Posts filed under “Apprenticed Investor”

My motto: ‘Fresh mistakes, every year’

My motto: ‘Fresh mistakes, every year’
Barry Ritholtz
Washington Post February 9 2014



“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”

— Ray Dalio, Bridgewater


Once again, it is the time of year where I look back at the various investing, trading and other mistakes I’ve made. (Last year’s version is here; prior years can be found here).

Why go through this annual review of blunders?

Rather than engage in the sort of selective retention that so many investors tend to do and pretend mistakes never happened, I prefer to “own” them. This allows me to learn from them, and with any luck avoid making the same errors again.

My motto: “Fresh mistakes, every year.”

It also provides a good opportunity for humility — a reminder of how little we actually know, and how much our expectations about the future are often at odds with what actually occurs. Ray Dalio, who runs the world’s largest hedge fund, observes this is how we “live up to our potential” as investors. The alternative is continually lying to oneself — about how smart we can be, how insightful our worldview is and what great investors we are. I am reminded of an old Yiddish expression: “Man plans, and God laughs.”

Last year, I got quite a few things right. But as always, I was regularly — and, on occasion, spectacularly — wrong. That is par for the course.

Here’s how I fared:

1 Emerging markets look cheap. There are a variety of ways to measure how expensive equities are. Yale Professor Robert Shiller’s CAPE valuation method was very popular last year. Shiller, who received the 2013 Nobel Prize in Economic Sciences, looks at 10 years of earnings in order to adjust for the ups and downs of the business cycle. By this metric, U.S. markets were a bit pricey, while Europe was moderately cheap, and emerging markets were even cheaper. Out of 40 major countries, the United States was the fourth-most expensive (36th cheapest) and Greece had the cheapest market. Russia was fourth cheapest, while Brazil was the 10th cheapest.

How did that work out in 2013? Here in the United States, the S&P 500-stock index had a total return of about 32 percent. Meanwhile, “cheap” markets, such as the broad MSCI Emerging Markets Index, fell about 10 percent. And when we look at specific countries, it was even worse, with Russia down 3.5 percent, Brazil lost 15 percent — and Greece was up 27 percent.

The saving grace of this is that emerging markets are less than 10 percent of the benchmark All Country World Index. These markets shaved about 1 percent off of our global equity portfolios.

2 AIG repays its $182 billion bailout.* In 2010, I described the possibility of AIG ever repaying the government for the $182 billion bailout as “highly unlikely.” I also described it as a “shell game” and wondered how the management of the bankrupt insurer would ever be able to sell off enough pieces of the company to repay the government. I have repeatedly said the same in public ever since.

According to the Treasury Department, AIG paid back a total $205 billion — more than the original bailout — thereby making a profit and proving me wrong. Even Pro Publica, which has been tracking all of the bailout disbursements, credits AIG with a $5.03 billion profit.

Why the asterisk? Well, like the steroid era in baseball, this one had to use a little juicing to get there.

As part of the repayment process, AIG asked Treasury for — and got — a special tax dispensation for “net operating losses” worth an estimated $25 billion to the company.

Before your eyes start to glaze over, a brief explanation: Whenever a company suffers a big loss, it normally gets to carry it forward. The big exceptions to this are either bankruptcy or a change in ownership. AIG had both, so it really should not have gotten the tax benefit of its massive ­losses.

Essentially, Treasury said to AIG: “Here’s a $25 billion tax break — please use it to pay us back our money so we can claim to have made money on the deal.” Oh, and normally, that is something that should really be authorized by Congress, not the executive branch.

But let’s be blunt: I never expected AIG to come anywhere close to paying back $182 billion. I was wrong. That it did just goes to show you how good its underlying insurance business was before AIG inadvertently destroyed it via adventures in derivatives.

3 Thinking about ­crashes and corrections.Throughout 2013, there was a steady drumbeat of warnings of an imminent crash. Comparisons were made to 1929 and 1987, with overlaid charts that “proved” we were doomed. The crash warnings were coming mostly from people who had been repeating them for years while missing an enormous rally. None of the technical signs that accompany market tops was present, making these easy to ignore.

On the other hand, the typical year sees about three stock corrections of 5 percent ormore. We had one. Although it didn’t affect how we invested our capital, I feel like I spent an inordinate amount of time thinking about the risk of imminent corrections.

Solution: We should be primarily concerned about things within our control. Markets correct, volatility happens. The key takeaway is to stay focused on what is within your ability to manage — our portfolio allocation, how much we contribute toward retirement, how much debt we accumulate. Time spent on things beyond our control is wasted.

4 Hating Microsoft. I have been a member of the Microsoft-bashing society for quite some time. Last fall, I penned my explanation for what’s behind Microsoft’s fall from dominance. In the past, I have even gone so far as to blame it for causing the dot-com bubble. And I savaged the leadership of Steve Ballmer, who oversaw a rather moribund period at Microsoft.

Perhaps I buried Microsoft prematurely, based on developments of the past week: A new CEO who seems very savvy with great tech credentials; the return of Bill Gates as chief technology adviser; and the push into subscription-based software sales. Microsoft seems to be gaining traction, and even its stock price is looking up.

5 Too much junk, not enough books. 2013 was the first year I read fewer than 10 books in a long while. Maybe it was because I was too busy with work (we launched a new firm) or too distracted with Twitter. Regardless, my usual voracious book consumption suffered. Even worse, I read a lot of meaningless news stories, gossip, blogposts and filler.

The silver lining is it led me to write two columns: “Reduce the noise levels in your investment process,” followed by “Use the news: How to get the most out of financial media.” Now I have to follow my own advice. The solution is simple: Return to reading at least one (and ideally two) books a month.

6 Don’t feed the trolls. Speaking of wasting time, one of the biggest mistakes I made last year was engaging in useless online debate with hacks, twerps and trolls. On Twitter, I wasted time with creationists; online, I debated global warming denialists.

Even worse, I know better. I came up with one of the most anti-troll comment policies even invented.

The solution is to ignore the online knuckle­heads who do not add anything positive to the discussion. On Twitter, reduce the number of people I am following. Block anyone creepy — including haters, people who do not believe in science and anyone whose contributions are negative. And stay out of the comments section!

Those are my errors for 2013. What mistakes did you make last year?

Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

Category: Apprenticed Investor

Your Ideology Is Killing Your Portfolio

“It’s going to blow up the deficit, won’t create any jobs and will cause all sorts of other problems.” A hedge-fund manager was lecturing me about the Jobs and Growth Tax Relief Reconciliation Act of 2003, better known as the Bush tax cuts. I had been suggesting that this fund close its short positions on…Read More

Category: Apprenticed Investor, Investing, Politics, Psychology, Really, really bad calls

Mea Culpas: ‘Fresh mistakes, every year’

>   Its my annual mea culpas column for the Washington Post Business Section column. Here’s an excerpt from the column: “Once again, it is the time of year when I look back at the various investing, trading and other mistakes I’ve made. (Last year’s version is here; prior years can be found here). Why…Read More

Category: Apprenticed Investor, Philosophy

Google’s Nest Labs Acquisition is a Smart Move

Defense! Google’s Nest Labs acquisition is a smart move Barry Ritholtz Washington Post, January 26 2014     With the Super Bowl just a week away, the age-old question of whether offense or defense wins big games is at hand. “The best defense is a good offense,” goes the saying, with the Denver Broncos called…Read More

Category: Apprenticed Investor, M&A

Crashes, Corrections & Sentiment

On Monday, we saw a sell-off of more than 1 percent across major U.S. markets. Europe and Asia followed suit the next day. Judging by my e-mails I received, this was it, the beginning of the end, and “you unrepentant bulls are finally going to get what you deserved.” Except not quite yet. Tuesday and…Read More

Category: Apprenticed Investor, Markets, Trading

Your Best Investment Idea for the Next Decade

Yesterday, Business Insider posted a huge piece, wherein they ask various folks for their best idea for a decade. With the low key headlne, Wall Street’s Brightest Minds Reveal Their Best Investment Ideas For The Next Decade, here is how I responded: Financial planning: “As it turns out, that is an easy question: Our own…Read More

Category: Apprenticed Investor, Asset Allocation, Finance, Media

Pushback: Lessons from Gold’s Rise & Fall

Last week, we published a 2,500-word opus on what lessons could be learned from the rise and fall of gold. There was lots of feedback on the general concept and many of the specifics. By and large, the response was positive, with most of the pushback coming from those who were long gold or other…Read More

Category: Apprenticed Investor, Gold & Precious Metals

Bitten by the Gold Bug? Some Lessons

>   I did something different with my Sunday Washington Post Business Section this week. Starting with the 2,500 word long form discussion I wrote for Bloomberg, I simplified this and edited it down to half that length. The print version had the headline Bitten by the gold bug? You’ll do well to heed the…Read More

Category: Apprenticed Investor, Gold & Precious Metals

10 Lessons Learned from Gold’s Epic Rise & Fall

This morning, I have a massive 2500 word piece at Bloomberg looking at the rise and fall of Gold.

The key to the discussion are the 10 lessons that we all can takeaway from that cycle and the experiences of Gold investors. Hopefully, these will make us each better investors in the future.

Here is the intro:

“It has been quite the ride for gold: from under $500 an ounce a decade ago, to above $1,900 in 2011, gold gained more than 400 percent. Since its peak of ~$1,921.15 on Sept. 6, 2011, however, the shine is off the yellow metal. Gold plummeted 38 percent, recently breaking below $1,200. Yesterday’s close is within 5 percent of the lows, at $1,241.

If a 20 percent drop is described as a bear market, and a 30 percent fall is called a crash — what do we call gold’s almost 40 percent plummet?

This column is not an “I told-you-so” or an exercise in “Goldenfreude” (describing a “delight in gold bugs’ collective pain”). Rather, it is an attempt to learn some investing lessons from the epic rise and horrific fall of gold.

As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade — such as the 2010s. There have also been decades when it does nothing, earning no return, generating no income, essentially dead weight to a portfolio, as in the 1980s and 1990s…”


Full column after the jump:

Read More

Category: Apprenticed Investor, Gold & Precious Metals

Financial Resolutions You Can Actually Keep

10 financial resolutions you can actually keep By Barry Ritholtz Washington Post, December 29, 2013     It’s that time of year, when many people resolve to be better: Gotta lose 20 pounds, stop smoking, start exercising. Human nature is such that come January, there will be a 20-minute wait for the elliptical machines in…Read More

Category: Apprenticed Investor, Asset Allocation, Investing, Psychology