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You’ll cry several times today. For joy and sadness.

Eye this chart. It comes from Bloomberg reporter, John Authers.

His article is:

Depressed Enough Yet? Try This Stock Chart, Then
If you were picking equities by throwing darts at a board, more than 90% would fail to beat cash.

Last week, I published a chart described by its creator as the “most depressing chart ever” for asset managers. Andrew Lapthorne, chief quantitative strategist at Societe Generale SA, pointed out that over the last two years, barely one in five stocks globally have managed to beat the S&P 500. Here is his chart again, for those who didn’t see it:

This made brutally clear the difficulties for active equity managers, judged these days against the ever-rising tide of money flowing into passive index funds. As Lapthorne pointed out, S&P stocks have the advantages that they can be easily hedged using derivatives, and boast the protection of the Federal Reserve, which seems determined not to allow a major fall. They also enjoy the exorbitant privilege of being priced in dollars.

Yet despite all of this, I am now inclined to say that this wasn’t, after all, the most depressing chart for active fund managers. My new candidate will come at the bottom of this piece. For now, let me take you through the arguments why this one wasn’t as scary as all that.

Tom Nelson, senior vice president and director for portfolio management at Franklin Templeton, made the following very reasonable point about the relative performance of the U.S. market and the MSCI ACWI Index of global stocks excluding the U.S. “With the S&P having returned roughly 10.5% and the ACWI ex-US up less than 1% (net total return) over the last two years, you will naturally have a low hit rate when comparing the average global stock with the S&P.” Fair enough. Lapthorne’s chart was showing that big-cap U.S. stocks have had a great two years; it was open to active fund managers to invest in them. For those managers whose mandate barred them from investing in S&P stocks, their clients would be unreasonable to complain.

Nelson also ran a screen on the Bloomberg, looking at how many stocks in the MSCI ACWI Investable Market Index (covering all emerging and developed markets) had beaten the S&P. He found the following:

The hit rate on outperformance of members of the index outperforming the S&P is 37% and 30% respectively in the 1 and 2 year period while outperformance hit rate against the ACWI IMI index itself is 43% [over the last 12 months] and 40% [over the last 24 months]. If you further parse that universe into US stocks and non-US stocks then compare the hit rate of US stocks vs the S&P and non-US stocks to the ACWI ex US IMI, the hit rate [over the last 2 years] is 35% and 47% respectively. Thus better hit rate for Intl vs US which makes sense for a number of reasons. And further converting all Intl stock total returns to USD and comparing to the index (which is USD based) the 2-year hit rate is 43%.

So on this basis, the chart need not be that depressing – beyond the well-known fact that U.S. stocks have been beating the rest of the world for a while now. As they continue to attract more flows in pursuit of strong performance, so the seeds of eventual U.S. underperformance should be sown.

There is a chart that is far more depressing for active equity managers. It comes from the work of Hendrik Bessembinder, of the W.P. Carey School of Business at Arizona State University, which was pointed out to me by the investment veteran Ewen Cameron Watt, to whom many thanks.

Bessembinder has also published some research on the chances of individual stocks beating the S&P, and in the long term it shows that the phenomenon is even more acute. Beating the S&P 500 is the least of their problems. Of the stocks available to buy in and since 1990, 56% of U.S. stocks and 61% of equities in the rest of the world have failed even to beat the return on cash – as represented by the return on one-month Treasury bills. Meanwhile, the top-performing 1.3% of companies accounted for all of the $44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than 1% of firms account for $16 trillion in net wealth creation over that period.

The phenomenon dates back even further. For the U.S., Bessembinder and his colleagues looked at how many stocks have beaten T-bills over their lifetime, starting in 1926. They found that four out of every seven common stocks in the Chicago Center for Research in Securities Prices database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. Put differently, the best-performing 4% of listed companies explained the entire net gain of the U.S. stock market since 1926. All the others between them did no more than match T-bills.

Put in a more technical way, stock pickers faced a classic difficult distribution, with very thick tails – large proportions of their potential investments doing much better or much worse than the mean:

Peter Lynch, the legendary fund manager, used to talk about looking for “ten-baggers” – companies that multiplied 10-fold. This chart shows that was sensible. There are quite a number of ten-baggers to be found, even though they are a tiny proportion of the universe of opportunities. But it isn’t so much that finding a ten-bagger will make you rich. It is more that in the long term, the only way to do significantly better than cash is to find a few ten-baggers.

These numbers have nothing to do with the dynamics of the S&P 500. They suggest:

+ Active investing is a horrendously difficult job, and

+ Active investors do their job much better than many realize.

+ If we were to think of active managers as throwing darts at a board to choose their stocks, far more than 90% of those they might hit at random would fail to give them a return better than cash. Active managers who have even managed to beat cash over time have done a decent job.

You can read the entire article here.

This is Harry talking. There remains  very powerful argument in favor of simple, low-cost ETFs.

Here are two I like.

This is the Vanguard technology fund, called VGT.

This is the VTI — Vanguard’s total market fund:

This is a beautiful story.

I cried. .

This is David Wisnia at his home in Pennsylvania. Photo…Danna Singer for The New York Times


My parents narrowly escaped the Holocaust. He from Romania. She from Austria.

I have visited Auschwitz. 1.1 million people died there.

Nothing prepared me for this story, published yesterday.

Lovers in Auschwitz, Reunited 72 Years Later. He Had One Question.
Was she the reason he was alive today?

She was. Click here. 

“I’m not sure I ever want to fly on a Boeing plane again”

These fighting words came from Susan this morning after she saw today’s New York Times:

Boeing 737 Max Was Plagued With Production Problems, Whistle-Blower Says
Ed Pierson, a former senior manager at the 737 factory, believes production problems may have contributed to two deadly crashes. He will testify before Congress on Wednesday.

The story begins:

Four months before the first deadly crash of Boeing’s 737 Max, a senior manager approached an executive at the company with concerns that the plane was riddled with production problems and potentially unsafe. That manager, Ed Pierson, plans to tell his story to Congress on Wednesday.

Employees at the Renton, Wash., factory where the Max is produced were overworked, exhausted and making mistakes, Mr. Pierson said in an interview. A cascade of damaged parts, missing tools and incomplete instructions was preventing planes from being built on time. Executives were pressuring workers to complete planes despite staff shortages and a chaotic factory floor.

“Frankly right now all my internal warning bells are going off,” Mr. Pierson said in an email to the head of the 737 program in June 2018 that was reviewed by The New York Times. “And for the first time in my life, I’m sorry to say that I’m hesitant about putting my family on a Boeing airplane.”

Mr. Pierson, who is scheduled to testify at a House Transportation Committee hearing on the two 737 Max crashes, called on Boeing to shut down the Max production line last year. But the company kept producing planes and did not make major changes in response to his complaints. During the time when Mr. Pierson said the Renton facility was in disarray, it built the two planes that crashed and killed a total of 346 people. …

Mr. Pierson also identified 13 instances, besides the crashes, in which newly produced Max jets had safety incidents, including engine shutdowns and problems with hydraulics. …

Despite this, in June 2018 Boeing continued with its plan to increase its production rate to 52 planes per month from 47 per month.

You can read the full story here.

Boeing is down a couple of bucks this morning. Its stock has been remarkably resilient this year:

It should be shorted. But not me. Been there. Done that. Timing too hard for my tiny brain.

Fixes

+ Your color printer needs a new cartridge. If it’s spraying yellow everywhere, it needs a new yellow cartridge, etc.

+ You’re old. You will end up in hospital with bone fractures. Please be careful. Just happened to a dear old friend.

+ Yesterday I wrote, “A friend turned me onto SkipLagged.com – cheap airline tickets, courtesy “hidden cities.” For example, buy NYC to New Orleans. Get off in Dallas. Cheaper than buying a ticket NYC to Dallas.

It only works if you can carry-on, writes reader, Aslan Slade. He means: Don’t check luggage.

Real estate developers’ good news:

From last night’s Ross Rant:

Various of my developer friends tell me it has never been better. Capital is readily available, rates are as low as they have ever been, and terms from lenders are relatively easier. Demand for multi is strong, as it is for other products in most markets. It is easy to refi a cash out loan on most projects provided a 1.25 debt cover is reached, and the project is stabilized, regardless of type of real estate. For most real estate other than retail,  it does not get better than this.  The problem now is lack of skilled labor and the cost of land. The great times mean big demand for developable lots, and that means high land prices, and now we are at a point where land prices in many markets are just too high. We may be at the top of the land value curve as developers start to walk away from buying at these prices.

Electrical surge protection

From reader, George Lennon:

We had an electrical malfunction a few years ago.  Fried the server motherboard, UPS and phone system power supply.

Suggest an electronics rider on your insurance policy, Trip Lite high capacity surge protectors (Amazon) on wall outlets, then UPS – all before your actual equipment.  Consider a whole house surge protector.

The utility companies seem to be getting worse, not better.

If you’ve ever driven in New York City….

You’ll relate to this. It seems they always start shuffling across the road, the moment their light turns red.

Read the full story here.

Bush fires surround my hometown of Sydney, Australia

Horrible air. This is the sun.

Yesterday, near my sister Barbara’s office in the eastern suburbs.


People are dying because of Sydney’s present smog — worst than Delhi’s. The smog is due to bush fires, themselves caused by climate change and drought. The Australian prime minister denies climate change. Go figure.

The New York Times has a piece: Australia Burns Again, and Now Its Biggest City Is Choking

Click here.

I was offered 12% yesterday

It’s on a bridge loan on a development in India.

This India:

Would you touch it? I haven’t got a pole long enough.

Don’t get between your wife and her ice cream

Remember’s yesterday’s ice cream lock. Watch what happened to it. Creative wife.

Everything really is getting better

My friend took his ten-year bicycle is for service.

While there, they suggested he ride a new bike with carbon fiber and disc brakes.

He did. And he bought the new bike. “It’s so much better.”

Back in Boston

Granddaughter Sophie and daughter Claire are back in Boston. Who can forget Sophie outside the Lincoln Center’s Nutcracker?

Take your kids. It’s still playing until early January. — Harry Newton