New Book One-Pager

Paradigm shift: the stock market, dividend investing, and the next thirty years. Dividend-focused investing has been strongly out of favor for the past five years, and receding in popularity for nearly four decades. Once the dominant investment style, it is now a boutique approach to the US stock market. That is about to change. Paradigm Shift explains how the stock market drifted away from a mostly cash-based returns system to one almost completely driven by near-term share price movements. The exceptional forces behind that shift are now substantially exhausted, and the market is well positioned for a return to more …

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Episode 23: Paul Schmelzing on the long-term decline in rates

Financial historian Paul Schmelzing takes on many of the assumptions of 20th century financial economics–about risk-free rates, real rates, risk premia–and suggests that they fail the “out of sample” test.  How has he done that? By meticulously creating an 800 year data set that indicates more than six centuries of declining returns. In the process, he takes on Thomas Piketty’s claim that returns on financial assets have consistently exceeded broader economic growth, leading to ever greater economic inequality. Not so says Schmelzing. If you are thinking about asset allocation for the next decade or so when rates are supposed to return …

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Episode 22: Ed McQuarrie on the importance of 19th c data for your 2022 asset allocation.

Consider the shibboleths of our trade, deeply embedded in our risk models, our IPSs, our return expectations: stocks are better than bonds over time, stocks are risk assets, bonds are risk-control assets, a resulting equity risk premium, with real growth from equities.  What if it turns out that these are not exactly true? What if these conclusions are based on incomplete data? That would be a problem, wouldn’t it?  And what about the present time, what’s unusual about it compared to earlier investment periods? These answers and more when  Edward McQuarrie, retired business professor from Santa Clara University, joins me …

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A meditation on trust in finance. Yes, you read that correctly.

I have been wondering about the role of trust in modern finance. To judge by the academic literature and the dominant rules and formulas, it has no role whatsoever. I find that paradoxical, to say the least, because trust is inseparable from participating in modern society. Everyday we make judgments, including economic and financial ones, based primarily if not exclusively on trust, as opposed to a calculation of odds, risks and rewards, costs and benefits. Academics refer to these daily challenges as exercises in “decision making under conditions of uncertainty.” Modern finance tries (and has failed) to quantify that decision-making …

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Leading from the middle: The NBN interview with John Roy Price

History is told, it is said, by the victors. And so it is in regard to Richard Nixon. We all know how his presidency ended. What too few of us recall or bother to learn is how it started. In his new The Last Liberal Republican: An Insider’s Perspective on Nixon’s Surprising Social Policy (UP of Kansas, 2021), John Roy Price details how in Nixon’s first few years in office, the President ardently tried to lead from the middle to eradicate the widespread poverty that had so characterized his own upbringing. It is a view of Nixon and a big-tent, policy-driven Republican Party that …

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Episode 21: Getting perspective, with the brilliant & wide-ranging Will Goetzmann

How does an art historian, TV producer and art museum director end up teaching quantitative finance? I am joined by Will Goetzmann, the Beinecke Professor of Finance at Yale’s School of Management, to discuss the virtues of changing careers, being interdisciplinary, and following your curiosity.  He is one of the most interesting people you are likely to encounter.    

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Episode 20: The economics of education, with university president David Finegold

Ever wonder about the economics of higher education? Are the people in the classroom, “students” or “customers”? Who is accountable to whom?  Who is in charge? Chatham University President David Finegold joins me to view higher education through the lenses that we often use to examine businesses: value creation, accountability, and future trends. It makes for sober listening.

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If it sounds too good to be true….

If it sounds too good to be true, ….  Big takedown of the Private Equity industry by former PE manager  Jeff Hooke (now of JHU-Carey).  His new The Myth of Private Equity  (Columbia Business School Publishing, 2021) highlights the sky-high costs, poor returns, & very low visibility. And yet, the industry persists… Hooke’s expose is a latter day “Where are the Customers’ Yachts?” The New Books Network interview.

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Seeing the right Navalny.

Everyone has heard of Alexei Navalny, the leader of Russia’s opposition to Putin’s rule. But what do we really know of him? Navalny: Putin’s Nemesis, Russia’s Future? (Oxford, 2021) provides the first detailed political biography of Navalny.  Most importantly, Ben Noble, Morvan Lallouet, and Jan Matti Dollbaum turn the one-dimensional, cartoon-like image of Navalny in the West into a nuanced portrait, properly situated in the context of modern Russian politics.  The New Books Network interview is here.  

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Episode 19: Kristy Ironside, “The Full Value Ruble” & current debates on currency, inflation, & monetary policy.

Thinking about the dollar, crypto, fiat currency, MMT? Get some perspective on the purpose of currency, managing money supply, inflation, wage pressures and all the currently popular financial issues……from a review of how Soviet bureaucrats grappled with similar challenges in the 1950s. Yes, Soviet bureaucrats. Seem remote? Of course, on one obvious level it is. On many other levels, however, the challenges were quite similar. Professor Kristy Ironside from McGill University joins me on the show to discuss her just published Full Value Ruble: The Promise of Prosperity in the Postwar Soviet Union (Harvard University Press, 2021).

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How big is your platform? or “What color is your parachute?” 50 years later.

I recently got this very positive email mail through a professional social media platform: “:) .. your web site is treasure of great insights – I’m in my year two of my MBA journey and more and more I found myself checking historical and geopolitical “whereabouts” when reading the cases the profs. thrown on us .. I think it’s a/THE key  to fully understand what is happening “behind the scenes” of all/most they want us to do (evaluate equities or M&A deals, making recommendations, etc. etc. ) unfortunately it’s mostly omitted…” I was touched. The thing is, nobody goes to …

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Episode 18: Big user of index funds/ETFs? Better look under the hood.

The brilliant Adriana Robertson, professor of law and finance at the University of Toronto, joins me to discuss what’s really going on behind the scenes at “passive” ETFs and index funds. You might be surprised to learn that they are nowhere near as passive as you think.  Investing is about making decisions under conditions of uncertainty. Modern finance, including the mountain of marketing and academic literature behind index products, seems to offer a way around that fundamental human challenge. Not so. Hear why.

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It’s time to retire “Left” and “Right”.

George Orwell’s famous 1946 essay, “Politics and the English Language,” lamented how ideologues were wreaking havoc not only on their societies, but also on the language of politics itself.  He condemned the “staleness of imagery” and the “lack of precision” in the political writing of his day.  During the past 75 years, little has changed. The labels and personalities may be different, but the abuse on and by words is much the same. We can all agree that the United States has become politically polarized, especially so in the past half-dozen years. In better times, Yeat’s middle translated into a …

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NBN Interview with Jon Lukomnik on his Moving Beyond Modern Portfolio Theory

Jon Lukomnik thinks outside the box, specifically the Modern Portfolio Theory box. Rather than trying to pick up a few basis points here or there by operating within a flawed system, Lukomnik argues in favor of looking for factors which affect overall systemic risk and reward.  That is, he looks at what factors will influence the health and levels of the overall capital markets. This is an important work for all market participants. Listen to the NBN interview here.

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Episode 15: The Descent of Growth (with apologies to Charles Darwin)

Where did all the dividends go? In this episode, I explain how dividend-free growth investing became the norm in the US stock market. For dividend-focused investors, how we got to this state of affairs should be of some interest. And they make take some comfort in the realization that cashless investment is to a great extent a historical, and I would argue, a logical anomaly. For growth investors content with the current situation, knowing whence they came serves at least some utility, even if I do not believe that those conditions will persist.

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Episode #14: Jeff Brown the Grocer joins me to discuss how to operate in a very tough business.

Treat your investments like holdings in actual businesses is a common invocation on this podcast. To that end, today I talk to an entrepreneur on the front lines of business ownership. My high school classmate, Jeff Brown, is the owner of 12 grocery stores in Philadelphia. How does he survive in a brutally competitive low-margin environment? How did he respond to the additional challenges of Covid? How does he make being in food deserts work?   It turns out there is an answer, and it’s not on the University of Chicago MBA curriculum: community involvement. Listen to the very end. There …

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Episode #13: Zachary Karabell joins me to discuss “Inside Money.”

In his new book Inside Money: Brown Brothers Harriman and the American Way of Power, the prolific Zachary Karabell uses the history of Brown Brothers Harriman to follow the arc of American political economy, from the muscular capitalism of the early generations of the Brown family in the 19th century, to their maturation as genteel private bankers in the 20th century, to the sense of service of the BBH partners when they were regularly called to Washington from the 1930s through the 1960s. It is a (mostly) positive tale about American history, American finance, American economic growth and innovation.  That makes it …

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NBN Interview with Timothy Frye on his Weak Strongman

Vladimir Putin is not the unconstrained, all-powerful boogeyman he is made out to be in the popular Western media. So says Timothy Frye, Professor of Political Science at Columbia University in his new book, Weak Strongman: The Limits of Power in Putin’s Russia (Princeton UP, 2021). Drawing on more than three decades of research, and reams of data from within Russia itself, Frye depicts a “personal autocrat”, but one subject to numerous constraints and trade offs. And the shows of force we have seen in recent years, from his treatment of opposition figures to the planning for the upcoming election, …

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Equity duration: now is the “time.”

As a cashflow-oriented investor, I’ve been focused on equity duration for a while. Now others are beginning to catch on as well. Zero-Hedge may not be your cup of political tea, but it does have serious investing content, in this case a piece from data shop called VariantPerception. Their brief piece on equity duration can be seen here.  My case for using equity duration begins at the 22 minute mark of the Keep Calm and Carry On episode that dropped yesterday.

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Episode #12: Rising rates and the dividend investor. Fear not.

After four decades of declining interest rates, and widespread meddling in the risk-signaling mechanism of the US 10-Year Treasury Note, stock investors are justifiably confused by the prospect of rising rates. What’s it mean, particularly for income-oriented stock investors? In this episode, I try to clear the air and simplify the confusing narrative about rising rates and dividend-paying stocks.

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The power of narrative economics….

A recent New Yorker article by Charles Duhigg ties together nicely several threads of emerging finance that are worthy of notice. The first is the power of narrative economics (and finance) championed by Robert Shiller. My review of his 2019 book by that name appeared on the New Books Network. Shiller’s argument stands in stark contrast to the orthodox model of classical economics. The second is that investment bubbles of the type we are now seeing with SPACs can and have in the past left behind substantial technological and financial innovation after the bubble has burst and much money lost. …

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NBN Interview with William Nordhaus

Can classical economics help figure out climate change and support policies that slow global warming?  Yale Sterling Professor of Economics William Nordhaus thinks so. In his new book, The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World (Princeton UP, 2021), Nordhaus tackles the “externality” that is pollution and carbon emissions. By making several adjustments to how we treat this externality in economic terms, it can be brought back into the “system” whereby sensible regulation, market relations, and innovation can lead to markedly lower levels of pollution and greenhouse gas emissions. The most important of those adjustments is getting the price of …

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NBN Interview with Louis Nelson

Louis Nelson’s Mosaic: War, Monument, Mystery weaves together a personal memoir, a history of the Korean War and its aftermath, and the tale of how the Korean War Veterans Memorial in Washington DC came to be. The result is a fascinating portrait of one of the late 20th century’s most important designers. Listen to the New Books Network interview here.

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Equity duration, revisited for an even lower market yield.

Updating a post from late 2018 on equity duration. The yield of the market is now down to around 1.5% and inflation expectations are much higher than they were at that time. Hence it is worth revisiting the math of valuing cashflows in a rising rate environment, or at least one in which rates are not relentlessly declining. Updated table below.  The conclusion has not changed. If you have a choice of distributable cashflow options, get paid up front. Those distant cashflows take a real beating in any reasonable discounting exercise.  In that regard the S&P 500 Index is an …

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