Research Watch

PORTFOLIO POINT: This is a sampling of this week’s best research notes. In a world of too much information, we hope our selection helps you spot the market’s key signals.

The latest swings in equities show just how fragile the markets remain. This week, Nassim Taleb, of “Black Swan” fame, introduces the concept of “antifragile” investing, that is, positioning yourself to benefit from instances of stress and surprise. (He also shares his obscure workout regime.) Jeremy Grantham says the US is on the road to zero growth — for the next 40 years — while Jeff Saut has reason to believe we are in the next secular bull market without realising it, and it might be the cheapest to buy into since Ronald Regan was in office. Elsewhere, Barron’s examines the new equity investment strategy at Berkshire Hathaway, and Apple’s share price suggests it might be going the way of Microsoft. Also, a year in the life of the euro, five years of failure at the IMF, and John Hempton finds investment lessons in the social media campaign against Alan Jones. On video, the Financial Times names its finance minister of the year.

Antifragile investing...

“If fragility means something that breaks under stress, its exact opposite should mean something that grows stronger under pressure. There is no word that quite captures this, says Nassim Nicholas Taleb, an American essayist and scholar, so he has invented one: ‘antifragile’. The neologism is necessary because antifragility, he argues, is the secret to success in a world full of uncertainty. Mr Taleb’s earlier books were devoted to showing that no one can measure the likelihood of rare events—or ‘black swans’, in his now famous phrase. From the financial crisis to the tsunami that struck the Fukushima nuclear reactor in 2011, the worst-case scenario will never be quite bad enough. So instead of trying to predict the future and failing, the best thing to do is try to benefit from shocks when they occur. … [It’s] being in a position where the unexpected allows improvement, where the potential gains from a surprising event outweigh the potential losses. … The equivalent in investment terms is to hold mostly ultra-safe assets and have a sliver of wealth in something that offers a huge pay-off if there is a positive surprise. In business, inefficiency becomes a potential virtue; holding lots of inventory is a great strategy if there is a shortfall elsewhere in the market. As for countries, Switzerland takes the prize for being the ‘most antifragile place on the planet’. When bad things happen, the money flows in. ... Mr Taleb takes on everything from the mistakes of modern architecture to the dangers of meddlesome doctors and how overrated formal education is. He overstretches the argument and is not as iconoclastic as he likes to think. … But this is an ambitious and thought-provoking read.” (From The Economist’s review of ‘Antifragile: Things that Gain from Disorder’, November 17)

And antifragile living...

 “Do you apply these [antifragile] principles to your life? Nassim Taleb: I lift stones and do weightlifting. I don’t go to the doctor except when I’m very ill, and when I go to India, I drink a drop of local water. Things like this harness the body’s antifragility. I have never had personal debt and never will. I also picked a profession in which I am antifragile, because any attack makes me stronger. When I write about something, I have skin in the game, and I have benefitted more from attacks on The Black Swan than been harmed by them.” (New Scientist, November 14)

The end of growth...

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“The US GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates. … Going forward, GDP growth (conventionally measured) for the US is likely to be about only 1.4% a year, and adjusted growth about 0.9%. … The bottom line for US real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050. This is all done presuming no unexpected disasters, but also no heroics, just normal ‘muddling through.’ … Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the US is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!” (Jeremy Grantham of GMO, November 20)

A secular bull nobody believes...

“In my opinion, there is a 20-25% possibility that we are in a new secular bull market and nobody believes it! That ‘call’ rests on the premise that the nominal price low was made on March 6, 2009 when the S&P 500 printed at the ‘mark of the devil’ level of 666. Subsequently, I think the ‘valuation low’ was made on October 4, 2011 where the SPX was trading below 10x its forward earnings estimate, with an earnings yield of over 10%, rendering an equity risk premium above 8% for a valuation low not seen in decades. Despite that message, in every meeting during the past few weeks the first question was, ‘What about the fiscal cliff?’  My comment to that question was, ‘Over my 42 years in this business when e-v-e-r-y-o-n-e was asking the same question, it has typically not been the right question.’ … I think the surprise is going to be a more cooperative environment from our leaders going forward. And maybe that is what the stock market sniffed out last Friday with its intraday upside reversal on heavy volume. If the SPX can travel above 1362 it may be able to recapture the 1390 level that I have deemed to be critical. However, until that happens, I am going to err on the side of caution.” (Jeff Saut via Minyanville, November 19)

And it’s the cheapest since Reagan...

“The post-election rout in US stocks has driven the Standard & Poor’s 500 Index down so far that it would have to advance 26% to reach the valuation of bull markets since John F Kennedy was in the White House. Investors have seen $806 billion erased from the value of American equities since President Barack Obama was re-elected November 6 in the biggest decline since May. The combination of falling stocks and rising profits as the economy recovers has left the S&P 500’s price-earnings ratio below the ending level of eight of the nine bull markets since 1962 and beneath the average of any since Ronald Reagan was in power. Bears say the 4.8% drop in the S&P 500 and valuations show investors are losing confidence that Congress and Obama will reach a budget compromise that would keep the recovery from stalling. Bulls, including the top strategists at six Wall Street firms, say that the declines are another reason to buy.” (Bloomberg, November 18)

What’s Berkshire buying?...

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“Warren Buffett hired two investment managers in the past two years to run equity portfolios at Berkshire Hathaway and prepare them to manage all of Berkshire’s investments... when Buffett leaves the scene. He staked Todd Combs and Ted Weschler with $1.75 billion each and allowed them to make their own stock selections. Combs came on board in early 2011; Weschler, at the start of this year. … It’s hard to know for certain [what they have been buying], but given Buffett’s comments in Berkshire’s 2011 annual report, and the boss’s predilection for focusing on multibillion-dollar investments, it’s logical to assume that purchases in the $200 million to $400 million range cited in company filings reflect decisions made by Combs and Weschler.” (Barron’s, November 17)

Is Apple the new Microsoft?...

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(Bloomberg Briefs via Pragmatic Capitalism, November 18)

A year in the life of the euro...

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(Morgan Stanley, November 20)

And five years of failure at the IMF...

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The Alan Jones Facebook experiment...

“Can a couple of Facebook groups with 20,000 members each and a 100,000 strong email list maintain the rage [that has kept advertisers away from Jones’ show]? Is social networking more powerful than a fabulous communicator-with-a-microphone and a rusted on audience? Can personal attack campaigning be sustained on Facebook? … There is a direct stock market way of playing this. Macquarie Radio Networks, the company that controls the Jones show, is listed. But honestly the Business Partner and I cannot decide. So we just had a bet. It is only $50 (we are not big-swingers here) but I think the Jones show will be gone in six months and that social networks provide very high and sustainable advertising values and negative feedback from social networks is a major-corporation nightmare. The Business Partner - he thinks that over time... the anti-Jones groups will fade and Jones will come back - maybe a touch chastened and less strong on the personal attack. But he thinks the results of those attacks (by Jones as well as by his critics) is more likely to be temporary.  Five and a half months from now we will declare a winner and $50 will duly change hands. It is the Facebook mob versus Radio demagogue - a powerful but admittedly uncontrolled experiment in social media versus traditional media. From an investing perspective from this we will learn a great deal about the power, and the limits to that power, of Facebook.” (John Hempton of Bronte Capital, November 15)

Video of the Week: Finance minister of the year...

Wolfgang Schäuble, Germany’s finance minister, has been voted as European finance minister of the year by the FT. He talks about the light at the end of the tunnel for the Eurozone crisis.

(Financial Times, November 21)