For another change to trading books I got this one to read about global value investing. I have not started to doubt in my trading philosophy, quite the opposite. I just like to read about other investing and trading methods irrelevant to my own to keep my mind fresh and unbiased. The book Global Value by Meb Faber was published in 2014. I wrote down the following points that caught my attention.
The author describes what a bubble is and gives some examples like the Dutch tulip mania of the early 17th century, but even mentions Bitcoin which at the time of writing this book in 2013-14 had already had some good runs and terrific declines. He goes in more detail with the South Sea Company bubble in 1710s and looking at the chart of its stock price, it sure does look like Bitcoin in 2017-18.
The odds are against us
Meb lays out some interesting statistical facts why most people are bad investors. And besides behavioral biases and emotions I am talking about facts that stock picking is hard, very hard. Only up to a quarter of stocks drive the market on average while there is a 64% chance an investor underperforms the market when picking a stock, and a 40% chance he or she will lose money.
He suggests his favorite metric to measure value which is Robert Shiller’s cyclically adjusted price-to-earnings ratio: CAPE. The long-term average in US has been 16,5. The lowest reading was 4,8 at the end of 1920 and the highest was 44,2 at the end of 1999. Right now at the time of writing, it is at 33, well above the average. In this book, Meb shows how to use CAPE ratio globally and not to get stuck in a single country. Japan reached CAPE of almost 100 in 1989 when there was a massive bubble waiting to burst. Many interesting statistics and educational facts about global CAPE ratios right there for a value investor.
The author shares a simple trading system based on the CAPE ratio. He compares the results of buying the cheapest countries vs buying the most expensive countries, how adding a filter of max ratio affects the results, and how all of this looks compared to buy and hold.
Summing it up
I agree that stock picking is an overestimated activity. It’s far more important how one manages positions than what names he or she actually has in the portfolio. Ratios like CAPE or PE may not work in the modern QE era like they worked before. Meb wrote in 2013 that US stocks were expensive. Now 7 years later we know “they” have only got more and more expensive. Not to say it’s going to last forever, but in my opinion using such value metrics can give a long wait and time is a valuable asset in life. Nevertheless, some interesting insights I got about investing in a basket of countries and how to go global. If you lean towards value investing I think the book is well worth to read.Share this post