Avoid the consequences of being wrong

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Avoid the consequences of being wrong

Post by gaspr »

I really like this recent interview with William Bernstein

http://www.aaii.com/journal/article/inv ... ong.mobile
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Re: Avoid the consequences of being wrong

Post by gaspr »

I especially liked this line,

"Any time that you decrease your credit quality or substitute dividend-paying stocks for bonds, you are picking up nickels in front of a steam roller. You are taking a risk that you really don’t understand."

He does have a way with words... :)
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Re: Avoid the consequences of being wrong

Post by like_to_retire »

gaspr wrote:I especially liked this line,
Actually the entire answer is quite good.

CR: What should they do, given the prevailing interest rate environment? As we speak in June 2016, German bonds just went negative. Some of our members feel that low interest rates are pushing them into higher dividend-paying stock allocations. What do you say to somebody who is concerned about getting 1.5% or 2% from a bond and trying to live off of that?

WB: Any time that you decrease your credit quality or substitute dividend-paying stocks for bonds, you are picking up nickels in front of a steam roller. You are taking a risk that you really don’t understand. What also tends to happen is that you are exposed to the kind of risk you have never really been exposed to before. The person who has always invested in fixed income and suddenly starts buying REITs (real estate investment trusts), utilities stocks and oil stocks, for that matter, is going to wind up in a world of hurt probably sooner rather than later and be exposed to the kind of risk that they are completely not prepared for. That is an unfortunate thing that tends to happen all too often.

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Re: Avoid the consequences of being wrong

Post by Lazy Ninja »

I rather liked this bit:
understand that CNBC wants to make you poor and stupid. Turn it off. The only thing that I do is, occasionally, if I want amusement, I’ll turn on Jim Cramer, but I’ll turn the sound off and I’ll pretend I’m watching “Animal Planet.”
:D
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Re: Avoid the consequences of being wrong

Post by deaddog »

Another way to avoid the consequences of being wrong is to admit you are wrong and get out of your investment. :)
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Re: Avoid the consequences of being wrong

Post by BRIAN5000 »

Having a good strategy and not having a good result happens all too frequently as well.
Just like in poker, snake bit the last few times all in heads up AA against AQo and 10 10 against A9o and shown the door.
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Re: Avoid the consequences of being wrong

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like_to_retire wrote:WB: Any time that you decrease your credit quality or substitute dividend-paying stocks for bonds, you are picking up nickels in front of a steam roller. You are taking a risk that you really don’t understand. What also tends to happen is that you are exposed to the kind of risk you have never really been exposed to before. The person who has always invested in fixed income and suddenly starts buying REITs (real estate investment trusts), utilities stocks and oil stocks, for that matter, is going to wind up in a world of hurt probably sooner rather than later and be exposed to the kind of risk that they are completely not prepared for. That is an unfortunate thing that tends to happen all too often.
I suspect this is quite true for the 'average' investor who is seeking yield and hasn't really risked capital before. Doubt it applies to any FWFers. The problem is that a downdraft in equities is likely to be exacerbated by the fixed income yield seekers who haven't really been in equity markets before and suddenly become sellers. The downdraft will be more severe than it might otherwise be.

The same is true, of course, for a material rise in interest rates. Those yield seekers will flow back into FI and corps who have leveraging themselves more than they normally would with cheap debt will be doing their best to shed that debt (likely with secondary equity offerings). My take is to agree with WB that 'we have not been here before' but there are more reasons than just uninformed and inexperienced retail investors/savers. Somewhere, someplace, there is going to be one hell of a roller coaster appearing on the horizon.
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Re: Avoid the consequences of being wrong

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Lazy Ninja wrote:I rather liked this bit:
understand that CNBC wants to make you poor and stupid. Turn it off. The only thing that I do is, occasionally, if I want amusement, I’ll turn on Jim Cramer, but I’ll turn the sound off and I’ll pretend I’m watching “Animal Planet.”
He must have something against animals. I watched it yesterday for the first time in years. More like the Gong Show. Especially Lightning Round!
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Re: Avoid the consequences of being wrong

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Am I the only one who remembers both the picking up nickels in front of a steamroller and watching a muted CNBC as entertainment comments are straight up lifted from the writings of Nassim Taleb.
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Re: Avoid the consequences of being wrong

Post by 2 yen »

It is SO tempting to lower bond allocations and up dividends. However, all one can do is remind people that bonds do anchor a portfolio in good times and bad. So the anchor now is really dead weight, but that's actually the entire point. In the last couple of big crashes, the most my portfolio declined was around 20%. This is almost entirely due to the bond anchor. I can live with this.

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Re: Avoid the consequences of being wrong

Post by Peculiar_Investor »

2 yen wrote:It is SO tempting to lower bond allocations and up dividends. However, all one can do is remind people that bonds do anchor a portfolio in good times and bad. So the anchor now is really dead weight, but that's actually the entire point.
So very true and well said. In a similar vein, another potential issue with lower bond allocations and upping dividends is the "dividend yield or growth" portfolio has become a very crowded trade as bond yields have dropped. As such, many market participants have similar positions, creating the risk that there will be insufficient liquidity or poor pricing should market participants seek to unwind their positions simultaneously.
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Re: Avoid the consequences of being wrong

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Peculiar_Investor wrote:creating the risk that there will be insufficient liquidity or poor pricing should market participants seek to unwind their positions simultaneously.
I think a corporate mentality has set in that has a lot of companies in a race to increase dividend payout at the expense of organically driven growth. Upping dividend is a currently convenient way to get a market response on stock price appreciation which then allows the corporation to take on more debt, or go to the equity market with a secondary offering.

Many mainstream culpirts are actively playing this game. Will it come back to haunt them? I guess a 100 bp increase in interest rates, when and if that ever occurs, could start to expose that. I suspect the thing to watch most closely are the various debt ratios.
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Re: Avoid the consequences of being wrong

Post by Wallace »

"If you're going to be wrong, be wrong with confidence."
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"Why do I have to go to school? If I watch YouTube I'll know everything."
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Re: Avoid the consequences of being wrong

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AltaRed wrote:
Peculiar_Investor wrote:creating the risk that there will be insufficient liquidity or poor pricing should market participants seek to unwind their positions simultaneously.
I think a corporate mentality has set in that has a lot of companies in a race to increase dividend payout at the expense of organically driven growth. Upping dividend is a currently convenient way to get a market response on stock price appreciation which then allows the corporation to take on more debt, or go to the equity market with a secondary offering.

Many mainstream culpirts are actively playing this game. Will it come back to haunt them? I guess a 100 bp increase in interest rates, when and if that ever occurs, could start to expose that. I suspect the thing to watch most closely are the various debt ratios.
Yes. At my stage I can live with some inflated dividends, however, I would advise a newbie to go with consistently low payout ratios. First, this allows less attention at an early stage of the learning curve and MAY help avoid an implosion later. Personally, I do not believe interest rates are going to rise fast at all. North American demographics don't support it, nor salary growth. Additionally, the split between those who are educated and those who are not widens, thereby keeping consumer demand down. An interesting discussion for sure.

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Re: Avoid the consequences of being wrong

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2 yen wrote:Additionally, the split between those who are educated and those who are not widens, thereby keeping consumer demand down. An interesting discussion for sure.2 yen
Do you mean consumer demand in the wider economic sense ? I should have thought a growing under educated populace would increase consumer demand because they would not be as sophisticated a buyer and less able to see though marketing ploys ? (Although, spending would be subject to disposable income levels)

Also, are we entering such an era ? I thought the problem with the current generation was they were Over educated and under employed. Still pretty good consumers though (ask AAPL)
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Re: Avoid the consequences of being wrong

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Koogie wrote:
2 yen wrote:Additionally, the split between those who are educated and those who are not widens, thereby keeping consumer demand down. An interesting discussion for sure.2 yen
Do you mean consumer demand in the wider economic sense ? I should have thought a growing under educated populace would increase consumer demand because they would not be as sophisticated a buyer and less able to see though marketing ploys ? (Although, spending would be subject to disposable income levels)

Also, are we entering such an era ? I thought the problem with the current generation was they were Over educated and under employed. Still pretty good consumers though (ask AAPL)
I guess I was thinking more in the U.S. where the difference appears more stark.

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Re: Avoid the consequences of being wrong

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What we don't know is whether standard of living increases and thus increases in consumer demand in developing nations will be enough to counter the declining hard goods consumption of developed nations. I believe 'hard goods' is decreasing in importance due to increased product longevity, less bulk weight and higher recycling ratios. Technology has allowed for more efficient and effective use of materials.
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Re: Avoid the consequences of being wrong

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Payout ratios may turn out to be very important. Interest rates will rise eventually. Both these factors suggest bank divs are higher quality than telcos, insurance, pipes or utilities. Rising interest rates are positive for bank earnings and bank payout ratios are generally quite low, in the 40-50% range.
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Re: Avoid the consequences of being wrong

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SQRT wrote:Payout ratios may turn out to be very important. Interest rates will rise eventually. Both these factors suggest bank divs are higher quality than telcos, insurance, pipes or utilities. Rising interest rates are positive for bank earnings and bank payout ratios are generally quite low, in the 40-50% range.
Rising [long term] interest rates are even better for insurance companies earnings.
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Re: Avoid the consequences of being wrong

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Rising interest rates are only good for most? majority? of financials. Tell that to the telcos, utiliities, pipelines, and a host of other highly capitalized industries.
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Re: Avoid the consequences of being wrong

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adrian2 wrote:
SQRT wrote:Payout ratios may turn out to be very important. Interest rates will rise eventually. Both these factors suggest bank divs are higher quality than telcos, insurance, pipes or utilities. Rising interest rates are positive for bank earnings and bank payout ratios are generally quite low, in the 40-50% range.
Rising [long term] interest rates are even better for insurance companies earnings.
Agree. Insurance co's have very long duration Balance sheets. Banks are much shorter.
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Re: Avoid the consequences of being wrong

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AltaRed wrote:Rising interest rates are only good for most? majority? of financials. Tell that to the telcos, utiliities, pipelines, and a host of other highly capitalized industries.
My point was that the banks are much better positioned for higher interest rates. I doubt the others (other than insurance co's) would be happy to see higher rates.
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Re: Avoid the consequences of being wrong

Post by Shakespeare »

Rising interest rates have been forecast for a long time now and haven't happened. I'm not holding my breath; we may see stagnation/low rates for some time (Japanese disease?).
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Re: Avoid the consequences of being wrong

Post by 2 yen »

Shakespeare wrote:Rising interest rates have been forecast for a long time now and haven't happened. I'm not holding my breath; we may see stagnation/low rates for some time (Japanese disease?).
I believe we are in the beginnings of Japanese disease. That said, our much better immigration laws and employment of women may mitigate things somewhat.

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Re: Avoid the consequences of being wrong

Post by always_learning »

back to the article for a sec, I really liked this bit:
Bernstein wrote:[...]the concept of the sleeping point, which is that no matter what your stock or bond allocation is, there are always going to be times when you feel bad that you didn’t invest enough in stocks and there are always going to be times when you feel bad that you didn’t invest enough in bonds.

The trick is to find that stock/bond allocation where you feel at those points about half the time each.
Brilliant.
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