Xmas reading, asset allocation, and how much gold?

Down in the bottom right hand corner of this blog, I keep a list of Interesting People.  Generally, what qualifies someone as sufficiently interesting to make the list is that they have published a collection of works that are worth reading.  Someone that I recently added to the list is Michael Mauboussin.  He has written some interesting articles in the investing game theory space, and a particularly relevant article on the importance of position sizing (asset allocation) in investing called Size Matters.

The point of that article is that, just because you have a strategy with a positive expectation value, doesn't mean that you should go all in on your first bet.  You might lose, and then you'd have nothing.  Clearly, this is not the best way to play a game that, in theory, gives you an edge and should allow you play profitably over the long term.

ASX Investor Hour with Jim Berg

Once a month, the ASX run lunch time investor hour seminars in each capital city in Australia, and occasionally, they are worth going to.  Today's was called "When you should reinvest and how you should do it" by Jim Berg, and it sounded interesting enough, so I went along.

Before hand though, I checked out his website, and this made me somewhat skeptical of the seminar.  Basically, I figured it was going to be a sales pitch, and sure enough, his book was on sale as I entered the foyer and for $30 a month I could subscribe to his newsletter.

Still, I took some notes, so here goes:

Invest in your health 2

Some videos that I recommend, if, like me, you're a little too tubby:


Beware of the carbs:

Beware of fructose:

Be healthy, be happy.

Gold Symposium Panel Questions

Earlier this week, I attended the Gold Symposium in Luna Park in Sydney.  All in all, it was a great couple of days, with great keynote speakers.  The final session was Q&A with a panel that included Eric Sprott, John Embry, Ben Davies and Egon von Greyerz.  Anyway, there were a couple a questions that were posed to the panel that I don't think they did a great job of answering, and with the benefit of contemplation time, and a text editor, I'd thought I'd give them a shot.

Question 1: If I had invested 1 ounce of gold into the equity market 100 years ago, today it would be worth 1400 ounces (or whatever), yet if I had kept it as gold, it would still only be 1 ounce.  So, why should I buy physical gold?


My answer to this is three fold:

Money Money Money

If you don't already read and follow FOFOA, you should.  He's written a great article on Money. 

What I learnt:

• It is important to consider the functions of money separately.  Specifically, that the "unit of measure" can be anything, eg, we could prices things (everything) in units (eg. "Man-days work", Bit Coins, 0-10) irrespective of the transactional currency (eg. AUD, cigarettes) and the store of wealth (works of art, houses).
• Base (government) money, is not the same as credit (bank) money. Base money is the "unit of measure", or the yard stick, or the zero to ten system of pricing things.  Changing the amount of base money is different to changing the amount credit money.
• MMT is NQR.  Sectoral balance sectoral shmalance.
• Government spending is the main problem.  (D'uh!)
• USA is headed for hyper-inflation.
• Gold is the place to be.

Fooled by randomness

As I have briefly mentioned before, I have just finished reading Fooled by Randomness, by Nassim Taleb.

Taleb's take on the investing world is that in the spectrum of skill verses luck, many people attribute the success of successful traders, including the traders themselves, down to skill, whereas Taleb mostly attributes it to luck.  Even if the traders have demonstrated "long running" success, Taleb attributes this to survivorship bias rather than skill.  He believes that many traders essentially follow a well masked "increase risk until you blow up" strategy, he says that it's only a matter of time until they actually blow up, and there is no point praising those that are yet reach that point.

Cocktail parties and Bottomless pits

From One Up on Wall Street, here's Peter Lynch's Cocktail Party theory:

Employed Capital

At the right price, any profit producing security could give me an initial rate of return of 40%.  The security could be a bond or it could be an equity.  Let's use CocaCola as an example, as its earnings growth is quite stable, and has been for some time.  So, there is a price as which Coca Cola will give me an initial rate of return of 40%. I chose 40% because that's highly likely to be the "once in a lifetime" buying opportunity.

Fooled by Regression to the Mean

I've just finished reading Fooled by Randomness by Nassim Taleb (Great book BTW).  There are many interesting topics covered in the book, but I'd like to pick on the one topic that Taleb doesn't quite get right - that of Regression to the Mean.

Taleb writes:

This applies to the height of individuals or the size of dogs.  In the latter case, consider that two average sized parents produce a large litter.  The largest dogs, if they diverge too much from the average, will tend to produce offspring of the smaller size than themselves, and vice versa.  This "reversion" for the large outliers is what has been observed in history and explained as regression to the mean.  Note that the larger the deviation, the more important the effect.

I've long thought it obvious that "regression to the mean" of populations was a myth.  After all, on an evolutionary time scale, the "tree of life" expands (into a tree) rather than reaches equilibrium, at a mean.  If it were true, we'd all be the same size, and we are not, therefore it isn't true.