Newsletter – 2018 Q4

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Welcome to Tom’s Quarterly Reads

As we move into 2019, I’m trying something new – a quarterly summary of great finance-related content (I cheated on this first one and used stuff from all of 2018). The links are put into groups based on how into the weeds they get; the further you scroll down the newsletter, the deeper things dive.

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Top Articles

The Psychology of Money (Collaborative Fund): If you want to pick just one thing in this entire email, read this. All of Morgan Housel’s work is worth your time, but this look at “flaws, biases, and causes of bad behavior” is easily his best piece to date.

Prediction vs. Preparation (A Wealth of Common Sense): No one knows exactly what is going to happen in the market – making specific predictions is a fool’s errand. This is another way of approaching the principles I lay out in my thoughts below. [Go deeper: The Prediction Polka.]

Shaping a Life of Money and Meaning (Bps & Pieces): Brian Portnoy’s new book outlines great principles to guide your financial life. Two keys among them: 1) focus on continuous planning, not just the one-time plan; and 2) think of wealth not as a quantity, but rather as “funded contentment”.

Negative Space: Why It Always Feels Like the Top (Mullooly): As the market goes up, the rising line on the chart has an ever-increasing blank space below it. The higher the market goes, the more that space can look like a gaping crater waiting to swallow up all the gains. Remember this when the market recovers, and don’t fall for it.


Getting Into the Weeds

Trust the Process (Alpha Architect): Using the Philadelphia 76ers’ rebuilding process as a lens, this outlines the need to have a process that you stick to when investing. [The short version: A book called Shut Up and Wait.]

The Myth of Passive Investing (Prag Cap): Everyone makes some sort of active bet when setting up their overall portfolio, the most common of which is being overweight stocks in your home country. Additionally, just because an ETF is rules-based doesn’t mean it’s an index fund. None of this is necessarily bad, but an investor must be aware of the choices they are making.

The State of Technology at the End of 2018 (Stratechery): Ben Thompson is one of the best observers and writers about tech out there today. [Go deeper: The Future of Tech podcast with Chris Dixon.]

A Sober View on Crypto (Invest Like the Best): Here is the obligatory Bitcoin/cryptocurrency item. In all seriousness: if you want to consume one piece of content about cryptocurrencies, make it this podcast. [Go deeper: start with Episode 1 of the ILTB Hash Power series if you want to understand the nuts and bolts of cryptoassets like Bitcoin.]


Down the Rabbit Hole

Negative Equity, Veiled Value, and the Erosion of Price-to-Book (OSAM): A phenomenal research piece that builds on the idea that a stock’s price-to-book ratio may have lost the predictive power that it once had, since it doesn’t capture important things like brand names and truly long-term assets. [Go deeper: Why Financial Statements Don’t Work for Digital Companies looks at specific accounting issues, and An Evolve-or-Die Moment for the World’s Great Investors takes a larger look at the ongoing question of whether value investing is dead, evolving, or neither.]

Failing Slow, Failing Fast, and Failing Very Fast (Newfound Research): Risk and reward are inextricably linked in investing, but figuring out the right amount of risk to take is difficult. Taking too much risk can lead to ruin quickly; taking too little risk may guarantee your nest egg will never grow to the size you are planning on. [Go deeper: this overview of trend-following gives greater detail on using it as a risk-management tool within a portfolio.]

Is there a signal in the noise? Yield Curves, Economic Growth and Stock Prices (Musings on Markets): The yield curve has been flattening and portions have inverted or come very close. Yield curve inversions have historically presaged recessions, but on highly variable timelines. There is no one perfect signal about when to enter or exit the stock market.

Asset Diversification in a Flat World (Alpha Architect): A cornerstone of investment portfolio construction is the inclusion of different assets (i.e. stocks, bonds, and real estate) that are somewhat uncorrelated – they behave a bit differently over time. This article takes a look at whether globalization and increasingly correlated assets across the world mean we should ditch diversification across countries. Hint: you should still diversify. [Go deeper: Understanding the correlation of equity and bond returns and 3 Correlation Myths In Portfolio Construction.]


Longform

The Big Change (Frederick Lewis Allen): Published in 1952, this book provides a great perspective on how America evolved from 1900 to 1950, without a narrative shaped by subsequent events. This passage could just as easily have come from a book written today:

How This All Happened (Collaborative Fund): In some ways, a companion piece to The Big Change. It covers American consumerism from WW II to now, and acknowledges that its narrative is guided by where we are today.

Exploring The New Science of Psychedelics (Tim Ferriss Show): This podcast is a bit out there, but that’s what makes it worth your time. I’m not all-in on psychedelics after listening, but I’m no longer outright dismissive of them either. Yes, it’s a long episode – just start listening and give it a chance.


Tom’s Thoughts

The quarterly cadence of this newsletter means that by design this is not a news source. Since short-term market news tends towards overreaction and loud noise, it isn’t conducive to sticking to one’s long-term financial plan. Instead of news or market predictions as we end a rocky 2018, I’ll stick to some core principles:

  1. Identify your financial goals, let them drive your planning, and keep them up to date.
  2. Align your investment portfolio with your goals, and establish rules (write them down!) for managing the portfolio that you will stick to in good and bad markets.
  3. I can’t predict what the market will do in the short term, but I’m confident that stocks will perform quite well in the long run.

Finally, on a completely personal note, Liz and I welcomed Claire Olivia Figgatt to the family in December. We’re all looking forward to a great 2019!

Thanks,
Tom


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