The Fortnightly is an eclectic look at ideas from around the ecosystem. It’s part of the free tier for this site. You can sign up for it — or dive into the deep pool of original content that a paid subscription offers — here.
On to the readings.
A focus on behavior
The 2022 edition of the annual Behavioral Economics Guide offers the typical wide range of articles. One of the great questions for investment organizations is whether and how to adopt efforts to improve decision making behavior — in an industry that is famously “hands-off” in many respects, what kinds of structuring and nudging is warranted in the pursuit of better outcomes?
Here are some of the articles that might illuminate that question:
Partnership Between Data Science and Behavioural Economics
Using a Behavioural Lens to Manage Risk in the Financial Industry
How to Introduce Behavioral Science Into Organizations and Not Perish While Trying
Applying Behavioural Economics to Firms
Behavioral Incentives and Their Influence on Employee Performance
Other entries also offer important context, and there are additional resources as well, including a very good glossary of behavioral science concepts.
An investment organization of any size ought to be investigating these ideas. Who is doing so in yours?
Learning the business
Brent Donnelly of Spectra Markets published “How to Succeed as a Sell Side Trader,” which offers thoughtful advice on finding your personal approach, becoming the “go-to expert” in your market, the franchise value that comes with certain jobs, being a team player, the importance of client service, and much more.
If you’re not a “trader,” don’t let that stop you from reading it. Many of the ideas apply to other corners of the investment world. Such as: “A trader cheering for a position that’s moved aggressively their way is the most reliable trading indicator I have ever seen.” That applies to analysts, portfolio managers, advisors, and allocators too; when the crowing starts, it’s a red flag.
(The piece also appears on Epsilon Theory, sans the two appendices: “Steps toward becoming an expert in your currency” and “21 ways to succeed at trading and 13 ways to fail.”)
Also:
~ Twitter has become a source for threads on investment career recommendations. Here are two from Brett Caughran: for a new pod shop analyst and getting a hedge fund job.
~ For some basic career path information, 300 Hours offers summaries on investment research, portfolio management, investment banking, private equity, financial planning, corporate finance, and accounting.
~ Be careful when tinkering with shared models.
Private equity assumptions
From January to April, the capital market return assumptions for private equity published by BlackRock collapsed, dropping five percentage points on a five-year horizon, three on a fifteen-year horizon, and more than two on a thirty-year horizon. In contrast, U.S. public equity return predictions showed little change across most horizons, and expectations actually went up for the shorter ones.
Discuss.
Paired articles
Here are some pieces that fit together thematically:
Data and research. “Research & Alt Data: A Zero Sum Game” (Michael Mayhew, Integrity Research Associates) and “5 Key Takeaways from Unbundling Uncovered USA” (Mike Carrodus, Substantive Research) cover the dynamics at play and the impact on budgets for each.
Indexes. Dueling headlines in the Financial Times: “Index regulation is tricky but necessary” (by Alex Matturri, the former chief executive of S&P Dow Jones Indices) and “Worries about the dominance of big three index trackers are wrong” (from Charley Ellis, the founder of Greenwich Associates).
Ethics. An Apple lawyer in “a role that involved managing the company’s compliance efforts to avoid employee insider trading” pled guilty to insider trading, while 49 EY employees cheated on CPA ethics exams.
Other reads
“Pension Funds Plunge Into Riskier Bets — Just as Markets Are Struggling,” Dion Rabouin and Heather Gillers, Wall Street Journal.
The funds can try to fill the gap by the politically difficult task of demanding more in yearly contributions from governments and from workers themselves, a move that often meets with pushback from public-employee unions. Or they can adopt a potentially higher-yielding — but riskier — investment strategy.
“Collaboration Is a Key Skill. So Why Aren’t We Teaching It?” Deb Mashek, MIT Sloan Management Review. “What is surprising . . . is how little professional development people reported receiving on how to build healthy and productive collaborative relationships at work.”
“Night Moves: Is the Overnight Drift the Grandmother of All Market Anomalies?” Victor Haghani, et. al, SSRN. In contrast to institutions, retail investors tend to buy on the open and sell on the close, and:
Our research on the overnight effect in single name stocks suggests that the hypothesis of retail trading likely goes a long way toward explaining the phenomenon at both the level of the overall stock market, and that of individual stocks.
“New Business Boom and Bust: How Capitalism Experiments,” Michael Mauboussin and Dan Callahan, Counterpoint Global. The entrance and exit of companies in a new industry. (By the way, how do so many asset management firms manage to hang on?)
“Divergent Interests: Interest Rate Sensitivity in the Cross-Section of Stock Returns,” D.E. Shaw.
We believe that sector and style factor portfolios, as well as my commercial equity benchmarks, may have more active exposure to interest rates than many investors appreciate.
“When 9 is the Perfect Number,” Rusty O’Kelley, et. al, Harvard Law School Forum on Corporate Governance. “To develop the most effective board possible, board leaders should look to assemble a group of directors who, as a collective group, always demonstrate seven behaviors,” and “without going to extremes that can be problematic,” display two other ones as well.
“Researchers Set Out to Determine How Much Endowments Invest With Diverse Managers. Most Refused to Participate.” Jessica Hamlin, Institutional Investor.
Specifically, the research examines the extent to which the wealthiest 25 public and 25 private U.S. colleges and universities invest their endowment assets with firms owned by women and people of color.
“Activist Short Selling,” Market Sentiment. A look at the performance of four of the short-sellers whose picks often move prices. (You may be surprised.)
“Chaos is a Ladder,” Josh Brown, The Reformed Broker.
Everyone hates rules and regulations until it’s too late.
“Creating Visual Deliverables That Clearly Communicate Financial Planning Concepts,” Nerd’s Eye View. “Communication is one of the most important skills for a financial advisor.” A look at learning styles, types of illustrations (by content and purpose), and resources to consider.
“Extroverts, Your Colleagues Wish You Would Just Shut Up and Listen,” Pamela Reynolds, Working Knowledge.
But there’s a down side to being the life of the party, according to new research: People often assume their extroverted colleagues are poor listeners.
Sophisticated guesswork
“Private market valuations are set by a process of sophisticated guesswork based only partly on the value of comparable listed businesses.” — Kaye Wiggins.
Echo
It’s unusual, maybe even unheard of, for a company to be a “poster child” for excess in two different eras. Perhaps bitcoin will rally to new heights and MicroStrategy will avoid that fate; founder Michael Saylor has bet the company on that eventuality.
The peaks in return for each cycle are synchronized here, showing that the dot-com-era ride was even wilder than the bitcoin one so far. (The earlier heyday was followed by Saylor and others settling accounting fraud charges with the SEC.)
Postings
Recent pieces for paid subscribers:
“Performance Results and Measures of Greatness.” This posting serves as a coda to the earlier series about Bill Gross and Pimco, focusing on evidence of performance and other factors that contributed to the legacy they produced.
“Switching Hats from Entrepreneur to Investor.” Some of the personal qualities and decision making skills that lead business owners to success can work against them as they deploy their assets into other investments.
All of the content published by The Investment Ecosystem is available in the archives.
Published: July 4, 2022
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