Tag Archives: Financial History

CFA Seminar on Financial History; Bubble Studies; Advanced Study in Human Action

Seminar of Financial History

In an age when an algorithm is the main competitor for many fund managers, what can we know that they don’t? Algos understand the data trail of history, but this trail provides only limited insight into the key lessons of financial history for investors. In this talk, first provided at the 62nd Annual CFA Institute Financial Analysts Seminar, Russell Napier discusses those 21 most important lessons from financial history that allow human beings to profit at the expense of the machines.    1 Hour on-line seminar Feb. 1, 2018. Register (CSInvesting.org: I believe it is free: https://www.cfainstitute.org/learning/events/Pages/02012018_138012.aspx

Regardless of whether you can attend, read relentlessly about financial, economic, and common history.   Note what Jim Grant of Grant’s Interest Rate Observer says:

But our main goal is to tell you the next important event in the markets. And sometimes we succeed.

– As with the tech bubble in 1999
– The 2008 mortgage crash
– The 2009 recovery in financials
– And the 2012-13 rise in house prices

How have we been so prescient over the years?
We don’t have fancy, financial computer models or a team of MBAs and Ph.D.’s to help us make these predictions. And we don’t have access to any kind of special information.

But we have been immersed in the markets for over 30 years. And we’ve studied the financial history of the past 200 years. None of which guarantees clairvoyance—nothing does. What we do claim is the capacity to see the present in the context of the helpful lessons of the past.

Like when we warned about the mortgage debt bubble in September 2006.

From the Sept. 8, 2006 Grant’s:
“Overvalued,” we, in fact, judge trillions of dollars of asset-backed securities and collateralized debt obligations to be, and we are bearish on them. Housing-related stocks may or may not be prospectively cheap; they at least look historically cheap. But housing-related debt is cheap by no standard of value. For institutional investors equipped to deal in credit default swaps, there’s an opportunity to lay down a low-cost bearish bet.

Bubble Studies

368353935-GMOMeltUp   J. Grantham says that the current market does not YET show the characteristics of a bubble despite being highly valued.

Referenced study in the article: Bubbles for Fama 2017 and gmo-quarterly-letter

and more of interest: faang-schmaang-don-t-blame-the-over-valuation-of-the-s-p-solely-on-information-technology


Update (1/10/2018) Runaway Train – Dec 2018

Advanced Seminar in Human Action

12/06/2017  Mises Institute
Arguably one of the greatest thinkers of the twentieth century, Ludwig von Mises created a framework for all of economic science beginning with the simple axiom that individuals act. In his magnum opus, Human Action, he described economics as a branch of the theory of human action and stressed how broadly it spans, far beyond a discussion of mere money and prices. Mises said, “Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.” For Mises, it was imperative that everyone learns economics, calling it “the main and proper study of every citizen.”

Human Action is a challenging read. With over 800 pages of dense material, study tools are very helpful. The course, Advanced Seminar in Human Action, is a useful addition to other materials like the Human Action Study Guide.
In this course, leading Austrian economists walk the student through Human Action a chapter at a time.

If you’ve ever wanted a push to help you get through the book or if you’ve wondered about your own reading of the material, here is your opportunity to study Human Action with David Gordon, Joe Salerno, Jeffery Herbener, Peter Klein, Guido Hülsmann, and Mark Thornton.

Human Action by Ludwig von Mises is available for free on Mises.org and for purchase as a paperback and hardcover in the Mises Bookstore.

Register: https://mises.org/library/advanced-seminar-human-action

The teachers are excellent and Human Action is the Magnum Opus of Ludwig von Mises.  The book is a DIFFICULT read but there is a study guide, lecture videos, and lecture slides for all the chapters of the book.  You will have a strong grounding in economics and improve your reading and critical thinking skills, but if you are a beginner, I would opt for  https://www.mises.org/library/economics-one-lesson

Sandstorm Gold Analysis; Other Readings

A reader (the ONLY one) presented his valuation below:

The analysis is in response to http://csinvesting.org/2017/10/27/sandstorm-gold-so-whats-it-worth/

Business Model

Sandstorm provides financing for other junior, mid-tiers and major gold producers. In exchange for a principal amount provided by Sandstorm, gold producers exchange a royalty stream on their gold production. This royalty stream can take different forms, the most common being a percentage of Net Smelter Revenue (“NSR”) or by offering an off-take agreement at discounted prices. In addition, Sandstorm may receive warrants or other traded securities.

Sandstorm offers their shareholders a diversified portfolio of royalty streams, which offers some benefits over investing in a gold exploration/producing company: 1) predictable cash flows, 2) very low cost structure, 3) replacement capex (investment in new projects) typically much lower than for a gold producer.

In my view, this kind of investment should benefit from a lower cost of capital because of its lower risk, so therefore investors would be willing to pay more for this cash flow stream vs. a cash flow stream coming out directly from a mine.


I’m looking at 3 main buckets of value here.

1) Producing assets – currently generate ~US$50mm of cash flows each year. My rough assumption here is that these cash flows should be relatively stable over the next 10 years. I assume no terminal value as these mines are winded-down over time. Discounting this at a cost of equity of ~8% yields ~US$335mm

2) Advanced exploration / explo / investment portfolio – I’m assuming no value to the exploration projects and assuming a 10% discount to the FMV of the investment portfolio. This yields ~US$70mm.

3) Development projects – this one is certainly tougher to ascribe value. If we look at the SSL presentation, we see that the majority of future cash flows will come out from Hot Maden which was paid US$175mm. Assuming there was a market check done on the sale of the stream, we can assume this is market value. Other projects from the development portfolio will also yield future cash flows, but it can be assume to be somewhat captured in the above DCF.

So overall, I compute US$335mm + US$70mm + US$175mm = US$580 which is far from the current market cap of the company.

One needs to believe that the development portfolio will materialize into sustainable cash flows (which would essentially translate into the addition of a terminal value in my DCF) before investing in this business.

Let me know your thoughts and feel free to share my response on your website!

CSInvesting: I will be posting my thoughts soon.

Interesting readings

https://thefelderreport.com/2017/10/31/tobias-carlisle-on-beating-the-little-book-that-beats-the-market/     Worth a listen!







Ecclesiastes tells us: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” Myrmikan Research applies this principle to the subject of credit bubbles.

The ancient Greeks discovered that debt could magnify wealth. The debtor feels richer from the use of the borrowed property, while the lender feels richer from the compounding interest yielded by his claim. Both indulge in consumption more freely. As long as the accumulating claims remain contingent, the bubble grows. But, eventually, someone asks to be paid, and the expandingclaims on wealth must be reconciled to tangible wealth, much of which has been consumed.

The first recorded credit bubble popped in 594 B.C. Athens. Threatened with a civil war of creditor versus debtor, the Athenian ruler Solon pulled down the mortgage stones to free the debtors and devalued the drachma by 27% to relieve the bankers. Every credit collapse since – from the Panic of A.D. 33 to John Law’s Mississippi Bubble to the Great Depression and many others besides – has followed Solon’s template of debt default and currency devaluation.

“The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postponed, the more violent it will be. Every collapse of a credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.” – Freeman Tilden, 1936

And against what is currency and debt devalued? Carl Menger, founder of the Austrian School of economics, was the first to explain that money is liquidity and that gold is the most liquid asset. Thus, gold has served as the reference point of value since the origins of money and is that against which currency must be devalued to relieve debts. Paper promises depreciate.

“The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.”
– Garet Garrett, 1932

Myrmikan Research chronicles the collapse of the current, global credit bubble – the largest and broadest in history – analyzing current events from the perspective of Austrian economics and placing them in historical context.  Many links to books: http://www.myrmikan.com/research/

A Value Investor/Analyst, http://www.hacketts.com/  Click on Samples link on the left and read examples of company research. If you want to be a professional analyst, his research sets a high standard.  Note the format: Thesis stated right up front. He eats his own cooking too.


Gavin Andresen, Chief Scientist of the Bitcoin Foundation, talks with EconTalk host Russ Roberts about where Bitcoin has been and where it might be headed in the future. Topics discussed include competing cryptocurrencies such as Dogecoin, the role of the Bitcoin Foundation, the challenges Bitcoin faces going forward, and the mystery of Satoshi Nakamoto.



Reader Question: Investing in a Rising Interest Rate Environment


A Reader’s Question

I am a student at XXX.  To cap off my summer internship, I am working on a series of projects which I will present to the investment team at my firm. One idea I would like to pursue is “Investing in a Rising Interest Rate Environment.” Are there any books/resources you would suggest for this project?

My response:  Well, if you knew rates would rise over a long period of time (decades) then a ladder of short duration bonds would probably be wiser than 30- year  Treasury bonds.  But when you talk about interest rates–what rates? 3-month, 10 year? Government debt or corporate debt? Are real interest rates rising?  You could have nominal interest rates rising while inflation is rising faster so real rates become more negative–sort of like today’s financial repression. You can’t just look at interest rates without looking at changes over time in commodity prices and producer prices.

Ask, “What is an interest rate?” Find out by reading Man, Economy and State by Murray Rothbard–see Chapter 6: Production: The Rate of Interest and its Determination. Go to www.mises.org/books/mespm.pdf

Two great books on financial history:

A History of Interest rates (4th Edition) by Sidney Homer and Richard Sylla.

The Golden Constant: The English and American Experience 1560 to 2007 by Roy W. Jastram (reprinted with additional material 2009). See a discussion here: alc56_golden_constant

The Golden Constant was the first statistical proof of gold’s property as an inflation hedge over the centuries–a seminal study.

What does the research say:

Gold is a poor hedge against major inflation and that gold appreciates in purchasing power in times of deflation.  The conclusions make sense when you consider that gold prior to 1971 was considered money.  When prices rise, then, by definition, the value of money declines relative to goods and services that money is exchanged for.

Since the 14th Century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no-one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.

The Golden Constant: The English and American Experience 1560-2007 by Roy W Jastram with updated material by Jill Leyland. Published 2009 by Edward Elgar Publishing Ltd (www.e-elgar.com), hardback, 368 pages, ISBN: 978 1 84720 261 1.

How about today?

But from 1971 the opposite is true and we revert to what we today consider the more normal situation of gold acting as a hedge against inflation, as in the 1970s, or the fear of inflation, as in recent times (2009). Note that gold may hold its purchasing power through the decades, there are substantial deviations in price as compared to an index–which index to use?




The key takeaway after 453 years is that despite often substantial fluctuations, gold has held its purchasing power over the centuries in every country.  A German family owning a certain quantity of gold at the end of the nineteenth century would find, if it still owned it today, that it would still buy approximately the same quantity of good and services. In contrast, any quantity of German currency held at the end of the nineteenth century would today be worthless.

Since gold is no one’s liability, it can be viewed as the alternative to fiat money. Investors turn to it when confidence in fiat money, and particular in the US dollar as the world’s leading fiat money, falls. However, gold, despite severe fluctuations, does hold its real value over the centuries and the fact that it has repeatedly shown its ability to safeguard wealth through crises.

History combined with a solid grasp of economic principles allows us to place even gold into perspective.

Investor Personality Tests; Research; Birth of Plenty; MBA Course on Hedge Funds

Investor Personality Tests

If you take these tests quickly and truthfully perhaps you will gain insights into your strengths/weaknesses as an investor. Have fun. http://www.marktier.com/Main/ipp.php



Unfortunately, if your test results were like mine, you will have little choice but to receive therapy. http://www.youtube.com/watch?v=UpL3ncoK99U

A Recommended Web-Site

Jason Zweig: http://www.jasonzweig.com/resources.html

Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control – the unrelenting effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding. There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk……

Risk is a function of probabilities and consequences – not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis-and to underestimate how keenly they will kick themselves if that analysis is mistaken. Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s always the tortoises who win the race.

The Strategy of Rich vs. Poor Countries

Video Lecture–How the world became rich: The Birth of Plenty by William Bernstein (58 minutes). This is an enjoyable romp through economic, political and financial history that explains how countries create wealth. http://www.youtube.com/watch?v=fTUZXwQwUJM from http://www.efficientfrontier.com/ Another great resource.

TREASURE CHEST for Research Sources

An amazing collection of academic research on securities and historical financial data here (need prices on stock from 1825? How about on the Shanghai Stock Exchange?): http://viking.som.yale.edu/ Follow the links.

For example: MBA course on hedge funds: Strategy and tactics here: http://viking.som.yale.edu/will/hedge/Hedge%20Funds%202005.htm

Strategy Lesson: The benefits of focus and specialization-A Gunslinger. http://www.youtube.com/watch?v=ks7-A-7Zvak&feature=related  & http://www.youtube.com/watch?v=JeFpM2OEWPs&feature=related

The duality of man: http://www.youtube.com/watch?v=KMEViYvojtY