Archive for June, 2008

Does Macro matter to markets?

Friday, June 13th, 2008

It’s an economics topic, so we’ll start with the prime economics cliché:

On the one hand: No. Per Graham and Dodd, the fathers of rigorous financial and systemic evaluation of stocks, the macroeconomic environment isn’t a big factor. “All cars are racing on the same track,” and the better companies will perform better than the worse companies. The analyst’s job is to figure out who is who.

Furthermore, anyone who believes even somewhat strongly in the Efficient Market Hypothesis believes that all publicly knowable news is already reflected in the price. Thus, good economy or gloomy, they argue, it doesn’t much matter what you think because the market has already adjusted to the prognosis.

On the other hand: Yes. “Buy straw hats in winter and parkas in summer.” “Sell when the streets run with champagne; buy when the streets run with blood.” The latter advice is paraphrased from Baron Rothschild. Real-world investors and the public can suffer from shortsightedness, and from excessively emotional reaction to events. An investor with a clearer eye and mind can find unusually good deals from time to time.

Famous investors from this school include hedge fund managers such as George Soros, but also more mainstream investors such as Bill Gross of the PIMCO bond funds.

And I? Both. For stock picking, there’s no substitute for looking closely at the company as an operating organization, to decide if they know how to do what they do profitably. For this fund, the stock-picking process will be mostly fundamental, careful study of individual stocks. That’s what I’ll most often discuss here in the blog. At the same time, sometimes you can see changes coming, if you take a moment to think about it. I enjoy thinking about it, so that’s the material that finds its way into my (nearly) monthly newsletters.

Why investing?

Tuesday, June 3rd, 2008

My first career was as a computer chip designer. While I’m not old enough to have been involved from the beginning of the Integrated Circuit age, I was involved starting in the early Personal Computer (PC) era. Through my jobs designing telecommunications and PC graphics chips, I got to help (in however small a way) build the Internet world.

Designing chips in the early days was tons of fun partly because it was fairly new. There was a lot of real discovery going on, trying to figure out how to solve new problems as the technology evolved. By the time I was at my last chip job, though, I felt as if it had become a rut. Certainly there are still challenges to be had, but the industry has matured and grown huge. Most of the work is now pretty routine engineering, and so not so engaging for me.

Enter investing. Modern Finance was invented in our lifetime, mostly in the latter quarter of the 20th century. It is definitely a new field, with lots of discovery yet to be done.

A few years ago at UC Berkeley I heard a fascinating talk by Stephen Ross ( ). He’s an econ professor at MIT and is one of the main contributors to the field. His topic was “What I Don’t Know About Finance.”

His point was that modern finance is still in the stage of working with theories that are simple, elegant, and wrong. The current framework theories depend on heroic simplifying assumptions and have been shown to have too many instances of not matching reality. Ross argued that we, financial theorists and investment professionals, need to come up with a new foundation. Meanwhile, we’re all trying to build useful products (investment ideas) in an environment of active discovery.

It’s stimulating, exciting, challenging, and I’m having fun again.