What I read this week…

What I read last week...

Finance & Markets

 

Morgan Housel is one of my favourite writers. In his post he wrote about an ubiquitious phenomenon. Bad things happen very fast, good things need a lot of time to unfold. This can be observed in the financial markets on a daily basis. Signifikant stock market returns sometimes need decades to materialise, while stock market crashes can happen in a blink of an eye.

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Technological developments have reshaped almost every aspect of our lifes during the past decades. During the COVID crisis many people started inveting through online brokerages which offer near zero commission trading. From my point of view it is very important to aknowledged the konsequences for wealth managers and in particular stock markets.

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Forecasting equity market returns seems like a fruitless endeavor. Nevertheless it is important to assess potential equity returns especially in constrast to other investable assets.

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Anybody who is involved in the financial markets knows the potential havok it can wreck on your emotions. To distinguish good from bad decisions just looking at the results you achieved won’t achieve much. You need to develop a thorough process which can be reviewed.

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Business & Strategy

 

The mega IPO of Ant Financial got pulled by the chinese government two days before initial trading. The reasons are not just idiological in nature.

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What I read this week…

What I read last week...

Finance & Markets

 

Aswath Damodaran wrote about different sources of equity returns. In general, I agree with the notion that to earn any kind of return in the market, you have to accept the pain that goes with it.

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Too often, people confuse trading with investing. Keeping the long term perspective matters most.

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As of late, there have been numerous articles on the valuation of global equity markets. It is critical to put valuation metrics into context and decipher their calculation.

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Howard marks published a piece on the current uncertainty. It is outright brilliant, don’t miss it!!!

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Business & Strategy

 

Ben Thompson wrote about the “anti-amazon-alliance”, which has formed over the last years. Alternative e-commerce providers like Shopify or Instagram are gaining traction in the marketplace. 

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What I read this week…

What I read last week...

Finance & Markets

 

Since the inception of risk parity as a method to allocate capital between different asset classes by Ray Dalio, it has become the core of many investment strategies. There is a variety of parameters, which influence the performance of risk parity strategies. Follow the link an find out how big the spread between these strategies was as of late.

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Deep value stocks have been punished during the latest market rout. This article provides some context of how “cheap” they appear lately.

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Seth Klarman wrote one of the most sought after books in finance. Here are some of the timeless insights it provides.

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A volatile market environment sometimes suggests that particularly complex asset allocation strategies are needed. Oftentimes the opposite is the case. Jonathan Clements provides a good starting point for the portfolio construction of individual investors.

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Business & Strategy

 

E-sports’ culture is growing rapidly for years now and game publishers have profited generously. In contrast to other popular sports, the e-sport teams struggle to take their “fair” share of profits.

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What I read this week…

What I read last week...

Finance & Markets

 

An interesting article on the role of equity beta in portfolio diversification. In my opinion, cross-asset correlations are often underestimated.

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Behavioral insights from the latest market crash. Some of them seem too familiar.

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Although people (including me) often complain about taxes and the social welfare economy in Germany, it makes society more resilient to crises.

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Behavior

 

I already wrote about people’s tendency to focus on unimportant details and lose sight of the bigger picture. Shane Parish described the “Bikeshed Effect” very well.

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A well-written article on the inaccuracy of models, trying to predict the development of the COVID-19 outbreak. It is important to keep in mind that models are only as good as their inputs.

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Stillness in times of chaos

Stillness in times of chaos

Do you experience the present times as highly chaotic?

Is the overflow of information draining your attention capabilities, making it difficult to focus?

You are not alone!

But there are effective strategies to fight feeling powerless, getting more proactive, and cope with every adversity you encounter.

I read about the art of stoicism a few years ago and recognized the potential benefits it could bring to my life.

A brief history of stoicism

The philosophy of stoicism was created by  Zeno of Citium in the early 3rd century BC who debated about its core beliefs at a porch (stoa poikilê) in Athens, hence the name “stoicism”.

Zeno laid the cornerstones of this school of thought, crafting core beliefs about logic, physics, and ethics. Today, the ethic principles of stoicism are most prominent, but logic and physics are needed for an ethical life too.

Later on, stoicism was further developed by the likes of Seneca, Epictetus, and Emperor Marcus Aurelius. Each one of them used the principles to deal with adversity they faced during their lifetimes. From growing up as a slave, as Epictetus did, to Marcus Aurelius’ rule over the Roman Empire, stoicism is universally applicable.

What is stoicism about?

I outline some of the core tenets as well as my personal interpretation below, using some of the most important quotes of famous topics.

1. Controlling your reaction to adversity is essential

Man is disturbed not by things, but by the views he takes of them.” – Epictetus

 

You have power over your mind – not outside events. Realize this, and you will find strength.

– Marcus Aurelius

Today I escaped anxiety. Or no, I discarded it, because it was within me, in my own perceptions– not outside.

– Marcus Aurelius

Recognize which things can be influenced and which not, and focus all your actions on the former. Dreading about the latter is just a waste of time.

2. Time is a precious good you should use efficiently

Not to live as if you had endless years ahead of you. Death overshadows you. While you’re alive and able– be good.

– Marcus Aurelius

This tenet supplements the first one. Don’t contemplate too much, be proactively working towards your goals.

3. True wealth is not material

Wealth consists not in having great possessions, but in having few wants.

– Epictetus

The want for materialistic things can be overwhelming sometimes, but recognizing the worth of non-materialistic things creates true satisfaction.

4. Embracing failure helps you prepare for it

Does what’s happened keep you from acting with justice, generosity, self-control, sanity, prudence, honesty, humility, straightforwardness, and all other qualities that allow a person’s nature to fulfill itself? So remember this principle when something threatens to cause you pain: the thing itself was no misfortune at all; to endure it and prevail is great good fortune.

– Marcus Aurelius

There will be tremendous failures in your personal and professional lives, embrace them to anticipate the pain. There won’t be growth without failure.

5. Develop a pragmatic approach

Don’t just say you have read books. Show that through them you have learned to think better, to be a more discriminating and reflective person. Books are the training weights of the mind. They are very helpful, but it would be a bad mistake to suppose that one has made progress simply by having internalized their contents.

– Epictetus

The mere consumption of information is not sufficient to make a difference. Attaining a vast amount of knowledge is important, acting upon it even more so.

6. Get your priorities right

A key point to bear in mind: The value of attentiveness varies in proportion to its object. You’re better off not giving the small things more time than they deserve.

– Marcus Aurelius

It is important the focus on the most pressing topics, sometimes we lose focus on what is important. What are the immediate actions you have to take to push things forward?

Applying stoic principles to financial markets

Stoic principles lend themselves to the application to the application in modern financial markets.

Especially in the fast-paced environment of financial markets, the effects of applying stoic principles can reap huge rewards.

In the distractive turmoil of daily market movements and news-flows, market participants who understand, which parameters of their investment strategy can be influenced and which not, have a substantial edge.

In my daily work as a portfolio manager, I try to incorporate an evidence-based decision-making process to cope with the adversity and ambiguity of markets.

Instead of talking about the latest price movement of company Xyz, one should focus on important questions like:

  • Is my overall asset allocation in line with my business objectives?
  • Did I diversify enough or are risk factors of my portfolio highly correlated?
  • Am I taking enough or too little risk?

The list could be continued indefinitely…

Answering these questions in advance of market turmoil, as we experienced recently, not trying to interpret every market movement and in the end, focus on executing your strategic plan is a true application of stoic principles.

If you like to learn more about stoic philosophy and how to apply it to your life, I can highly recommend the following resources:

Ryan Holiday on stoicism

The Daily Stoic

Resources on Stoicism by Tim Ferris

What I read this week…

What I read last week...

Finance & Markets

 

Bridgewater Associates estimates the COVID-19 hit to US corporations to be around $ 4 Trillion. Without a doubt, the coming months will be challenging for businesses of any kind.

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I enjoy reading the memos Howard Marks puts out. His writing puts the current environment in perspective and outlines actionable ideas.

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Changing your investment strategies always inherits timing risk. CalPERS unraveled their tail hedging strategy just before the market crashed and missed out on a huge pay-poff.

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Technology

 

Ben Thompson wrote a fantastic piece on the power big tech companies have about user data, their marginal cost advantages and the role of alternative news providers like twitter during the current crises.

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Another fascinating article wrote by Ben Evans about the recent growth of different forms of digital communication.

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