The first quiz from The Investment Ecosystem is now live. It is mostly a look at the wacky market year of 2021, but there are some historical questions too. See how you do; you might win a one-year subscription (or extension of your existing one) just for entering.
There are instructions at the start of the quiz that describe it more fully. The quiz will be open until January 7. To synchronize with that, the Founder subscription will remain available until then, rather than being retired after the first of the year.
Good luck!
A new understanding?
The Oliver Wyman Forum has produced a report (the first in a promised series) it calls, “A new understanding of the past, present, and future of the US equity market.” The piece reworks a number of standard equity measures, including the Capital Asset Pricing Model (to arrive at a “True North equity risk premium”) and the price/earnings ratio, based upon “perceived earnings,” which it finds more timely. Plus, there’s a “Holistic Market Model.” The author sets a high bar, promising that the work will “bring the financial community’s understanding of US markets to the next level.”
Of note: “We conclude that secular profit margins before corporate taxes are near an 80-year high, the combined corporate and investor personal tax rate is near an 80-year low, and the secular post-all-tax margins are near a 100-year high.”
ARK
It seems that something about ARK Investments could be included in every edition of the Fortnightly.
This time around, Amy Arnott of Morningstar wrote about the firm’s flagship fund in “ARKK: An Object Lesson in How Not To Invest.” To be fair, the “how not to invest” under review is not about the management of the fund but the chasing of performance by investors, which has resulted in a huge gap between the reported returns for ARKK and the estimated returns for investors. (That’s something we’ve seen many times before with other high-fliers.)
ARKK has been under pressure since it peaked in February, and is down almost 38%. In a recent note, “Innovation Stocks Are Not in A Bubble: We Believe They Are in Deep Value Territory,” Cathie Wood kept preaching the gospel that has made her famous. Originally, she wrote that ARKK “could deliver a 40% compound annual rate of return during the next five years,” but subsequently changed the language to “our strategies will triple to quintuple in value over the next five years.”
Most investors would be hard pressed to find “deep value” in the names that ARK favors and many question Wood’s statements about the capabilities of her firm (“I believe that our research on innovation is the best in the financial world”). The very first posting on The Investment Ecosystem used ARK to illustrate some universal challenges for asset managers, and addressed that last issue among others.
Decision making
Redington packs a lot into just a few pages in “Three Steps to Better Decision-Making,” starting with seventeen investment governance principles. #14 is highlighted: “Monitoring the quality of your decision-making can be as important as monitoring the financial performance of your investments.” That sets up the three steps: defining a good decision, building a “CheckLog,” and reviewing outcomes. The numerous questions throughout are reminders of how challenging good decision making can be — and how important a careful, structured process is to getting you where you want to go.
Resources
Given the proliferation of free and paid sources online, finding the good ones is an ongoing challenge. Thankfully, Edwin Dorsey of The Bear Cave compiled “A Hedge Fund Analyst Christmas List.” Don’t let the title hold you back; you don’t need to be an analyst or work at a hedge fund to find some nuggets that will be helpful in your particular node of the ecosystem.
Other good reads
“The Inside Story of How Bob Maynard Simplified PERSI’s Portfolio,” Alicia McElhaney, Institutional Investor. A summary of the chief investment officer’s philosophy in advance of his September retirement: “We want to be simple. We want to be transparent. We want to be focused. And we want to be patient.”
“Africa 2021: A continent of opportunity,” Invesco. An overview of 54 countries in charts and stats.
“Do Mutual Funds Increase Disclosure Complexity to Hide Fees?” Elisabetta Basilico, Alpha Architect. A review of a paper that answers the question with a “Yes.” (Related: “Fund Critic Birdthistle to Take Reins at SEC’s Division of Investment Management.”)
“A Quant Investor Uses A.I. to Track Down Corporate Greenwashing,” Liam Vaughan, Bloomberg Businessweek. There has been a spate of ESG-pushback articles of late (including ours); this one looks at an effort at Acadian Asset Management to make money trading on the difference between what firms do and what they say they do.
“Resilience and the Stockdale Paradox,” Paul Kedrosky and Eric Norlin, SK Ventures. Looking at “the full house of data” and seeing the need for resilience — “of society finding new ways to adapt and even thrive in a more volatile world” — as a big theme of venture going forward.
“Private equity groups spend $42bn buying companies from themselves,” Kay Wiggins, Financial Times. What should we think of the expanded use of continuation funds and the potential conflicts that are involved?
“2021 Recap of the Recaps,” Chris Perry, Media Genius from Weber Shandwick. In a meta year, here’s a meta list.
Reminder
“The secret of success is constancy to purpose.” — Benjamin Disraeli.
Apes on the move
Had you seen a Wall Street Journal headline a year ago titled, “Inside AMC’s Crazy, Bonkers, Upside-Down Year of Apes, Memes and Shorts,” you might have been left perplexed. You still may be (even before you consider the Bored Ape Yacht Club and the like.) In addition to offering some corporate history, the piece describes a bonkers environment, with shareholders rolling the dice and CEO Adam Aron doing everything he could to fuel the frenzy.
A posting from Doomberg, “No Planet for the Apes,” took the CEO to task: “Aron’s behavior has been downright shameless and gimmicky,” instead of “doing the serious work of capturing profits.”
After being privately held for a time, AMC once again came public in 2013. The chart shows the total return after that, with the absolute performance on the top and relative performance in the middle. The stock peaked at $62.55 on June 2, when it had increased 2,850% year to date, taking it from being an extreme laggard to a solid outperformer since the IPO. The next day, AMC sold additional stock, which is now down 54% from the top.
Aron’s own activity in the stock is shown in the bottom panel of the chart; he’s sold more than 90% of his holdings in the last two months.
Postings
It has been a quiet end of the year in terms of subscriber postings, but there are many new ones on deck. See part one of “We Need Some New Terminology,” ten interesting charts, and a tale of the wining and dining in the investment business from years gone by.
Check out the archives of all of the postings and follow The Investment Ecosystem on Twitter.
Happy New Year!
Published: December 28, 2021
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