Oh, the world. Go read Jeremy Grantham’s GMO quarterly letter; as always it’s pretty fun. Then go read this HSBC report that Paul Murphy wrote about on Alphaville. These are things you probably know already but are worth remembering. First, Grantham:
The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in “fair value” for the stock market. This difference is massive – two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend. The market’s actual price – brought to us by the workings of wild and wooly individuals – is within plus or minus 19% two-thirds of the time. Thus, the market moves 19 times more than is justified by the underlying engines!
You probably knew that, though the numbers were new to me.* This though seemed like a useful breakdown: Read more »
It’s Becoming Increasingly Obvious That You’re Going To Need To Get (More) Comfortable Slaughtering ChickensBy Matt Levine
A few weeks ago Jeremy Grantham, in Part 1 of his quarterly letter, told you everything you need to know about current markets. Specifically (1) get rid of stocks, bonds, and just capitalism generally while we’re at it, (2) get yourself a farm, and (3) keep a pretty close eye on soil erosion. Good news: some of you have clearly been listening. For example Perry Vieth, a former quant money manager who now buys farmland at Ceres Partners LLC. And as Bloomberg reports, he is not going to let a dystopian future of soil erosion rain on his 16% returns:
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