What's up Behavior, Characteristics, Conditions, and Identity?

Dear Reader,

Identity. What makes you, you. The masks we wear — or don’t wear — shape the way that we interact with the world around us, and they determine the space in front of us. That inner person (your inner voice) is who you are. What you tell yourself and what you express to others is what you are. And your reflections on life and your reactions to life will determine where you are. Your identity is only as valuable as its ability to help you create a sense of order in your mind about what is going on in the world. Live what you preach and accept your reality as best as you can. In a world dominated by distractions, we are increasingly getting out of touch with our ability to direct ourselves to where it matters most. We don’t become who we are by staying as we are now. There’s a constant fight between who I want to be versus who I should be. Should I always be nice and genuine? Positive and soft-spoken? Or can I benefit from being ruthless and emotionless? With a thick face and a black heart.

The Market:

• International applications to US full-time-two-year MBA programs feel 17.1% this year
• The tech sector has outperformed all other sectors in 2019, with Energy performing the worst (Graph below)
• Howard Marks’ memo: negative interest rates means you’ll get less than you put in. People are starting to be charged to store their money safely. The majority of EU and Japan bonds carry negative yields (25-30% of all debt in the world). With a negative rate, the price you pay for a bond today exceeds the sim of the face value you will be repaid when it matures. “The negative rate environment is making consumers so uncertain about their financial environment that they’re starting to save more rather than less.”
  • Why would people buy negative yield bonds? Fear regarding the future (recessions) so investors want to limit their loss. A belief that interest rates will go even more negative. An expectation of deflation, causing the purchasing power of the repaid principal to rise.
  • Interest rates: determined by the time value of money, expected changes in purchasing power, and a risk premium.
  • Benefits of negative interest rates: to lower borrowing costs and to stimulate economies, weaken their currencies to become more competitive and attractive in the trade space, locking in a limited loss if a global recession occurs in the near future.
• The BREXIT deal: The UK may be officially exiting the EU on October 31st. The agreement: the UK will continue to abide by EU rules to allow businesses to adjust, the UK will pay a 33billion euro divorce bill, the rights of EU citizens living in the UK, and UK citizens in the EU will be guaranteed.
• Best investment advice for new investors: investing is an act of optimism, but you must diversify with low-cost products across many sectors and markets.
• Smartphone dependence is a good predictor of loneliness and depression. “If smartphone dependency precedes depression and loneliness, we can reduce smartphone dependency to maintain or improve well-being.”
• The US market is valued above average. (See figure below) Growth stocks are becoming more expensive. Small-cap stocks are trading at 11.7x their trailing 12-month earnings.
• Americans have higher levels of well-being inequality and report more pain on average than countries of comparable and even lower levels of income.

Characteristics of a Fund Manager. When people compete, their success is often predicted by their techniques and their track record. Mutual fund managers rely on a variety of techniques when trying to beat their benchmarks. We can tell whether a manager is skilled by comparing his investment decisions with the decisions of other skilled managers. These managers have strong leadership, are open to experimentation and risk, are willing to challenge the status quo, and focused on the customer. Managers who make similar investment decisions have similar skills.

Earnings Season. Q3 financial earnings season started off with a boom earlier this week. Out of the major financial companies, we saw only Wells Fargo miss earnings by a large margin, with Goldman hitting expectations, and Charles Schwab, JPM, BNY Mellow, PNC, BOA, and Morgan Stanley significantly beat earnings. In the current economic environment, this financial earnings season was very important, as the underlying reasons for beating/missing earnings for financial companies are usually indicators for how the economy is forecasted to perform. Jamie Dimon (CEO of Morgan Stanley) attributed, “the consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels,” with the opposing being, “this is being offset by weakening business sentiment and capital expenditures are mostly driven by increasingly complex geopolitical risks, including tensions in global trade.” This is the current sediment from most financial institutions as they are releasing earnings. Wells Fargo earnings miss seems to be attributed to previous controversies they were facing earlier this year with the fraud.
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We are Melting. According to a report from the National Oceanic and Atmospheric Administration, the Arctic has lost 95% of its oldest ice, and 78% of its ice volume or roughly 10 trillion tons of ice since 1979. Rather than working to find solutions to combat this massive geological crisis and emplace restrictions to protect what’s left of the Arctic, the World’s leading nations are scrambling to gain territorial and political ground to capitalize on the resources opened up by the melting ice. Large amounts of oil and natural gas have been discovered in the Arctic, shipping routes are staying open for more months of the year, and soon enough ice will melt to allow for a Northwest Passage where ships could sail north from the U.S to China in 20 days fewer than it currently takes. Last weekend world leaders, politicians, scientists, and environmentalists met at the Arctic Circle Assembly to discuss climate change, security and the exploitation of new oil and gas discoveries. Representatives from the U.S, China, and Russia expressed their interest in Arctic exploration and asserted their right to do so. Russia laid out its plans for new liquified natural gas fields, which they plan to continue their skyrocketing industry that has already quadrupled since 2016. Russia is currently sailing a nuclear powered, ice-breaking ship through the Arctic to emplace infrastructure along with small villages in preparation for the coming Arctic boom. China has proclaimed itself a “near-Arctic” power which the U.S and its allies have condemned. China has planned several multi-billion dollar initiatives to reduce its trade logistics costs in the Arctic as part of China’s Belt and Road initiative. The melting ice is forcing nations to redraw their maps and disputes are already breaking out overfishing, mining, and land rights. To protect resources and shipping routes potentially worth 100’s of billions of dollars, Arctic powers are expanding their military’s presence in the arctic and tensions are rising quickly. The U.S, Russia, China, Canada, and Norway are all slowing increasing their Arctic military might with new military bases, increased troops, and large scale drills. Over the next decade, we may see the Arctic turn into the next geopolitical flashpoint similar to the South China Sea today. 

Behavioral Finance. “The human mind is fundamentally not a logic engine, but an analogy engine, a learning engine, a guessing engine…” The study of behavioral economics allows us to understand the decisions we make. Behavioral finance aims to influence and improve our financial decisions. We are more sensitive to losses than gains and overly influenced by short-term considerations. We seek to conform to group behavior and prevailing norms. We overweight the importance of recent events. We are poor at assessing risks and gauging probabilities. We over-estimate our own abilities. We focus on outcomes. We are often persuaded by captivating stories. Have a long-term investment plan. Automate your savings. Rebalance your portfolio. Don’t check your portfolio too frequently. Don’t make emotional decisions. Don’t trade, invest. Save more tomorrow. Individuals should build reserves that can provide an acceptable standard for living in retirement. To achieve this, they should start saving early. What’s hurting us is our tendency to think that the present is more important than the future, and limits to our self-control. Ask yourself these questions: What is the problem or issue? What is the rational or optimal decision? How do you actually behave? What is causing this difference between what you should do and what you actually do? How can we alter behavior to deliver better outcomes?

Reasoning Logic Down to its Roots. What drives us? What formulates our thoughts? What makes us do what we do? It starts with nurture. How our parents raised us, taught us, punished us, rewarded us, loved us… Then nature. How community-based your family is, how close your family is, where you live, who you hang out with, where you went to school, religious beliefs, economic-political standing… Then when you leave the nest and go out into the world, it ends with individual growth and understanding, and your contribution to the world when you no longer exist. Who you make yourself out to be, the core rules and principles that you live by, the experiences and mistakes that you learn from, the relationship you have with yourself and with others, the restrictions and disciplines you impose on yourself… We now live in a world where we’ve connected to everything except ourselves. We read up on others, obsess over the latest gossip and keep up with the hourly following. We lost our courage and increased our insecurity. The secret? You will become way less concerned with what other people think if you when you realize how seldom they do. Everybody else is too worried about themselves to really care what you do.
 

Keep Climbing,


The Alchanati Campbell and Associates Team