Pain, Guaranteed

The future is unknowable but the agony is eternal.

All investment strategies that have historically outperformed the risk-free rate have, without exception, gaslit investors.

Even something as mundane as equal-weight vs. cap-weight of the same index is not settled science by any stretch of imagination. I don’t like it because with the index on a 6-month schedule, chances of a monthly equal-weight strategy systematically selling winners and buying obviously sinking turds is pretty high. Plus, STT on every trade requires the edge to be high enough to make the transactions worth their while.

However, over the long-run, who knows? Historically, since the year 2000, equal-weighting has out-performed cap-weighting by ~2%. Long-term buy-and-hold worked out.

The problem is, how “long” is long term?

As an index, equal-weight has out-performed cap-weight in 13 out of 22 years. 60% of the time, equal-weight wins.

Before 2017, equal-weight won 11 out of 17 years. Who wouldn’t want that? So, in 2017, DSP launched its equal-weight NIFTY 50 index fund. And guess what?

It went on to under-perform the cap-index right out the gates and investors had to wait for four years before they could see some light at the end of the tunnel.

The fund, on a CAGR basis, is still trailing the cap-weight index by ~4%.

This is pretty much the story of every single market investment. Whether it is quantitative, systematic, discretionary or qualitative doesn’t matter. We only know the historical odds of success. The future is unknowable. And while you wait for the odds to work in your favor, all you get to endure is pain.

Markets this Week

The bear market rally in the US lifted stocks in India. US tech earnings were not as bad as feared and Indian banks and financial services companies look strong enough to weather whatever is coming.

Links

Aswath Damodaran’s Zomato thread is one for the books. (tra)

~

Exxon’s free cash overtakes Alphabet for first time since 2015. (bloomberg)

Russia's Gazprom says it has stopped gas supplies to Latvia. (dw)

Europe ramps up coal imports as energy supply fears grow. (reuters)

US regulators will certify first small nuclear reactor design. NuScale will get the final approval nearly six years after starting the process. (arstechnica)

~

Sack your manager who talks up the prospects of an Asian country’s GDP growth.

Are booming economies good for markets? During the decade from December 2010 to December 2020, when nominal GDP in Asia excluding Japan grew almost 4.5 times faster than global nominal GDP, the former’s equities underperformed the latter’s by 25%.

Investors should prepare to be bombarded with bad economic news. They should also be prepared to ignore it. (man)

Florian Kronawitter @fkronawitter1

1- WMT earnings are a mirror of a boom-bust economy. Businesses expanded production, thinking the ravenous demand was sustainable. It was a stimulus-driven mirage and inflation ensues, instead of productivity gains

businessinsider.comWalmart employees share photos of overcrowded back rooms, pallets sitting in store aisles, and boxes blocking access to a breastfeeding roo…Walmart employees tell Insider about “overwhelming” and “ridiculous” working conditions as they sort through unending boxes of overstock.

~

Michael Pettis @michaelxpettis

1/8 Germany is caught in the high-income version of the middle-income trap: "Roughly one-quarter of German jobs depend on exports, compared with about 6% in the US. Germany’s home market is too small to absorb the surplus production of its firms."

wsj.comHow the German Economic Machine Broke DownAn energy crisis caused by Russia, slowing Chinese growth, supply-chain blockages and an aging workforce are ending the decadeslong reign of Germany’s export-focused manufacturing.

Michael Pettis @michaelxpettis

2/7 In the end the value of infrastructure spending to the economy depends on the the economic value it generates, i.e. the net increase in future production accommodated by the infrastructure, including externalities.

~

David Ingles @DavidInglesTV

Market sees the Fed rising rates 100BPS further this year AND then cutting by 60BPS next year. Take a moment and just ask if that makes sense.

~

BTFD only works on broad-based indices. Don’t try it on individual stocks.

Wasteland Capital @ecommerceshares

$UPST now down 96% from highs. “The future of AI enabled-lending”. 🥴 It was down 62% from highs by end 2021, and now it’s also down 85% YTD. So you could have lost 62% last year & then 84% again. How loss-math works, for the “average-down” crowd. Never average down in 💩

~

TikTok won (garbageday).

Like Bill Gates before him, Mark Zuckerberg is having a ‘Pearl Harbour’ moment. His company’s motto is ‘move fast and break things’ – but if it doesn’t move fast it’ll soon be broke. (theguardian)

~

Twain's Mustache @TwainsMustache

It can't be repeated often enough, the Chinese Communist Party is not our friend. A report by Senate Republicans found China tried to build a network of informants inside the Federal Reserve system and even detained a Fed economist wsj.com/articles/china… via @WSJ

wsj.comChina Targeted Fed to Build Informant Network and Access Data, Probe FindsThe investigation by Senate Republicans found that the decadelong effort included threatening to imprison a Fed economist during a trip to Shanghai unless he agreed to provide nonpublic economic data.

Rishi Sunak @RishiSunak

1/ China and the Chinese Communist Party represent the largest threat to Britain and the world’s security and prosperity this century. Read this thread👇on how I will face down China.

Memes of the Week

Robin Wigglesworth @RobinWigg

A+ economics meme.

Chris Bakke @ChrisJBakke

A.G. Sulzberger became the Chairman of the New York Times at the age of 40. Here’s how he did it: ▫️Worked as a writer for his college newspaper ▫️His great grandpa bought the New York Times and gave it to his grandpa who gave it to his dad who gave it to him at 40.