It Pays to Be Naughty

I read a headline this week that left me shaking my head in disapproval.

In a grandiose display of high-minded social responsibility, Japan’s Government Pension Investment Fund, the world’s largest pension plan, decided to ban the shares of the stocks it owns from being borrowed by short sellers. (In order bet against a stock by selling it short, a short seller must first borrow the shares from another investor.)

Apparently, the fund didn’t like the idea of shares it owned being used by hedge funds for supposedly nefarious ends. The horror!

Where do I even start in ripping apart that argument…

Money Is Lost

To start, the pension’s first priority is to the retirees whose money it manages. Allowing short sellers to borrow shares netted the fund around $300 million over the past three years. That’s money that will no longer be available to fund the retirement of elderly Japanese pensioners.

Arguably worse is the precedent it sets.

Short sellers may come across as dodgy characters at times, but their trading adds liquidity to the market. A healthy market needs both buyers and sellers. If other large pensions feel pressured to follow Japan’s lead and restrict shorting, market liquidity dries up and execution gets worse for all investors.

It’s another case of the road to hell being paved with good intentions.

But believe it or not, that’s actually not the worst case of do-gooding run amok I’ve come across this week.

Enough Is Enough…

Activist hedge fund TCI threw down the gauntlet and threatened boardroom proxy battles with any company that didn’t publish detailed reports on their carbon dioxide emissions.

In plain English, TCI threatened to fire the boards of directors of literally any company, anywhere in the world, that didn’t share their sense of urgency about global warming.

Now, I’m all for corporate responsibility. If you can quantify the damage that a company does to the environment, it only makes sense to make them pay. It’s not fair that a company can pad its profits while damaging the world we all have to live in.

It gets ridiculous when you look at some of the “polluters” TCI singled out.

At the top of the list was Moody’s.

Yes, Moody’s. The bond rating agency…

Moody’s isn’t an oil fracker or a coal plant. It’s a company that creates credit reports for bonds.

I’m struggling to comprehend how company full of white-collar analysts with spreadsheets is causing the polar icecaps to melt with excessive carbon dioxide emissions. It’s also my understanding that a money manager’s job was to make money, not engage in meaningless virtue signaling. But what do I know…

We all have our pet issues, and business shouldn’t be immoral. There’s a reason why some industries are illegal and others are strictly regulated. But high-mindedness can be taken to an extreme.

And when it is, it creates opportunities for those of us with a level head.

Profiting from the Politically Incorrect

In their 2007 white paper, The Price of Sin: The Effects of Social Norms on the Markets, Princeton Professor Harrison Hong and New York University professor Marcin Kacperczyk found that the taboos associated with investing in politically incorrect industries such as tobacco, alcohol, and gaming led these sectors to be priced as perpetual value stocks.

This perpetual discount means attractive pricing and dividend yields, which in turn meant market-beating returns for investors willing to be a little naughty.

In other words, by being socially responsible, you end up with lower returns. But by being a little less judgmental, you put yourself in a position to profit quite well.

Historically, socially-responsible investing tended to focus its disdain on tobacco.

Today, I’d argue that energy companies are viewed as the greater evil. And this has created fantastic opportunities for income investors like us.


I have a library. And you should have one, too.

I’m proud of the collection of books I’ve collected over the years. A good chunk of my library is dedicated to investing, economics, and other money-related topics. It is my job, after all.

But I also have an entire shelf of literature dedicated twentieth century Spain, and another dedicated to the rise and fall of the Ottoman Empire. I own just about every book Hemingway wrote. And I have a fantastic translation of Don Quixote. The particular edition I own is one that I’ve not found elsewhere since.

Why? You may ask…

Why not! The book is particularly interesting in its own right, and even more so since it’s something of a one-of-a-kind find. It was too good to pass up.

I have fiction, nonfiction, which includes biographies, how-to books, essays on various topics… And that’s just to skim the surface. When it comes to my books, I have it all. And I’ve actually read 95% of them. The remaining 5% I’ll get to soon enough.

In Good Company

I’m not the only voracious reader on the team.

Harry Dent has a formidable book collection spanning an impressive breadth of information.

Back when we were office mates, I remember watching Rodney Johnson get through three newspapers every morning before even touching his first cup of coffee… and then following that coffee with more reading.

I don’t know how many annual reports John Del Vecchio has read over the years. If I had to guess, I’d say that number is in the tens of thousands. It’s what makes him great at his job as a forensic accountant.

In short, we’re a bunch of nerds.

But we’re in good company.

Becoming the Best Version of Yourself

Warren Buffett is arguably the best investor of all time. I say “arguably” because he has his share of competition for the crown.

Much like professional basketball players, fans will always debate who the all-time great is.

Is Lebron James really as good as Michael Jordan in his day? It’s hard to say.

Likewise, it’s hard to say whether Buffett is greater that Jesse Livermore, Julian Robertson, or even a quant pioneer like Jim Simons.

But what is beyond debate is that all of these giants of finance reached the heights they did by continuously learning.

Todd Combs, one of Buffett’s lieutenants at Berkshire Hathaway, said that the best advice he ever got from his boss was to “read 500 pages per day.” Buffett apparently made that offhand comment while teaching a class at Columbia University, which Combs was attending at the time.

Combs took that lesson to heart and reportedly reads 500 to 1,000 pages every single day of his working life.

And Buffett practices what he preaches, too.

The Oracle of Omaha claims, even at his age today, to spend five or six hours every day reading.

What Should You Read?

The easy, one-word answer: everything. Read everything you can get your hands on.

Of course, that’s not possible. So, let’s be a bit more practical.

I suggest taking a cue from Rodney and start with a couple good financial newspapers. I prefer the Financial Times because it gives the best international coverage, but the Wall Street Journal and Investor’s Business Daily are both solid options as well.

It goes without saying that you’re not going to learn how to invest by reading a newspaper.

In fact, I know traders that make a living betting against mainstream media. But reading a good financial paper at least gets you that baseline of knowledge that you need in order for the additional research to make sense.

Read plenty of books, too. And not just the ones on investing. You can find tidbits of knowledge in history books or biographies, even novels. These books can spark an idea or help you to make a connection.

Every time I go to London, I make a pit stop by the bookstore of my old alma mater, the London School of Economics, and fill up a bag with books that I can’t find anywhere else. You don’t have to get that crazy, but make an effort to read books on a variety of different subjects. It’s training for your brain.

For a deeper education, read the quarterly or annual letters of large, influential investors like Buffett. He often goes into the nitty gritty details of why he bought or sold something. You’ll learn more about investing from reading 15 minutes of one of Buffett’s Berkshire Hathaway letters than you would from two years in an elite business school.

He’s something of a controversial figure, but I also get a lot of value out of reading Bill Ackman’s letters. For a fantastic understanding of the bond market, read everything that Jeff Gundlach has to say.

And, naturally, keep reading Sizemore Insights!

It’s my job to get you fresh content that you’re not likely to find anywhere else.

Don’t Strive to Be a Jack of All Trades

Hakeem Olajuwon was one of the greatest basketball players in history.

Two-time NBA Finals champion — and Finals MVP — with the Houston Rockets, two-time defensive player of the year, and the 1994 league MVP; he is rightly included among the all-time greats.

But whatever you do, don’t put a baseball in his hand.

Hakeem the Dream was invited to throw out the ceremonial first pitch in last night’s World Series game in Houston, and it wasn’t pretty. It landed in the dirt.

It was all in good fun, of course. He took it all in stride. The crowd still cheered for him. Hakeem is  a hometown hero.

But let’s just say the Houston Astros won’t be signing him as a relief pitcher any time soon.

There are parallels to investing here.

Just as Olajuwon was legend on the basketball court but a joke on the pitcher’s mound, investors that are good stock pickers might be terrible market timers. Or an options expert might be terrible at putting together a bond portfolio.

Two Real-World Examples

My friend J.C. Parets, editor of Breakout Profits, is one of the best technicians I’ve ever met.

In seconds, he can pick apart a stock chart and tell you what direction that stock is likely to go. But don’t ask him to read a balance sheet. J.C. identifies trends, but it’s not his job to dig into the details of analyzing an individual company. J.C. has no clear advantage there. So, he sticks to his charts.

Now, contrast that to my buddy and fellow Rich Investor contributor John Del Vecchio.

John is a forensic accountant. He can dissect a company’s financial statements with ruthless efficiency. Within minutes, he can tell you whether a company has been overstating its revenues and earnings. He knows where the bodies are buried in the accounting. But don’t ask him to give you precise timing. That’s not his bag. There’s no special advantage for him in this.

The Take Away from This Comparison

To start, don’t try to be a jack of all trades.

Experiment until you find an investment style that suits your skills and temperament, then stick with it so you can refine your techniques.

Keep in mind that there’s no need to pigeonhole yourself into one narrow style. But don’t constantly try to reinvent the wheel or switch from style to style based on what’s hot that moment. That’s a form of performance chasing, and it generally doesn’t end well.

Second, seek out mentors and experts in your chosen discipline.

You’re probably not going to get great results by copying another investor’s style verbatim, but you can certainly pick up a few tricks along the way.

While trying to find your niche, remember that not every discipline works well in every market.

I’m a value investor, and let me tell you, my job was a lot easier 10 years ago. The 2000s were a fantastic decade for value investors and a lousy decade for growth investors. But the 2010s have been the complete opposite… It’s been a cakewalk for growth investors and a hard market for value investors.

That’s ok though. There is a season for everything. And a good strategy will eventually come back into favor.

Speaking of, it looks like we may be in the early stages of a rotation from a growth market to a value market.

Where to Put Your Money in 2020

I’m not sure how I’d feel about inviting Jeremy Grantham to my Thanksgiving dinner.

On the one hand, I could see him being a font of fascinating cocktail chatter. After more than a half-century of navigating the markets, the man no doubt has stories to tell, and in a sophisticated English accent at that!

But on the other hand, at the first mention of U.S. stocks, I could see him being a real wet blanket. His forecast for the next seven years isn’t exactly rosy.

If case you’re not familiar with him, Grantham is the co-founder of Grantham, Mayo, & van Otterloo (GMO), a Boston-based money manager with about $60 billion under management. He’s one of the best in the business, and he successfully called the last two market bubbles in 2000 and 2008, even though he took a lot of flak for it both times.

Grantham’s firm regularly publishes a seven-year forecast for the returns of various asset classes. While it’s not gospel truth, it’s proven to be pretty accurate over the years.

But Why Seven-Year Forecasts?

Grantham’s learned that seven years is roughly how long it takes for profits and stock prices to revert to their long-term averages.

In any single year, guessing the direction of the market is a crapshoot. And over the long term, stocks have historically returned about 7% per year after inflation.

But seven years is that sweet spot where Grantham’s mean reversion models add value.

So, let’s see what Grantham & Co. see going forward:

There’s a lot of red on the chart.

Based on GMO’s mean reversion models, U.S. large-cap stocks are priced to lose 3.9% per year over the next seven years. U.S. small-caps are priced to lose 1%.

Essentially, Grantham is forecasting a major bear market in the coming years and what is likely to be a slow recovery.

Overseas, the story isn’t quite so bad… but it’s not exactly stellar.

Developed international stocks are projected to essentially go sideways over the next seven years.

Even bonds look nasty…

U.S. bonds are projected to lose 2.2% per year over the next seven years, and developed international bonds (i.e. Europe, Canada, Australia, and Japan) are projected to lose 3.9% per year in dollar terms.

If there’s one bright spot, it’s in emerging markets.

Emerging markets have been beaten and left for dead over the past decade. As a case in point, the iShares MSCI Emerging Markets ETF (NYSE: EEM) is still sitting at prices first reached in 2007.

In a 12-year period that has seen the S&P 500 rise nearly 120% even after taking the 2008 meltdown into account, emerging markets have gone nowhere.

Now, I agree with Grantham that emerging markets look like an attractive place to park some of your savings over the next seven years or so. I plan to seek out opportunities in that space.

But you can’t put your entire portfolio in emerging market stocks. That would be madness.

After all, emerging markets started 2018 attractively priced and yet still managed to drop 20% in the nearly two years that have passed.

So, Where Do You Put Your Money?

You can, however, take a more active approach to investing and expand beyond the S&P 500.

Buy-and-hold investing works over the long-term. I believe that. And history has proven it.

But the “long-term” can sometimes be a lot longer than you’re willing to wait…

The S&P 500 went nowhere between 1968 and 1982, leaving investors to tread water for 14 long years.

More recently, the S&P 500 went nowhere between 2000 and 2013, again making buy-and-hold a tough proposition.

None of this means that another 13- to 14-year drought starts today. But if you’re in or approaching retirement, you really shouldn’t take that risk.

Travel and Spend Your Money the Right Way

My job is to help you make money. It’s what I spend most of my waking hours thinking about.

But today, we’re going to take a break from all of that.

Rather than talk about making money, I’m going to focus on having a little fun with it. After all, you can’t take it with you. The whole point of making money is to eventually spend it.

I recently got back from a trip to Greece and Turkey, so I have travel on my mind. I travel often. Both for business and for pleasure. I’ve wasted more money than I care to admit by doing things inefficiently in the past. But by now, I’ve (more or less) figured things out.

Nowadays, I generally travel better, smarter, and, in most cases, cheaper.

Without further ado, let’s cover a few ways you can make your precious travel dollars stretch a little further…

All About Airmiles

Airmiles are a familiar concept. They can be a fantastic way to significantly lower your travel bill.

Last year I used my accumulated airmiles to fly business class to Paris with my wife, saving thousands of dollars in doing so.

Every airline has some version of a loyalty program in which they reward their frequent flyers. You should sign yourself and your entire family up for an airmiles account with every airline you’re likely to use on a semi-regular basis.

In addition to free travel, accumulating miles with an airline gives you other perks: occasional upgrade to business class, access to the VIP lounge, the right to board ahead of the unwashed masses, and better baggage allowances.

And accumulating airmiles is relatively simple. Actual travel with the airline of your choosing is one way; purchases uses a credit card with rewards — like the Chase Southwest card, for example — is another.

On the first count, there is a tradeoff. If you consistently fly a small number of airlines, you can obviously accumulate miles more quickly. But you might not always get the cheapest price for that particular flight.

So, you have to ask yourself: Is it worth paying a little more in order to better accumulate airmiles?

There’s no “right” answer here.

But my rule of thumb is that I’ll pay $50 more on a domestic flight and $100 to $200 more on an international flight in order to fly with one of my go-to airlines. I’m naturally frugal. I hate paying a penny more than I have to. I do it thought so I can enjoy a decent scotch in Admirals Club while the rest of the poor slobs fight for seats at the departure gate. It makes travel almost bearable.

As for accumulating miles with a credit card… Just be careful. You can easily use that as an excuse to spend more money than you normally would or should. You might think, Well, I don’t really need this new big screen TV, but think of the airmiles… Don’t fall into that trap.

Get those thoughts out of your head. I believe it’s better not to have a credit card at all. But if you’re going to get a credit card, and you’re going to use it on core expenses — utilities, groceries, gas, etc. — then you might as well accumulate miles in the process.

The “right” card depends on what airlines you tend to fly. I tend to fly American Airlines, so the Citi AAdvantage MasterCard is a good option for me. But every airline will have a card that is best tailored to them.

Next time you fly, ask the flight attendant. She’ll likely have a card application on her person.

Again — and I can’t emphasize this enough — only get an airline credit card (or any credit card) for expenses that you were planning to make anyway. The road to financial ruin starts with a credit card, and if you know you have poor spending control, it’s better to leave the airmiles on the table and use a no-frills debit card instead.

To Upgrade or Not to Upgrade

I love flying business class. It takes some of the misery out of travel and makes it almost civilized.

But I’ll be straight with you… Usually it’s not worth it.

I have a rule of thumb for this as well: For flights less than four hours, I won’t even consider paying for an upgrade.

If they give me one for free, I’ll gladly take it. But for short flights, what are you really getting? A little more legroom and a free cocktail or two. If you’re as rich as Jeff Bezos, sure, go for it. But for the rest of us, the money can better be spent elsewhere.

The longer the flight, the more likely I am to consider an upgrade. This is particularly true for overnight flights.

On flights to Europe, Asia, or South America, the seats in business class will often fully recline, allowing you to sleep in relative comfort. Trying to sleep in coach with your seat tilted at a 45-degree angle and your knees being crushed by the seat in front of you is utter misery.

Arriving at your destination well-rested and fed clearly has value. It’s just a question of how much it’s worth to you and what you’re willing to pay.

Buying a business class ticket outright is usually punishingly expensive. But you can sometimes get a fantastic upgrade deal at the last minute. When you check in for your flight, check out the price to upgrade. If it seems reasonable, go for it.

On my outbound flight to Europe last month, I got a fantastic price on an upgrade, so I took it. The deal wasn’t so sweet on the return flight, so I opted to stay in coach.

Now that we’re more than a decade into an economic expansion, it’s a little harder to get a cheap upgrade to business class.

As the economy starts to cool, the cheap upgrades will be back.

Be on watch for them.

Hotels: Take Transport into Account

I try to scrimp on hotels when I can.

There are times when the hotel is the destination. For that, you should plan to spend accordingly. You don’t want to cheap out on your honeymoon or a romantic getaway and ruin the experience.

For most travel though, the hotel is a place to crash and nothing more. I’m rarely willing to pay more than I have to.

Cheaper isn’t always better. You have to factor transportation costs as well. It doesn’t make sense to save $10 per night on a hotel room if you’re going to end up spending an extra $50 per day in taxi fare. Plus, your vacation time is a precious commodity. You don’t want to spend your entire vacation commuting in from a hotel on the fringes of the city.

So, as you look for hotel deals, make sure to check the hotel’s location on Google Maps to see if it’s close enough to the attractions you want to see. I’d gladly take a less luxurious room or pay a slightly higher price to be in a convenient location.

Alas, my pleasure travels are over for the time being.

Hopefully yours are just getting started.

Bon voyage!