Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe
A Lonely “Bear” on the Market:
As a side note, the Federal Reserve presently has a balance sheet of about $3 trillion, on total capital of about $54.7 billion, meaning that the Fed is leveraged about 55-to-1. At an average maturity of over 10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a 100 basis point move in interest rates impacts the value of the Fed’s holdings by about 8% (about $240 billion). Since July, interest rates have increased by about 60 basis points, which has undoubtedly wiped out the Fed’s capital, making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t mark its capital to market). As a practical matter, the only effect is that the interest that the public pays on Treasury debt cannot actually be remitted by the Fed back to the Treasury as usual, but must instead be retained by the Fed in order to recapitalize itself due to losses on the bonds it holds. The losses therefore effectively represent an unlegislated fiscal expenditure. Moreover, assuming an average interest rate of about 2.5% on Fed holdings, each further increase of 30 basis points in interest rates would wipe out a full year of additional interest payments. Needless to say, nobody cares. These observations aren’t central to our current concerns, but it’s worth understanding how reckless Fed policy has already become.
On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week – Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.
A reader makes a book suggestion
A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.
While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.
“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.
Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.
The companion website: http://theemotionallyintelligentinvestor.com/
Contrast that video with Krugman calling the artificial boom a “virtuous circle.”
Enroll in a Critical Thinking Course
FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!