"No Longer Analyzable"

By Patrick Donley and Shawn O'Malley, edited by Robert Leonard · November 03, 2022

*LinkedIn newsletter is posted at a one-day delay.

?? Interest rates are feeling the heat after the Fed’s rate hike announcement yesterday intended to squash hopes of a “pivot,” with the two-year Treasury hitting 4.75%. These same bonds yielded below 0.8% at the start of this year.

And the difference between two-year and ten-year Treasury bond yields is the largest (most inverted) since 1982, meaning it costs more to borrow in the short term than it does over nearly a decade.

This is an indicator that investors expect things to get ugly over the next year or so as we work through an expected recession

???? In other news, President Biden?delivered a speech?on the risks facing American democracy, and how it can’t be taken for granted.

Here’s the market rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we’ll discuss two things in the news: Elon Musk’s latest moves at Twitter and new developments in the Chinese property crisis, plus our main story on why simplicity trumps complexity in investment planning.

All this, and more, in just?5 minutes to read.

IN THE NEWS

???Elon Musk Plans To Trim Twitter's Workforce By Half?(FT)?

Explained:?

• Elon Musk has drawn up plans to lay off up to half of Twitter's (TWTR) 7,500-person workforce as a part of his first major cost-cutting overhaul, which could come as soon as next week.
• It appears that remaining workers will be mandated to work in person, which marks a pivot from the company's current remote work policies.
• Musk has also publicly discussed a premium $8 subscription service for users who hope to become verified and boost their visibility while seeing fewer ads.

Why it matters:?

• Twitter is undergoing major changes, and as one of the largest social media platforms in the world, the results may be quite impactful. With the old management team and executives out, Musk has largely unchecked discretion to implement new changes.
• The challenge, though, will be for Musk to balance his transitional reforms with advertiser demands since most of the company's revenue comes from paid advertisements.?
• Given how controversial Musk is and some of his potential moves surrounding layoffs, it's not surprising that he wants to pivot more towards a paid subscription model for Twitter rather than relying primarily on advertisers.

???? China's Property Crisis Leaves Its Bonds "No Longer Analyzable"?(Bloomberg)?

Explained:?

• The crisis in Chinese property bonds issued in U.S. dollars has become so severe that long-time analysts find it impossible to do their jobs.?
• Investment-grade Chinese real estate bonds have dropped 23% in the past month, with lower-rated firms seeing their debt fall as low as 50 cents on the dollar.?
• These bonds from China's troubled and over-leveraged property developers have fallen to price levels that reflect deep distress, with defaults piling up at an unprecedented rate.

Why it matters:?

• One analyst said, "investors have lost all confidence towards the sector and the companies," despite real estate development representing nearly a third of China's entire economy.?
• This comes at the same time that?venture capital (VC) investments in the country have fallen precipitously?this year. VC deals fell 44% year-over-year to just $62 billion through October.?
• While China once seemingly rivaled the U.S. for capital investments in startups, its ruler Xi Jinping's harsh crackdowns and sweeping reforms have driven investors away.

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THE MAIN STORY: A WEALTH OF COMMON SENSE

Overview

Every once in a while, a book comes across my radar, and I scratch my head, wondering how I've (Patrick) never read it.?

I saw someone on Twitter mention?A Wealth of Common Sense, by Ben Carlson, as their favorite investment book.?

Naturally, I'm compelled to research further when someone makes such a glowing endorsement. The reviews on Amazon were also full of high praise. I ordered the book. Read it, enjoyed it, and wanted to share my takeaways.

Who's Ben?

Ben Carlson is the Director of Institutional Asset Management at?Ritholtz Wealth Management.?

He posts his?financial insights regularly?and hosts a weekly podcast,?Animal Spirits, where he discusses what he's been reading, researching, listening to, and thinking about.

The big picture

Carlson believes in keeping things simple. The book's subtitle aptly says, 'Why simplicity triumphs complexity in any investment plan.'

He writes, "Conventional gives you a much better return than exotic. The long-term process is more important than short-term outcomes. And perspective goes much further than tactics."

Simplicity triumphs

Carlson adds that "complexity tends to be the default option that gets used to persuade investors to buy unnecessary investment products while the vast majority of people really just need to understand more conventional options to succeed."

As I said, these ideas aren't new, and many investment experts have pointed out the merits of simplicity. Philip Fisher wrote a book in 1975 called?Conservative Investors Sleep Well.?

Warren Buffett has become a very wealthy man by investing in simple, straightforward companies selling everyday products like soft drinks (Coca-Cola), fast food (McDonald's), and shaving products (Gillette).?

Key takeaways

? Investors aren't all equal?—?Carlson suggests not trying to implement advanced institutional investment strategies which operate under a very different set of parameters than the average individual investor.?

He gives the example of the "Yale Model" used by David Swenson, whose portfolio management style is widely admired, having racked up an average gain of 14% since the mid-1990s.?

Unfortunately, we don't have the massive endowment fund that allows Swenson to take advantage of private market deals, nor are we armed with a team of analysts.?

? Know what not to do?—?According to financial advisor Nick Murray, investors who eliminate common mistakes can boost their yearly returns by 3 to 4 percent.?

One common mistake is expecting to get wealthy fast. There is no key to immediate wealth, and avoid anyone offering to show you the secrets to instant investment success.

Other common?mistakes include overconfidence (markets are incredibly difficult to predict), following the herd to feel safe and right, and buying over-hyped investments.

? Create an investment plan tailored to your personality?—?We all have unique investment personalities. Just as you have a Myer's Brigg's personality type, some of us are designed to be trend followers, short-term traders, or diversified asset allocators. It's our job to figure out the best style for us and stick to it over time.

With your own predefined, tailor-made investment strategy, you'll be able to resist the latest "hot, new investment."?

? High rewards come with high risk?— Each asset class has its risks and rewards. We need to determine the level of risk we are comfortable with, which may well change depending on our stage of life. It's easier to take bigger risks at a younger age than when you're in retirement and want more security and predictability.

Don't expect big returns when playing it safe, and be prepared for a bumpy ride if you're hunting bigger rewards.

? You're not Marty McFly?— Unlike Marty McFly in Back to the Future II, we have no idea what the future holds. According to Carlson, we can make our investment bets safer by investing in diverse assets.

Once you've allocated your assets appropriately, don't reallocate them unless you have a good reason to do so.?

A study by Fidelity Investments showed that the top-performing portfolios were those the owner had forgotten about, which we?wrote about previously.

The final word

Successful investing isn't necessarily easy, but it doesn't need to be complicated. Carlson's key investing message can be boiled down to the KISS principle (Keep it simple, stupid).

Know your financial situation, investing personality, and risk tolerance. Keep calm and rational when making investment decisions, and have your investment plan in writing.?

Stick to that plan, and you'll be on your way to common sense wealth.

To go deeper, check out?Clay Finck's interview with William Green on how to live a richer, wiser, and happier life.?

RECOMMENDED READING

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From their co-authored research report with Riot Blockchain (NASDAQ:?RIOT) to their weekly newsletter and podcast,?Blockware Intelligence?covers all things macro, Bitcoin on-chain and derivatives, and Bitcoin Mining.

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