"Macro" Musings

[yadayada]

what are the different ways to short them? Is it possible to buy longer term puts somewhere? It would be a nice hedge.

[obtuse_investor]

I don't know if shorting JGBs at this point is a good bet or not... I just want to quote Nietzsche because it came to my mind when I read that post.

 

"For every man there exists a bait which he cannot resist swallowing" --  Nietzsche

[yadayada]

I wish someone like Kyle bass would make a fund of those contracts he bought. That would be really neat. Doesnt seem like it would take much of his time, and he could earn nice fees?

[physdude]

There is an inverse JGB ETF JGBS but it seems extremely illiquid. There have to be JGB futures trading somewhere but I have to figure out how to find them on IB.

[Liberty]

http://brooklyninvestor.blogspot.ca/2015/01/the-perils-of-market-timing-iii.html

 

http://brooklyninvestor.blogspot.ca/2015/01/overvalued-market.html

[Liberty]

Another one: http://brooklyninvestor.blogspot.ca/2015/01/what-to-do-in-this-market-gotham-funds.html

[giofranchi]

Another one: http://brooklyninvestor.blogspot.ca/2015/01/what-to-do-in-this-market-gotham-funds.html

 

http://brooklyninvestor.blogspot.ca/2015/01/the-perils-of-market-timing-iii.html

 

http://brooklyninvestor.blogspot.ca/2015/01/overvalued-market.html

 

Why should you devote so much time to something you believe to be basically useless? ???

 

Gio

 

[giofranchi]

10yr US Treasuries Yield down to 1.80%: it looks like FFH's bonds portfolio is making a lot of money in 2015! :)

 

Cheers,

 

Gio

[Liberty]

Another one: http://brooklyninvestor.blogspot.ca/2015/01/what-to-do-in-this-market-gotham-funds.html

 

http://brooklyninvestor.blogspot.ca/2015/01/the-perils-of-market-timing-iii.html

 

http://brooklyninvestor.blogspot.ca/2015/01/overvalued-market.html

 

Why should you devote so much time to something you believe to be basically useless? ???

 

Gio

 

Useless doesn't mean uninteresting. But what's truly useless is what you see on CNBC or Bloomberg. This guy doesn't make forecasts or pretend to understand all the variables that affect the macro. He's thinking about it on a more meta level, explaining what he thinks can work and what doesn't and why, and sharing his mental models. His posts are also usually 3/4 digression about other things than the supposed main topic, and that's the best part (they're rarely really about actual macro anyway, more about investing strategies). Very different from what you're implying it is, and not useless, at least not to me.

[giofranchi]

Very different from what you're implying it is, and not useless, at least not to me.

 

Maybe… nonetheless I much preferred to read his stuff when he concentrated on analyzing owner-managers! ;)

 

Cheers,

 

Gio

 

[Liberty]

Very different from what you're implying it is, and not useless, at least not to me.

 

Maybe… nonetheless I much preferred to read his stuff when he concentrated on analyzing owner-managers! ;)

 

Cheers,

 

Gio

 

Me too.

[giofranchi]

Me too.

 

Liberty,

I know we think differently about cash, but imo it remains an hedge against uncertainty… We never know what might truly happen to our businesses… let alone the general market and the overall economy!… To hold some cash imo gives us staying power, even when something completely unexpected occurs… And I believe sooner or later it will!

 

Remember what Klarman writes in “Margin of Safety”: who ends up with more money? He who compounds at 20% for 9 years then loses 15% in year 10, or he who compounds at 16% for 10 years? The second one, of course… despite the fact the first one enjoys a better performance 90% of the time!

 

Therefore, imo the question is not whether to hold or not to hold some cash reserve… Instead, it is: how much cash should I hold? And I am not convinced that to answer that question the level of the general market is something I should not pay at least some attention to… After all we do not invest in a vacuum, and the companies we invest in do not operate in a vacuum!

 

On the contrary, if you believe that holding a cash reserve is only a waste of resources, I don’t see what’s the point in spending so much time thinking about the relevance, or the lack thereof, of the level of the general market.

 

Gio

 

[innerscorecard]

Me too.

 

Liberty,

I know we think differently about cash, but imo it remains an hedge against uncertainty… We never know what might truly happen to our businesses… let alone the general market and the overall economy!… To hold some cash imo gives us staying power, even when something completely unexpected occurs… And I believe sooner or later it will!

 

Remember what Klarman writes in “Margin of Safety”: who ends up with more money? He who compounds at 20% for 9 years then loses 15% in year 10, or he who compounds at 16% for 10 years? The second one, of course… despite the fact the first one enjoys a better performance 90% of the time!

 

Therefore, imo the question is not whether to hold or not to hold some cash reserve… Instead, it is: how much cash should I hold? And I am not convinced that to answer that question the level of the general market is something I should not pay at least some attention to… After all we do not invest in a vacuum, and the companies we invest in do not operate in a vacuum!

 

On the contrary, if you believe that holding a cash reserve is only a waste of resources, I don’t see what’s the point in spending so much time thinking about the relevance, or the lack thereof, of the level of the general market.

 

Gio

 

The problem is that Klarman's example isn't axiomatically true, only true with numbers like those. It could also be true that it is better to be fully invested and then take your lumps. I actually don't know which is true, but I'm just saying that there isn't total certainty that holding cash is the better thing to do.

 

Of course, sleeping at night is priceless, so in that respect it's worth it to just keep some cash if it's a push either way.

[giofranchi]

I actually don't know which is true, but I'm just saying that there isn't total certainty that holding cash is the better thing to do.

 

I was only trying to explain why I hold a cash reserve. I was not saying to hold it is the right thing to do.

 

Cheers,

 

Gio

 

[giofranchi]

The problem is that Klarman's example isn't axiomatically true, only true with numbers like those.

 

Even more plausible imo are the following numbers:

Person A: compounds at 20% for 9 years, -30% in year 10

Person B: compounds at 16% for 9 years, -3% in year 10

Again person B will finish the 10 years period with the most money.

 

By the way… The equity of my firm is already up 4% in 2015! It doesn't seem my cash reserve is dampening results too much! ;)

 

Gio

 

[frommi]

By the way… The equity of my firm is already up 4% in 2015! It doesn't seem my cash reserve is dampening results too much! ;)

 

Easy when the currency has lost 3.7%, i am under the impression that the only thing that counts at the moment is in which currencies you are invested in. Strange times!

[Liberty]

Gio,

 

I don't know where that's coming from all of a sudden. Did you miss our discussion about this, which I thought was over? :)

 

I never said I thought holding cash was a waste just in itself, in the abstract. I said that I don't see the point in holding cash if I see enough good places to invest (ie. holding cash for holding cash's sake).

 

If I don't see enough good places to invest, then I'll hold cash.

 

The examples you give are meaningless because they are handpicked to show what you want to show. I can make up numbers too that would show that holding cash over time is worse than being fully invested, even through downturns (which is actually what the REAL historical numbers show, as per Joel's paper).

 

My thinking is that since it's almost impossible to time the market and there are no metrics that are reliable enough (ie. that don't predict 10 of the past 2 recessions, or that wouldn't keep you out of the market for decades because they see them as overvalued).

 

Even if you do better during period A because you had cash, you might do worse during period B because you had cash, and so you aren't better off on average (but cash fans tend not to look at their opportunity cost -- what if your 30% of cash had been invested in your favorite companies in the past 5 years or whatever?). And since the market tends to go up a lot more than it goes down over time on average (capitalism and demography at work), there are more period Bs than period As... So under the condition that you can find sufficient ideas that meet your criteria, holding cash seems to be, on average, a drag. Remember, good investors/companies made money even in tough markets like the 70s or the 2000s..

 

Caveat is: If you have an operational business or external investors or your investment universe is very limited because of size (like Buffett who can basically just invest in the top of the SP500), then you might have to hold cash because you need liquidity elsewhere or can't find enough good ideas.

 

But I thought we had gone over all this already...

[giofranchi]

Easy when the currency has lost 3.7%, i am under the impression that the only thing that counts at the moment is in which currencies you are invested in. Strange times!

 

Sure! But if you consider the 1% currency movement today, I am up 5%! ;D

Therefore, 3.7% currency move, 1.3% underlying securities.

 

Gio

 

[giofranchi]

Gio,

 

I don't know where that's coming from all of a sudden. Did you miss our discussion about this, which I thought was over? :)

 

Liberty,

It was just to explain a bit better why I don’t like much The Brooklyn Investor’s posts on the price level of the general market, and the reason I don’t understand why he devotes so much time thinking (and writing!) about it.

 

Cheers,

 

Gio

 

[giofranchi]

The examples you give are meaningless because they are handpicked to show what you want to show.

 

Ok... ThenI will warn Klarman that what he has written is meaningless… Though, I think I am already guessing how he might answer: “Lad, the numbers are not all that important… I was just trying to convey an idea through a numerical example!”

 

;)

 

Cheers,

 

Gio

 

[giofranchi]

but cash fans tend not to look at their opportunity cost

 

On the contrary: if you read again “Margin of Safety”, you'll find out that to Klarman the true opportunity cost is suffered by those who don’t have buying power when a great investment opportunity comes around. Because, if the market declines, the value of their whole portfolio will most probably follow suit.

 

Instead, the opportunity cost suffered by those who hold cash is there for everyone to see: 9 years of compounding at 16%, instead of 9 years of compounding at 20% (just a numerical example of course!).

 

Gio

 

[Liberty]

The examples you give are meaningless because they are handpicked to show what you want to show.

 

Ok... ThenI will warn Klarman that what he has written is meaningless… Though, I think I am already guessing how he might answer: “Lad, the numbers are not all that important… I was just trying to convey an idea through a numerical example!”

 

;)

 

Cheers,

 

Gio

 

While you're at it, please ask him to get Margin of Safety reprinted. I have a PDF copy, but I wouldn't mind having a hard copy.

 

You know what I meant. You come out with numbers that show that it's better to compound at 16% and not drop than to compound higher but have a higher drop. Well, sure. And I can make up numbers that show that it's better to have a temporary drop (as long as it's not a permanent loss) yet compound faster over the long term.

 

That's another flaw in your example. You assume that the 30% drop in the last year is the end point and that's that, iit's a permanent loss. If you are in good businesses, it rarely is, and it can be an opportunity for these businesses to deploy capital, buy back shares, etc.

 

How much would the market have to drop for Hussman to make up for the lost opportunity from the past 5 years when he was bearish? If someone holds 30% cash, what's the IRR that he would have to deploy that cash at to make up for, say, 5-10 15 years of holding cash when that cash was in the sidelines beacuse the CAPE was above average valuation or whatever?

 

If you don't see opportunities, by all means hold cash. But realize what opportunity cost it has. If Buffett or Watsa or Munger or Klarman was running single-digit millions, do you think they'd be fully invested or do you think they'd hold cash based on market-timing/macro factors?

[Liberty]

but cash fans tend not to look at their opportunity cost

 

On the contrary: if you read again “Margin of Safety”, you'll find out that to Klarman the true opportunity cost is suffered by those who don’t have buying power when a great investment opportunity comes around. Because, if the market declines, the value of their whole portfolio will most probably follow suit.

 

Instead, the opportunity cost suffered by those who hold cash is there for everyone to see: 9 years of compounding at 16%, instead of 9 years of compounding at 20% (just a numerical example of course!).

 

Gio

 

I've read margin of safety.

 

What I'm telling you is that if you see good buying opportunities that meet all your criteria now you probably shouldn't hold cash. There might be better buying opportunities later (there can always be), but I'd rather spend years in good investments that create value, and then maybe have to sell cheap things to buy even cheaper things, or buy on margin, then spend potentially productive years sitting on dust gathering cash while I'm seeing opportunities that meet all my criteria.

 

You can very well say that you're not seeing enough things that meet your criteria, and that's fine, but what's the point of having these criteria if you don't buy when you see things that meet them? You can be a market crash fetishist if you want, but that's market timing and that's not how I want to operate because I don't think I can do it. If it works for you, fine.

[giofranchi]

And since the market tends to go up a lot more than it goes down over time on average (capitalism and demography at work), there are more period Bs than period As...

 

But when I think about my cash reserve, I am happy about the optionality it gives me in regards to what the price of my investments will do, more than the price level of the general market.

 

A concentrated portfolio like mine tends to be much more volatile than the general market, and opportunities to use my cash reserve intelligently come quite often! I surely don’t have to wait for the market to crash to make use of my cash reserve. I always have some cash reserve, but the amount of cash I hold can vary quite significantly, quite often, and quite suddenly!

 

Gio

 

[Liberty]

Anyway, this is redundant, we've already said all this before. Let's drop it.