chrisleithner.ca

Leithner Letter Nos. 184-187
26 March 2015 - 26 June 2015

My job, as I see it, is to learn from other people’s mistakes and from my own. … As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” … From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance. But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.

My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.

Jason Zweig
Saving Investors from Themselves
WSJ.com MoneyBeat (28 June 2013)

What Happens When Rates of Interest Rise?

“The Reserve Bank [of Australia] has lost faith in the economy staging a recovery,” The Australian stated on 5 February 2015 (RBA’s Growth Warning as Rates Cut to New Low). During the past three years it has halved its Overnight Cash Rate to the present 2.25%. Lower rates clearly haven’t caused a recovery; will record low rates do so? It doesn’t seem to matter: futures markets presently indicate that by mid-2015 the RBA will cut the OCR to 1.75%. During the past year, ever more people have extrapolated these unprecedentedly low rates far into the future. On 11 June 2014, for example, in What if Interest Rates Stay Low for the Next 70 Years? The Daily Reckoning Australia stated:

Rates have been going lower for years. In some [Western] nations, [counterparts of the OCR have] now reached [0.5% in Britain and 0.25% in the U.S.], a situation that would have been hailed as impossible just a few years ago. What if interest rates were to stay low for the rest of the century? This is definitely a possibility.

To read the entire Newsletter (PDF), click here.

Chris Leithner


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