finding a place to stand (v)

…continuing from yesterday:

–factor investing has been around for at least thirty years, maybe more than that, but I only became aware of it as a thing in the pension market in the 1990s. A broker or pension advisory firm creates a group of stocks that embody a concept that an investor might be willing to either bet for or against. Concepts or factors might be: large companies, small companies, most sensitive to oil price changes, most sensitive to interest rate changes… Ones like “oil” are created by regression analysis. Others can be made from computer screens. A recently popular one is, I think, “yuc,” young unprofitable companies, which already contains a sign of the way the creator wants the user to go.

Their appeal is simplicity, Their drawback is that, in the past at least, they’ve tended not to work particularly well. My sense is that this is because, although a given factor may be a reason for profits to vary, it’s often not the most important–or even if it is, there are half a dozen offsets.

I’m interested in picking through the wreckage of the yucs. Many are indeed yucky, but some have tangible and intangible assets that earnings screens ignore completely.

–“discounting” is stock market jargon for the process by which investors factor future prospects into today’s prices. Typically, investors have tended to factor into today’s quote their expectations for company developments over the coming year. In a very frothy market, one year may become three. In a bear market, investors tend not to pay anything for future events, not matter how near or haw much conviction they have.

In today’s world, though, a significant amount of price determination comes from machines reacting with lightning speed to just-released news. One of my early work friends had a boss who got ideas from reading the Wall Street Journal from back to front, with emphasis on small-print compilations of the earnings of obscure companies. That doesn’t work any more. It seems to me our best course of action is to take a longer investment horizon that these rapid traders do.

–during my working career I found two sure signs that I was dealing with a know-nothing: talking about the Dow and talking about the effect of politics on the market.

The Dow is, if anything, a more solid indicator than it used to be.

Politics is another issue, I think. While the Reagan Revolution did achieve the modernization of antiquated American plant and equipment, it also ushered in a long period of neglect of infrastructure, education and a lack of retraining, unique in the G-7, for workers displaced by globalization and technological change. If the US is in a race for world economic leadership with China, a country with over 4x our population, then the anti-growth, anti-science, anti-progress agenda of the Trump wing of the Republican party is a very bad place to be. Then there’s the coup attempt and his support for Russia in Ukraine …and the Democrats’ inability/disinterest in offering any credible alternative. During Trump’s term, the clear winning stock market strategy was to focus on publicly listed multinational businesses with limited plant and equipment in the US. It’s not clear to me that this won’t happen again.

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