw strong growth from their commodity producing sectors, but that growth came from massive investment, which was funded by diluting shareholders. Switzerland and Sweden did not invest as much and did not dilute their shareholders, leaving shareholders better off despite lower economic growth."

It's the GDP growth surprise which has stock market impact:
"If you can find cheap countries that are going to have a big positive GDP surprise over the next three years, you’ll outperform by a whopping 14.1% per year for the next three years, whereas if you are unlucky enough to buy the cheap countries that will have the worst GDP surprise, the outperformance is only 0.7%. Our strongest takeaway at GMO is that even the cheap countries with the worst GDP surprise still outperform, and even the expensive countries with the best GDP surprise still lose. The macroeconomic performance matters, but given how hard it is to predict who is going to do better than expected and the fact that it doesn’t change the sign for either the cheap or expensive countries, we’re sticking with value."

Seeking knowledge and wealth creation

I was brought up to believe that more knowledge will lead to better understanding of how the world works, which in turn would result in more wealth. Furthermore, I was led to believe that more 'difficult' knowledge, such as maths stats etc is a better form of knowledge, more empowering and hence more likely to lead to more income.

In retrospect, at least in the investment management field, unless you're in the HFT or quant fund field, more analytical knowledge is a distraction and hinders wealth accumulation. A consequence of acquiring a certain skill is that one thereafter engages in activities which utilize that skill, it's hard to just discard what one has expended effort on learning. 

Most of the time, the analytical toolbox doesn't help that much. It won't help you pick the technologies that are transformative, find the new retail offering that has connected with buyers, shed light on management error when embarking on stupid projects. It won't highlight policy possibilities, and how policy decisions will be made.

In the end, for all the numbers and data flitting across our screens, this isn't data mining of natural phenomena, such as lumens of stars etc. It's just humans, ruled by greed and fear. Sometimes mustering the courage to buy something, other times scared that they must sell. If you are honest to what drives the data flow and you respect the underlying forces, you will prosper.

On the SNB move yesterday

Brief Comment:
Always remember, investment management is the game of equilibrium and disequilibrium.
If an FX rate is destined to go somewhere, it will eventually get there, despite any policy wishes.
Policymaker wherewithal also has limits.


Links:

http://acrossthecurve.com/?p=19281
http://www.businessweek.com/articles/2015-01-15/heres-what-the-swiss-central-bank-just-did-and-why-its-such-a-shocker
http://www.bloomberg.com/news/2015-01-15/mayhem-erupts-on-trading-floors-after-snb-s-currency-shocker-.html
http://www.bloomberg.com/news/2015-01-15/franc-s-surge-ranks-among-largest-ever-in-foreign-exchange.html
http://www.bloomberg.com/news/2015-01-15/mild-mannered-jordan-hands-markets-seismic-surprise-in-cap-exit.html

WSJ

http://blogs.wsj.com/economics/2015/01/16/grand-central-swiss-franc-fallout-exposes-crack-in-post-crisis-regulatory-reforms/
http://www.wsj.com/articles/switzerland-scraps-currency-cap-1421320531
http://blogs.wsj.com/moneybeat/2015/01/15/on-switzerland-the-floor-and-losing-faith-in-central-banks/
http://www.wsj.com/articles/snb-shocks-bankers-and-markets-1421342951
http://blogs.wsj.com/economics/2015/01/15/10-takeaways-from-lagardes-swipe-at-the-swiss-national-bank/
http://blogs.wsj.com/moneybeat/2015/01/15/swiss-move-shows-central-bank-cant-operate-in-isolation/
http://www.wsj.com/articles/swiss-shock-tarnishes-central-banks-heard-on-the-street-1421341862
http://www.wsj.com/articles/swiss-franc-move-cripples-currency-brokers-1421371654
http://blogs.wsj.com/moneybeat/2015/01/16/a-franc-question-what-was-the-snb-thinking/
http://www.wsj.com/articles/after-defending-cap-central-bank-chief-scraps-it-1421380750
http://blogs.wsj.com/moneybeat/2015/01/16/why-swiss-bank-mortgage-pain-could-still-hurt-eastern-neighbors/

The 1986 Oil Glut

Just putting some links here (to be continuously updated) on the 1986 oil glut:

Bloomberg: Oil Collapse of 1986 Shows Rebound Could Be Years Away

Brookings - Lessons from the 1986 Oil Price Collapse

http://en.wikipedia.org/wiki/1986_world_oil_market_chronology

http://en.wikipedia.org/wiki/1980s_oil_glut

http://blogs.platts.com/2015/02/06/lesson-from-oil-history/

non-1986 Oil stories
http://blogs.platts.com/2015/02/10/oil-prices-push-towards-60/
http://blogs.platts.com/2015/02/10/opec-strategy-iea/
http://blogs.platts.com/2015/02/05/oil-big-five-feb15/

November reads and trades

Damodaran on why Twitter is worth half of current price

Whatsapp/FB merger agreement:

Buy Nikkei Div futures (rather than Nikkei futures)

Hedge Funders see Argentina boom inevitable post-Elliot issue, YPF seen best way to play rebound:

Go long shipping stocks:

Short UK Grocers (Tesco, Sainsbury):

Apollo - Short select US credit:
“All the danger signs are there of a future crisis." The vehicle, run by John Zito, will focus on so-called event-driven shorts, such as leveraged-buyout candidates and companies with regulatory risks, as well as companies with flawed business models or those facing competitive pressures. It will also ferret out corporations that would suffer from a slowdown in global growth, such as mining companies or those with exposure to emerging markets or China, according to the presentation.
It cites target returns of more than 50% if a 2008-type financial crisis occurs, and gains of about 1% to 3% in a more benign economic environment.
The document for the fund, which was started nine months ago with Apollo’s capital, cited Genworth Financial Inc , Getty Images Inc. and high-yield ETFs among potential money-makers. Genworth could be susceptible to real-estate risk in Australia and Getty faces “substantial competitive pressure,”.

Glenview long long term Monsanto:
"In a utopian world we would all be able to shop with hedge-fund managers and Hollywood stars and pay whatever we wanted at Whole Foods. In the real world, we do need to increase the food supply and GMOs unlock the key to that,” he said, referring to genetically modified organisms."
Also still long Humana to play ageing demographic trend

SBG latest comments on MTN

• MTN: we d/grade to HOLD (R270) on valuation: We make slight upgrades to earnings (FY15 +1.4%, FY16 +2.5%) and price target (R270 from R246) on tweak to Iranian revs, and higher cash balances from Nigerian towers sale - but total 1yr return +10% not enough to continue to justify a BUY (needs >20%). MTN 1yr fwd EV/EBITDA 7.9x compares with historical average 6.1x, PE 17.7x  vs long-term average 15.8x