My motto: ‘Fresh mistakes, every year’
Washington Post February 9 2014
“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”
— Ray Dalio, Bridgewater
Why go through this annual review of blunders?
Rather than engage in the sort of selective retention that so many investors tend to do and pretend mistakes never happened, I prefer to “own” them. This allows me to learn from them, and with any luck avoid making the same errors again.
My motto: “Fresh mistakes, every year.”
It also provides a good opportunity for humility — a reminder of how little we actually know, and how much our expectations about the future are often at odds with what actually occurs. Ray Dalio, who runs the world’s largest hedge fund, observes this is how we “live up to our potential” as investors. The alternative is continually lying to oneself — about how smart we can be, how insightful our worldview is and what great investors we are. I am reminded of an old Yiddish expression: “Man plans, and God laughs.”
Last year, I got quite a few things right. But as always, I was regularly — and, on occasion, spectacularly — wrong. That is par for the course.
Here’s how I fared:
1 Emerging markets look cheap. There are a variety of ways to measure how expensive equities are. Yale Professor Robert Shiller’s CAPE valuation method was very popular last year. Shiller, who received the 2013 Nobel Prize in Economic Sciences, looks at 10 years of earnings in order to adjust for the ups and downs of the business cycle. By this metric, U.S. markets were a bit pricey, while Europe was moderately cheap, and emerging markets were even cheaper. Out of 40 major countries, the United States was the fourth-most expensive (36th cheapest) and Greece had the cheapest market. Russia was fourth cheapest, while Brazil was the 10th cheapest.
How did that work out in 2013? Here in the United States, the S&P 500-stock index had a total return of about 32 percent. Meanwhile, “cheap” markets, such as the broad MSCI Emerging Markets Index, fell about 10 percent. And when we look at specific countries, it was even worse, with Russia down 3.5 percent, Brazil lost 15 percent — and Greece was up 27 percent.
The saving grace of this is that emerging markets are less than 10 percent of the benchmark All Country World Index. These markets shaved about 1 percent off of our global equity portfolios.
2 AIG repays its $182 billion bailout.* In 2010, I described the possibility of AIG ever repaying the government for the $182 billion bailout as “highly unlikely.” I also described it as a “shell game” and wondered how the management of the bankrupt insurer would ever be able to sell off enough pieces of the company to repay the government. I have repeatedly said the same in public ever since.
According to the Treasury Department, AIG paid back a total $205 billion — more than the original bailout — thereby making a profit and proving me wrong. Even Pro Publica, which has been tracking all of the bailout disbursements, credits AIG with a $5.03 billion profit.
Why the asterisk? Well, like the steroid era in baseball, this one had to use a little juicing to get there.
As part of the repayment process, AIG asked Treasury for — and got — a special tax dispensation for “net operating losses” worth an estimated $25 billion to the company.
Before your eyes start to glaze over, a brief explanation: Whenever a company suffers a big loss, it normally gets to carry it forward. The big exceptions to this are either bankruptcy or a change in ownership. AIG had both, so it really should not have gotten the tax benefit of its massive losses.
Essentially, Treasury said to AIG: “Here’s a $25 billion tax break — please use it to pay us back our money so we can claim to have made money on the deal.” Oh, and normally, that is something that should really be authorized by Congress, not the executive branch.
But let’s be blunt: I never expected AIG to come anywhere close to paying back $182 billion. I was wrong. That it did just goes to show you how good its underlying insurance business was before AIG inadvertently destroyed it via adventures in derivatives.
3 Thinking about crashes and corrections.Throughout 2013, there was a steady drumbeat of warnings of an imminent crash. Comparisons were made to 1929 and 1987, with overlaid charts that “proved” we were doomed. The crash warnings were coming mostly from people who had been repeating them for years while missing an enormous rally. None of the technical signs that accompany market tops was present, making these easy to ignore.
On the other hand, the typical year sees about three stock corrections of 5 percent ormore. We had one. Although it didn’t affect how we invested our capital, I feel like I spent an inordinate amount of time thinking about the risk of imminent corrections.
Solution: We should be primarily concerned about things within our control. Markets correct, volatility happens. The key takeaway is to stay focused on what is within your ability to manage — our portfolio allocation, how much we contribute toward retirement, how much debt we accumulate. Time spent on things beyond our control is wasted.
4 Hating Microsoft. I have been a member of the Microsoft-bashing society for quite some time. Last fall, I penned my explanation for what’s behind Microsoft’s fall from dominance. In the past, I have even gone so far as to blame it for causing the dot-com bubble. And I savaged the leadership of Steve Ballmer, who oversaw a rather moribund period at Microsoft.
Perhaps I buried Microsoft prematurely, based on developments of the past week: A new CEO who seems very savvy with great tech credentials; the return of Bill Gates as chief technology adviser; and the push into subscription-based software sales. Microsoft seems to be gaining traction, and even its stock price is looking up.
5 Too much junk, not enough books. 2013 was the first year I read fewer than 10 books in a long while. Maybe it was because I was too busy with work (we launched a new firm) or too distracted with Twitter. Regardless, my usual voracious book consumption suffered. Even worse, I read a lot of meaningless news stories, gossip, blogposts and filler.
The silver lining is it led me to write two columns: “Reduce the noise levels in your investment process,” followed by “Use the news: How to get the most out of financial media.” Now I have to follow my own advice. The solution is simple: Return to reading at least one (and ideally two) books a month.
6 Don’t feed the trolls. Speaking of wasting time, one of the biggest mistakes I made last year was engaging in useless online debate with hacks, twerps and trolls. On Twitter, I wasted time with creationists; online, I debated global warming denialists.
Even worse, I know better. I came up with one of the most anti-troll comment policies even invented.
The solution is to ignore the online knuckleheads who do not add anything positive to the discussion. On Twitter, reduce the number of people I am following. Block anyone creepy — including haters, people who do not believe in science and anyone whose contributions are negative. And stay out of the comments section!
Those are my errors for 2013. What mistakes did you make last year?