Galway Investment Strategy
Commentary
The New Face of Failure
A strong year in the domestic stock market - like we saw in 2013 - can create overconfidence in investors, which, in turn, leads them to make a number of predictable errors in judgment.
Commentary
Cirque du Ben
The Cirque du Ben will soon be leaving town for good. Some have cheered while others have watched in horror waiting for the disaster, but all were treated to a high wire act unlike any other Fed chairman has ever performed. Fed chairmen are often defined by the consequences of the previous performer. Bernanke had a couple of tough acts to follow in Volcker and Greenspan. Volcker had to guide an economy out of stagflation while Greenspan presided over 9/11, two recessions, and a full market crash in 1987. By the end of his his show, Greenspan had an oversized influence on policy.
Commentary
I Thought The Safety Was On
For the past thirty years investors could allocate a portion of their portfolio to investment grade bonds and regard that money as safe. Wealth preservation was easy buy a ladder of Treasuries or triple-A rated corporates and go back to bed. That perceived safety was a direct result of a continuing, if not steady, decline in interest rates.
Commentary
At 40 I'm Half Dead
So goes comedian Louis CKs bit about hitting middle age. Not old enough for anyone to care that youre old. Not young enough for anyone to be proud of you or impressed. And as we head into the backstretch of this economic cycle, that same cynicism and resignation seems to be settling right in. The glory days of riding the upward slope when almost everything was screamingly cheap in 2009 are behind us.
Commentary
The Tao of Investing
Risk-averse is often used as a description of a rational investor. However, aversion is not a logical desire to minimize. Aversion is fear and disgust. When we avert our eyes, we look away. The term risk-aversion, in fact, gets right to the heart of the behavioral side of finance. We are afraid of losing money and perhaps even more powerfully, we are afraid of the embarrassment that comes from being a loser.
Commentary
Beta The One Trick Unicorn
For a long time investors have been told the only free lunch is diversification. In a hurry to buy into the mythical free lunch investors jumped in without asking enough questions, like what is diversification. Instead everyone hurried to fill buckets and cover the style boxes with about as much thought as someone filling out a March Madness office bracket.
Commentary
Press Play
The Treasury has doled out approximately $10.5 billion on excess bank reserves over the last four years. The emergency Fed policy of paying 25 basis points on excess reserves was enacted on October 6, 2008 to incentivize banks to hold them in the midst of the financial crisis. It worked. But the policy also introduced another headwind to velocity of money.
Commentary
Fancy Hut
Frontier markets are not going to wait 30 years to take the global economy by storm. The parallels drawn between Africa today and 1980s China are apt, but the pace of the emerging market life cycle is likely to be accelerated by technology, investment, demographics, and other factors. The lack of a one-child policy leads to more favorable demographics. Africas workforce will be the worlds largest by 2040, surpassing both China and India. The payment-with-infrastructure investment approach favored by China can mean better transportation, utilities, and communication for whole communities.
Commentary
Mind the Gap
There is almost always a gap between price and value. Over the next few years price volatility is likely to be the source of the gap as sentiment waffles from overly exuberant to downright pessimistic. In the era of the 24-hour news cycle, high frequency trading, and an ever shortening investor attention span, prices move fast. Markets are emotional creatures and have a tendency to boom and bust. There have been occasions when underlying changes of value have gone unrecognized for sustained periods, and the gap was not primarily a function of price volatility.
Commentary
The King is Back
On Mar 1, Lazlo Birinyi called for the S&P500 to hit 1700 in 2012 (an increase of 35%). The 24% rise in the S&P500 between Oct 4 and Feb 29 has prompted many to review their outlook for the year. Their euphoric revisions are propelled by some tailwinds: lean company financials with high operating leverage; emerging markets consumer demand; improving jobs reports; low interest rates, and high cash balances. Many of these factors contributed to Galways relatively positive outlook. However, one lesson we have learned over the years is to start getting nervous when everyone agrees with you.
Commentary
Stay Frosty
The Roubiniesque blues felt globally due to a lack of confidence is not isolated to just the marginally attached and does have merit. As the economy restructured manufacturing workers in the 1980s only had a 65% reemployment rate. We feel the past few years have marked another restructuring in US the economy. Again it will likely mean unemployment will remain high as many workers may not make the transition. This time around the reemployment rate for housing related jobs and financial services will likely remain very subdued.
Commentary
Smart Strategies Looked Stupid in 2011
The US has a confidence crisis, not a growth crisis. Jobs are being created. Consumers spending rose 6.9%. Corporate profits went up 16%. Financial leverage is low, operational leverage is high. Even with the rise in government debt, public debt service is at its lowest since the mid 80s. And all this during the year we survived a major nuclear crisis in Japan, the first-ever Treasury downgrade, revolutions in North Africa and the Middle East, several hundred thousand government layoffs, gridlock in Washington, and the effective bankruptcy of Greece.
Commentary
I Dont Know What to Say, Except its Christmas and Were All in Misery"
The back half of the year has seen a dramatic rise in volatility that has shaken investor confidence in the market itself. Markets have routinely seen wild swings in the futures market prior to the open in New York, before the European close, and in the last hour of trading in the US. This pattern has been an almost daily occurrence and at times seems to have no connection to actual fundamental information. The mystery of this market behavior leaves investors wishing cousin Eddie emptying his chemical toilet was the biggest source of irritation this Christmas.
Commentary
The Whole Truth and Nothing but the Truth... Kinda
Determination of fact can be a science but discerning meaning is an art. For example, we recently spoke one-on-one with a fund manager who we have a long history with. He in no uncertain terms told us to steer clear of his asset class for now and even made other suggestions. A week later, on the general shareholder call, the manager listed all the reasons why the asset class did well year to date, which was the truth-but not the whole truth.The audience did not alter the facts but it sure impacted the message. Investors need to go beyond the facts and find the substance.
Commentary
Elevation
One region has five of the twelve fastest economies in the world, including the fastest at a growth rate of over 20% this year. This region has grown faster than the OECD countries and its consumer sector is growing 2 3 times faster than the developed worlds. A study by the Harvard Business Review in 2009 reported that publicly traded companies average return on capital was 67% higher than comparable countries in China, India, Indonesia, and Vietnam. Investors have been blissfully ignorant of Africa for decades, but the opportunity cost of ignorance is increasing.
