The Bigger Better Deal
You might think you don't have FOMO but wait till you hear about the BBD
A term basically used when a man or woman temporarily makes due with someone as his or her mate, while actually still in search for a mate that bares superior superficial qualities for an ideal lover.
There is no single investment strategy that will do well in all market environments. However, there is no shortage of people yelling about whatever seems to be working at a given moment of time. During a bull-market, everybody is a momentum investor. In a bear-market, everybody has always been a value investor. Some take turns becoming macro-tourists during wars, inflationistas during price spirals, virologists during COVID waves, and hydrologists during the Monsoon. Investors are lead to believe that there is a magic formula, available to them then at an affordable annual subscription, that will digest all the information in the world and spit out an investment strategy that will give them superior returns with no risk.
Welcome to the world of the Bigger Better Deal.
As humans, we are wired to keep looking out for the BBD - the Selfish Gene, and all that.
Receiving mate poaching attempts decreased the appeal of current partners while increasing the desirability of alternatives.
This is especially true for factor-investing, and why some of them have proved to be extremely resilient. See, factor-investing is a bit like a marriage. You’ll have good times and bad. Sometimes, you might go through decades wondering why you got married in the first place (Hello value investors!) However, a divorce should be the last-resort after everything else has been tried.
But that is not what I see most investors do. Most turn into factor-daters, swiping-right between different strategies, trying to predict what will work in the next few weeks or months. What is baffling to me is that if a factor’s rebalance frequency is once a year, then it will take at least 10-15 years before one can reasonably conclude that it has stopped working. A monthly rebalance frequency will need about 7-10 years before there is enough data, a daily frequency will need ~5 years or at least two market-cycles, and so on. However, investors seem to be making bets almost on a daily basis on them.
I think I’m beginning to understand why truly successful investors are so rare. I doubt it is because they have something “extra”, like higher IQ or more patience or better education. I think it is because they have something “less” of what makes us “human.”
Markets this Week
A lot of narratives getting violated on a daily basis.
A depreciating INR was supposed to provide a tailwind for tech. But look how they massacred our boys.
Long bonds found a bid reinforcing the “overshoot” narrative.
US large-caps were supposed to be unstoppable global growth engines. What happened to the charge of the #neversell brigade?
You would think that high inflation and Putin’s war would help gold find a bid, but it looks like the market believes in the Fed.
INR and JPY neck-and-neck to take the top-slot as the worst-performing currency vs. the dollar.
Links
A Tutorial on Principal Component Analysis (labml)
This study describes a comprehensive profitability analysis that introduces several novel ratios and decompositions. Key innovations relate to the separation and analysis of activities other than operating and financing, and, most importantly, to the decomposition of operating profitability. Three drivers of operating profitability are analyzed: profit margin, asset turnover, and a funding ratio that measures the proportion of operating assets funded by capital.
Profitability Analysis (ssrn)
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On bullshit in investing. (noahpinion)
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Saudi Arabia doubles second-quarter Russian fuel oil imports for power generation. (Reuters)
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EVs are tough and legacy car-makers are struggling to make the switch. Why? Software.
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On slave labor in the US:
One in 81 Black adults per 100,000 people in the United States is serving time in a state prison. In 12 states, more than half of the prison population is Black. And Latinx individuals are incarcerated in state prisons at a rate that is 1.3 times the incarceration rate of Whites. (CNN)
And they are not even pretending anymore.
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German economy running out of gas:
Some German power plants are not getting enough coal delivered because of low levels on the river Rhine, threatening to derail the country’s plan to store more fuel ahead of winter. (bloomberg)
Q4 German industrial activity:
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The great hydration myth debunked. It keeps the wellness industry afloat and celebs drink it by the gallon, but how much water do we really require? (telegraph)
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This reminded me of the epic movie Be Kind Rewind.
Memes of the Week
