Friday, 31 January 2020

Facebook - the bear case

Facebook is currently a stock beloved by both growth and value investors alike. It is an esteemed member of the FANG club - an aristocrat of the modern digital era. Everyone seems to own it. I don't like it. I think the stock is much riskier than most investors appreciate - particularly at this point in the cycle. (I am a day late in publishing this article, as the stock is down 6% to US$210 post its 4Q19 results - albeit this is small fry compared to the aggregate potential downside; I tweeted the WSJ Casper article referenced below over the weekend, and in related comments referenced the risks to Facebook, and began writing this post on Sunday. Unfortunately I was too slow to complete it).

Thursday, 30 January 2020

Learning the wrong lessons; style drift; and why smart value investors underperform

There are many things that separate the great value investors from the poor to mediocre, but aside from simply being better or worse at valuing companies (table stakes for a good value investor), one of the most important is that the former tend to reason from first principles - i.e. from things that are true by definition in the long term - and implement a disciplined and consistent process informed by those principles; whereas poor to mediocre value investors attempt to draw far too many 'lessons' about how to invest from recent market experience/outcomes. Quite often, the belated incorporation of these 'lessons' into investment decisions results in untimely 'style drift', with a shift towards strategies/sectors/stocks that have worked well in the recent past, rather than those that are most likely to work in the future. This untimely vacillation all but ensures long term underperformance.

Friday, 24 January 2020

Extrapolation; Technology One & SaaS; Affiliated Managers Group; margins of safety; and growth bubbles

Of the many causes of market inefficiency and investor misjudgement, there is perhaps no more important contributor than investors' tendency towards excessive extrapolation. This is borne - I believe - of investors' general overconfidence in their ability to predict the future (a theme I have discussed in many past blog entries).

Sunday, 12 January 2020

Demystifying post-GFC economics; the problem with scarcity; interest rates; long political cycles; and the end of history

The post-GFC era has given rise to widespread investor confusion, as macroeconomic and market outcomes have deviated from the received economic wisdom about what 'ought' to have happened. Old hands have been particularly wrong footed, as their tried and true mental and financial models about how the world operates, which worked so well during 1980-2007, have failed them. Traditional monetary policy has stopped working, and many economies (e.g. Europe) have remained sluggish and unresponsive to very low, or even negative, interest rates. Low rates were supposed to stimulate investment and consumption, and yet both have remained weak. "Unprecedented" unconventional monetary stimulus (in quotation marks as very similar policies were tried - with similar results - in Japan during the 1990s) in the form of QE has been undertaken, but despite this vigorous 'money printing' which was expected by many to result in inflation, we have had disinflation bordering on deflation, with inflation stubbornly refusing to rise towards central bankers' 2% trend-rate goal.