This week’s readings/links:

In gold we trust: 2020 report (the extended version).

Ronald-Peter Stöferle and Mark Valek’s annual publication covering the state of global financial markets, monetary dynamics and their influence on gold price developments. There is also a compact version of the report available from their website.

Charley Ellis: Why active investing is still a loser’s game.

This is worth a listen. Ellis weighs in on whether indexing has gotten too large, Vanguard’s foray into private equity, and the spots where active management might still work. Some of my paraphrased notes regarding his thoughts on active management and selecting managers are below.

It is remarkable to think that Ellis wrote “The Loser’s Game” in 1975, concluding then that “gifted, determined, ambitious professionals have come into investment management in such large numbers during the past 30 years that it may no longer be feasible for any of them to profit from the errors of all the others sufficiently often and by sufficient magnitude to beat the market averages.” Given the changes in the investment management industry over the last 45 years, it is clear that the challenge for active management has gotten even harder.

So where does Ellis see possible opportunities (if any) for active managers today?

One opportunity is in China, where the market is still dominated by individual investors. If you were really well informed and rigorous in your work, he thinks it would be a terrific place to be an active manager. On emerging markets more generally, however, he thinks they are more efficient than 15-20 years ago as people have become more comfortable investing from overseas. It’s not as efficient as with the large-cap stocks in the US or the UK, but it’s close enough so that he wouldn’t want to make an effort in that direction at all.

Another opportunity is to focus on the smaller capitalisation companies; for example, become an expert in a particular industry, spend 10 or 15 years analyzing the companies, get to know them, be diligent in your work, and become trusted by the companies to be able to give good feedback as to what they might think about doing.

The third is to play a game that almost nobody else is playing – think Jim Simons and Renaissance Capital, for example. But the challenge for investors then becomes that they often don’t have very much in the way of experience or methodology for evaluating performance and when/whether to stay with the strategy or not.

How to design an investment organization to be successful?

You want 6-8 really gifted analysts who’ve [ideally] already done very well financially, so they’re going to put their own money on the line with everybody else in the firm. And one partner who has got deep pockets and is going to put his private capital on the line. That’s going to be an investment management unit that has talent, experience and skills to succeed, especially if they are operating in a level of the market where the competition candidly is not very good and not very frequent.

The thing to keep in mind is that they can have quite unusual patterns of success – often lumpy returns, where you have a great year, then two or three not so great years, and then a great year, that sort of thing.

The traits required to be successful as an active investor?

Independent thinking (although helpful to have 1-2 colleagues so as not to go off the deep end), good skills in quantitative analysis, enjoying a game that includes long periods of doing nothing and a high degree of self-discipline to stick with your process and catch mistakes early on when you make them. 

The key thing to look for in an investment manager?

Character. Some people call it culture. Others call it integrity. All fine by him. The non-negative of really good character is so important that it overwhelms the possibility of doing “better than the market.” When he looks at why most investors do worse than the market, if it’s not because of their own mistakes (although they do make plenty of them), then it’s because of the mistakes that managers make of letting themselves pay too much attention to the business side instead of the professional side of their work, letting the assets under management get too large for them to be able to handle it the way they’re doing.

Eric Yuan (founder and CEO of Zoom): Discussing the impact of COVID-19 on tech and how we communicate.

AFR: The two things Kerr Neilson fears in pandemic (subscription might be required).

On the re-opening of international borders and possible implications: there will be personal trade-offs, as conditionality will likely be imposed on travel. He thinks testing will be the way you get a license to do anything. “That’s where we’re going to be seeing a lot more activity in terms of our movement and it’s not all attractive because it starts a whole chain of data, the collection and tracking. It’s the open season for that type of game to be played by what now has become an accepted term – hideous as it is – ‘the authorities’.”

On government intervention and bailouts during this crisis: some companies have found themselves in a cash flow crisis, with excess leverage and insufficient liquidity. “To say ‘well, no one could have said this would happen’ is correct, but it’s not exactly cautious custodians of other people’s money – there’s been plenty of buybacks and plenty of executive enrichment.” Most disappointingly, “we are still socialising the losses and privatising the gains.”

On what concerns him the most today: the authoritarian leaders who appear to be consolidating their rule. “Out of this debacle we’ll hear how they dealt with it because they could. And so then strongmen – sorry, invertebrates masquerading as strongmen – will use that to argue why they should have more power.

On why he prefers listening into company conference calls rather than reading the transcripts: “It’s in the Q&A that you can pick up the tics in individuals in terms of the way they respond to a comfortable question and the way they respond to an uncomfortable question.”

Russell Clark: Macro trends and macro trading.

Excerpt: changing underlying trends in oil, government spending and Chinese exports suggest that the macro trend of the 2010s will not be the same as the 2020s. If the experience of changing macro trends from the 2000s to the 2010s are repeated, then the winners of last decade, are now likely losers.