Who Told Celebrities They Could Do Science?

One of the most disturbing trends of modern times is the inexorable rise of the tendency for large swathes of the population to substitute proper scientific research in favor of “celebrity science.” Well I apologize, but I prefer to get my medical advice on things like GM foods from the FDA and not from, say, a guest on a chat show or a former swing dancer cum yogic flyer who self publishes books and now thinks he is the world’s authority on the issue.  I’m not sure if my approach is the one taken by the majority anymore.

I’m going to discuss a couple of examples here. It’s time to stand up for the scientists. The real ones, not the idiots.

It’s so much easier for people to listen to a celebrity when they are articulating their expertise on medical matters. Indeed, Time magazine has cited research that claims that 24% of parents place “some trust” in medical information given by celebrities.

The MMR Vaccine and Autism, What the Scientists Said

The most infamous case in modern times is the claim that there was a link between the MMR vaccine (measles, mumps and rubella) and autism. Indeed, anti-MMR litigation was directed at companies that manufacture the vaccine. Current manufactures include GlaxoSmithKline (NYSE: GSK), Sanofi (NYSE: SNY) and Merck (NYSE: MRK). Who speaks up for these companies when they are subject to this sort of nonsense in the media?

The original report on which much of the MMR/Autism claim is made was published in the The Lancet in 1998 by Andrew Wakefield. The report has subsequently been denounced as a fraud by the British Medical Journal and has received widespread condemnation in the scientific community.

In case anyone is in any lingering doubt as to the validity of the claim, the following bodies have found no link between the MMR vaccine and autism.

• Centers for Disease Control and Prevention
• The National Health Service in the UK
• Institute of Medicine (IOM)
• World Health Organization
• New Scientist Magazine

In addition the FDA reported on the subject  and discussed the final report of the IOM’s Immunization Safety Review Committee in 2004

“ body of evidence favors rejection of a causal relationship between thimerosal-containing vaccines and autism, and that hypotheses generated to date concerning a biological mechanism for such causality are theoretical only…  …the benefits of vaccination are proven… … widespread rejection of vaccines would lead to increases in incidences of serious infectious diseases”

So this is what the scientists said but they don’t always get listened too, according to a report  until relatively recently “one in four Americans” still thinks that vaccines cause autism.  Why?

What the Celebrities Said

There is no higher profile celebrity expert on autism than Jenny McCarthy and indeed her status on the issue has been raised by appearances on chat shows like Oprah Winfrey and Larry King where she has been on record as believing that vaccines caused her son’s autism. She is not alone as other television and radio presenters have also reiterated these claims.

Indeed media coverage of the Wakefield research caused widespread fear and declining rates of vaccinations with the inevitable disease outbreaks occurring afterwards. Of course the overwhelming scientific evidence (or rather the lack of scientific evidence) is presented to these people, but nothing works. Everything seems to be subservient to homespun anecdotal evidence which is given widespread credibility for no other reason than they saw it on television spoken from the mouth of a celebrity. As another celebrity and great philosopher, Marina & The Diamonds, correctly once wrote “TV taught me how to feel, now real life has no appeal”.

It’s not just celebrities and the media that were at fault here. The Wakefield research was always highly questionable and even after it was widely discredited and evidence came to light that made the Anti-MMR litigation case in the UK untenable, the lawyers still displayed their usual tendency to make money irrespective of the situation. According to an interview with Dr. Michael Fitzpatrick, the lawyers who lead the campaign

“refused to acknowledge openly that the scientific case against the MMR-autism link was overwhelming and advise their clients to conclude the action. Instead, they continued to pursue the case, allowing it to drag on for a small number of families, acting without legal aid funding, for a further three years.”

In addition Fitzpatrick claimed that £8m of the £15m ($23m) in legal aid funding used up in this case went to the solicitors. A further £1.7m went to the barristers and expert witnesses took up £4.3m.

Shameful.

Conclusions

This sad tale of misinformation which was promulgated by self-appointed celebrity experts, fraudsters, self-interested parties and lawyers would be an interesting footnote in history if it was an isolated case. Unfortunately there seems to no end this hogwash. The latest media friendly scare stories-backed up by flimsy “science”- seem to surround genetically modified crops and companies like Monsanto and Syngenta.

I’m certainly not arguing that these companies shouldn’t be subject to scrutiny, but what I am saying is that any criticism of them should be based on the body of scientific evidence rather than listening to chat show ‘experts’, celebrities whose usual response to the overwhelming evidence against their case is simply to find another chat show.

If I want to know about scientific facts I listen to a scientist.

Private Investors Outperforming Professionals?

At some point in his/her investing life, every private investor is faced with the same question: Does he actually add value by investing himself or not?  I suspect the most common response is to ignore the question safe in the notion that it’s just a bit of fun on the sideline. Another is to avoid the complication of benchmarking performance and just be happy that the account is positive. However, for full time investors, the issue simply cannot be avoided.

Discerning readers will note that I specifically reference private investors here. The reason is that professional investors are not that as exposed in how they earn money (fees, etc.) to the vagaries of performance. Private investors lose money when performance is negative. Do money managers refund fees?



Why Professionals Aren’t Trying to Outperform

It gets worse: The investment industry has learned a fundamental truth of behavioral finance and constantly applies it. I’m talking about the tendency of investors to psychologically weight a loss double that of a gain.

Asset managers understand this because they realize that investors will overweight a losing performance versus a winning one. In other words, if an asset manager underperforms for a client his downside risk (losing assets under management) is far greater than the upside from outperforming. Now you know why the investment industry produces such ‘samey’ benchmark-hugging performance. It’s in their interests to do so.

If there was a difference between what, say, T Rowe Price (NASDAQ: TROW) and Ameriprise Financial (NYSE: AMP) did, surely it would show up in marked differences in share price performance?

AMP data by YCharts



And investors in these companies should understand that they are just making a highly correlated bet on the markets by buying them.



A Waste of Talent

I'm not saying there aren’t a lot of talented people in the investment industry. There are, and in their ‘defense’ I should point out that it is hard to outperform when you are not really trying to do so! While this may be disheartening for the young investment professional anxious to prove himself by generating performance, he is soon overwhelmed by the pressure to conform to the industry game of focusing on getting assets under management (AUM) and not particularly bothering about performance.

Remember folks, given the same performance fee, an asset manager generating 5% with $1 billion AUM earns more than a guy generating 12% with $400 million. Who would you rather be? Also consider that during a down year the whole industry will suffer. As none of the major firms with AUM will deviate from each other’s performance they will all make the same excuses and try and hang onto AUM as best they can.

Some of these clowns even try to sell you their services without a track record. If I want my car window replacement, I go to someone who does it every day and is tried and tested at doing it. Alternatively, if I want my money invested, should I go and give it someone who won’t even tell me how good he is at what I am paying him to do?



Confidence is the Key

Turning back to the challenge for private investors confidence only really resonates with someone if it is accompanied by extensive experience. It is something hard won but easily lost. I’ve outperformed the market for years and across different market conditions. No matter. When I have a couple of months of underperformance, I start to stress. I’m the worst investor ever, this is all a waste of time, I am losing money. My hard earned money.

The usual ‘confidence boosting’ supporting arguments kick in. Historically, you lose money 4/12 months a year so it’s just random that two are next to each other. Look at the long term chart, you had blips before. You outperformed for over 10 years so what is two months in the scheme of things? It’s all good stuff but the truth of it only rings true when you get back to a profitable month. It is a stressful game.



Private Investors Edge

So, when under this stress, why exactly should private investors feel they can outperform? Why should they feel they can add value when all the empirical evidence suggests that fund managers don’t do so?

The answer lies in the fact that private investors are actually trying to outperform rather than mimic a benchmark. They don’t have to diversify away returns by constant adherence to sector weightings in the benchmark indices. In addition they are not obliged to be in the market just because they are trying to generate a buck in management fees. Private investors have far more flexibility.

For example take a stock like General Electric (NYSE: GE), which is going to see its prospects correlated with global GDP growth. Here is how the market priced it in 2000:

GE PE Ratio TTM data by YCharts



The good news is private investors don’t have to pay 50x earnings, while professional investors have to hold it. Another example is Google (NASDAQ: GOOG), of which we can see revenue growth here.

GOOG Revenue Quarterly YoY Growth data by YCharts



It is in a nice uptrend since the recessionary dip, and even with the transition to mobile and tablet Internet usage, Google still has a dominant position in search. However, every fund manager this year was forced to listen to the hoopla and hype surrounding Facebook (NASDAQ: FB) just because one part of the investment industry wanted to sell something to another part of the industry. However, amidst all this, very few people actually pointed out that Facebook had no articulated plan for mobile at the time of the IPO. No matter institutional investors were obliged to pick some up due to benchmark weighting issues. Private investors could avoid it altogether. Meanwhile Google goes on churning out revenue growth.



The Bottom Line

In conclusion, I think there are a whole bunch of reasons why hard working private investors can outperform professionals. It’s a stressful process, but then again it is a whole lot more stressful to look back on 10 years of miserable returns for you and then add up what your investment advisor has made out of this process. Despite the puff that the investment industry churns out, private investors are better placed to generate alpha. The real issue is having the confidence to keep doing it. Hopefully reading and participating in this sort of online forum will help!

How to Diversify Your Portfolio

Very few professional investors would advocate a portfolio of equities without insisting diversification. It is certainly a worthy aim, but what is puzzling is that so few seem to understand it or at least make the effort to think in non-conventional terms about. In my humble opinion the conventional and consensus opinion on the subject is plain wrong and investors with even a rudimentary understanding of the underlying issues can better generate diversified portfolios.

In this article I will briefly focus on two ideas.  The first is the concept of beta (derived from the modern portfolio theory beloved of unintentional index hugging fund managers) and the second relates to mechanical based investment systems. In turn, I’ll share a few thoughts on what investors might do to better achieve diversification.


Beta in Investing

The concept of beta is wonderful in principle. Theoretically all an investor has to do is put together a portfolio of stocks whose average beta works out to one and he/she has a portfolio thaqt approximates market risk.  Bingo he is diversified! Furthermore, when he wants more risk, he just buys more stocks with a beta more than one. When he wants less, he just buys stocks with the opposite property.

Unfortunately, it is not that easy. Beta is- by definition- based on historical data. It tells you what was a high or low beta across previous market conditions. I’m not saying that this isn’t useful. It is. If market conditions are the same going forward then the concept of beta is highly applicable. Alas, markets are not that compliant.

In the last 20 years or so, we have been through a technology boom, a housing market boom, a banking boom, a commodities boom, a banking bust, a housing market bust, a boom in emerging market bonds, boom in Gold, a China housing boom and so it goes on. The fact is that market conditions constantly change and deluding yourself that you can obviate the necessity to think about how macro-conditions are evolving by just relying on some backward looking data like beta, is a recipe for trouble.

Consider, a stock like Intel (NASDAQ: INTC) and then look at Caterpillar (NYSE: CAT). Yes, during the dotcom boom the former was likely to have been a high beta stock as the market priced in every ‘Blade Runner’ technological fantasy whilst Caterpillar would have been a lot less beta. After all, they just provide machinery to the boring housing, mining and construction industries. Fast forward a few years into the dotcom bust/low interest rate era and suddenly housing, mining and anything China are (literally) hot property and no one wants tech. Guess who is high beta now?

This sort of example illustrates that beta changes with market conditions and cannot be relied upon. In a brief aside, I will also note that fans of Soros’ reflexivity would also point out that self reinforcing feedback loops also create investment bubbles (i.e. high beta stocks or sectors) and they can come from origins such as sheer sentiment or regulatory changes. How anyone can think that these factors will be expressed in the historical beta of a stock is beyond me.

Ultimately, if the beta moves around with conditions then structuring a portfolio based on this approach will not lead to diversification because the portfolio will do the same.



Mechanical Based Strategies Lead to Unintentional Style or Sector Biases

Another instrument of self-delusion is the seductive idea that investors can achieve diversification by investing based on a set of mechanical metrics which attempt to capture some sort of attribute or other. Again, I am not completely decrying this idea because I use such metrics to quantify stocks and I think they are useful. What I am saying is that if they are applied without consideration of the macro-conditions or overall portfolio direction they will lead to an unintentional style or sector bias.

In plain English –I can use it in occasion, I promise- if a portfolio is constructed purely using a metric such as , say dividend yield or PE ratio or Price/Assets etc, it will end up manifesting an unintentional market view. To give you an example, consider that in 2008 the highest yielding stocks tended to be banks, insurance companies and house builders. Guess what happened next?  The dividend did not exactly provide a floor to the share price, especially when it had a tendency to disappear as earnings collapsed. Investors can look at the stocks like Citigroup (NYSE: C) as a classic example of this trap.

Another example of a pitfall with this approach can be seen if investors focus on only investing in say an earnings or cash-flow basis. This sort of approach has a tendency to immediately disqualify certain sectors like biotech or oil & gas exploration. No one invests in Vertex Pharmaceuticals (NASDAQ: VRTX) or other such stocks because their growth prospects are all about future cash flows and earnings. If you wait for them, you will be too late to capture the upside.

Putting these two examples together begs a key question. How can a portfolio be truly diversified if it overweights one sector and/or it ignores whole swathes of the market?



An Alternative Approach to Risk Management

I’m going to conclude this article by suggesting another approach. Namely, to try and actively diversify the profit drivers in a portfolio and/or select stocks that have upside drivers which are relatively non-correlated with the macro economy. An example of the former approach would be to say balance an oil services company (which you think is undervalued) with say a company that has a high proportion of its fixed costs in oil or energy. Another example would be to buy a fertilizer company and balance it out with a food producer.

In other words, what you are trying to do is pseudo-hedge away macro risks and create a diversified portfolio that isn’t over exposed to anyone sector of the economy. Of course such an approach requires a lot of forethought into stock selection, but hey, no one said investing is easy!

As for the non-aligned approach, I think special situations investors tend to cross over a lot into this camp. It is all about finding stocks with almost hidden upside potential.  I think an example of this now is Johnson & Johnson (NYSE: JNJ). It isn’t the sexiest stock out there but its growth prospects are mainly about execution. If it sorts out its production difficulties within consumer products, integrates the Synthes acquisition and successfully develops sales of its new drug products then the stock price can appreciate irrespective of the economy.

Investing is more of an art than a science and there is no reason for fund managers to try and bamboozle private investors with the idea that they have the secret formula for diversification. They don’t. In truth it is much more about understanding why stocks move in the way they do and trying to balance the overlying risk. There is no reason why private investors can’t do this just as well as institutional investors.

Spanish Housing Market

Spain Housing Market in Crisis

Some economic statistics on Spain displayed here, which suggest that it is still in crisis. Worrying times ahead, but great if you want to buy a property in Spain.

Spain Housing Market Statistics

The funny thing about Spain (and Ireland) was that before the 2008 recession their deficit situation was quite good. Of course, this was the consequence of a housing boom which boosted GDP growth and finances, yet, stored up a whole load of problems now. As ever, it’s worth reminding ourselves that irrespective of the efforts of the Government to capitalize the banks, if their underlying assets are falling in value then more capital will be needed.

The key is the Spanish housing market and, things don’t look good.

Spain House Price Index

Firstly, the latest quarterly numbers (general index) for the Spanish house price index is out from the Instituto Nacional de Estadistica

(%)	Q1 2010	Q2 2010	Q3 2010	Q4 2010	Q1 2010	Q2 2010	Q3 2010	Q4 2010
New Housing	-4.2	-1.7	-2.6	-2.1	-1.9	-5.2	-5.0	-8.5
Existing Housing	-1.4	0.0	-1.8	-1.6	-6.3	-8.3	-9.6	-13.7
General Index	-2.9	0.9	-2.2	-1.9	-4.1	-6.8	-7.4	-11.2

These are annualized numbers which suggest that Spain’s housing market is getting worse.

Furthermore, despite the fall in bond yields since the ECB’s LTRO operations, the banks in Spain are tightening lending conditions.

Spanish Bank Lending

Here is a summary of the Banco de Espana Bank Lending Survey

Index	Q1 2011	Q2 2011	Q3 2011	Q4 2011
Housing	11.1	11.1	11.1	22.2

This number is just the share of banks tightening vs. easing. It’s a similar type of survey to the one that the Federal Reserve does for Bank Lending.

And, nor is it likely to get better any time soon! 

Spanish Bank Bad Debts

Let’s go back to the Banco de Espana for a breakdown of lending and deposits of credit institutions and, then compare this with how many are classified as doubtful

Eur (bn)	2005	2006	2007	Q2 08	Q3 08	Q4 08	Q1 09	Q2 09	Q3 09	Q4 09	Q1 10	Q2 10	Q3 10	Q4 10	Q1 11	Q2 11	Q3 11	Q4 11
Total	1202	1508	1760	1838	1853	1870	1862	1861	1846	1837	1827	1847	1837	1844	1824	1818	1788	1783
Bad	9.6	11	16	31	49	63	79	86	90	93	98	99	101	107	112	122	128	136
%	.8	.7	.9	1.7	2.6	3.4	4.3	4.6	4.9	5.1	5.3	5.4	5.5	5.8	6.1	6.7	7.2	7.6

The rise in the doubtful rate is worrying.

The crisis isn’t over for Spain.

Source:

House Price Index
Banco de Espana Bank Lending Survey
Banco de Espana Credit Data

US Employment Data and Why Increased Public Spending Does Not Reduce Unemployment

US Non- Farm Payroll Data

The US non-farm payroll data was very strong but is it broad based? Moreover, what does this data tells us about whether countries should be stimulating employment growth via engaging in public spending?

Firstly, let’s look at average hours worked…

BLS Hours Worked Chart

…and moreover the weekly American Staffing Association Index is showing that 2012 staffing levels are tracking significantly ahead of 2009-10-11. You can access the data here

So the overall picture is of a sustained recovery in the US.

An interesting comparison can be made with the Eurozone and the differences between the countries with youth unemployment data…

EU Youth Unemployment Chart

If we accept the start of 2010 as a benchmark, it is clear the countries doing very well (Germany, Austria, Netherlands) and even those showing moderate improvement (France, Finland, Belgium)  are those that have a better Debt/GDP situation.  The countries that are failing their youth are Portugal, Italy, Greece and Spain.

The message is clear. Racking up Government Debt via spending is not the solution to stimulating an economy or generating employment, particularly for the youth.

Mitt Romney's Presidential Campaign and Flip Flops

The funny thing about Mitt Romney’s presidential campaign is that it appears to have gathered pace after the escalation of negative attacks on him. Of course, the two prominent attacks have been the entertaining Rombo ad which was put out by Rick Santorum and, the infamous $10,000 bet that you can see above with Rick Perry in a presidential debate.

Now what do these things have in common?

Mitt Romney’s Flip Flops

Previously, most of the negative campaigning had focused on Romney’s flip flops. Frankly, I think this is the best approach. However, what these ads do is detract from the previous campaign. In fact, they help to give Romney an image of competence and a tighter definition of his character.

Looking at the $10,000 bet, it comes across as being crass, arrogant and insensitive. Many Americans are suffering financially and, wealthy politicians (not least from a private equity background) throwing around large wagers doesn’t sit well with many voters.  It also suggests he would be alienated from the daily problems of the majority.

However, it does convey an air of confidence and more importantly, competency. He comes out of it looking like a man who, albeit arrogantly, backs up what he believes. Whither the flip flop image?

Similarly, the Santorum Rombo video portrays Romney as a kind of political serial killer. Here is the Rombo video ad...

Unfortunately, for Santorum, this ad backfires because it defines Romney as a focused and concerted individual. Definitively not a flip flopper! Similarly, its light hearted vein attaches an image of comedy to one of the negative charges against Romney. This detracts from the seriousness of what voters may have been thinking about Romney. As for Santorum, it is a tad hypocritical to be putting out a negative campaigning ad that complains about someone else’s negative campaigning!

Santorum’s videos may help shore up his support and, those who think he has the moral high ground but I suspect the floating voters and the ‘undecided’ vote (who always decide elections) are disposed to view all politicians as mud slinging charlatans. They just vote for the least bad candidate.

Mitt Romney’s Presidential Campaign

These shifts in attack on Romney have helped portray him, rightly or wrongly, as competent. And an appearance of competency matters. It matters a lot.

The key issue in the presidential election will be the economy and, this should play to Romney’s strengths. Moreover, the US public appears to want deficit reduction and growth. To accuse Romney of being a flip flopper on these issues is a powerful charge, but to portray him as being insensitive doesn’t matter so much, as long as he comes across as capable and competent.

Note that one word keeps coming up here and, there is a reason for this. I’m rather taken with the work of Alex Todorov and, how facial expression influences our judgment of a person.

How We Judge Presidential Candidates

When I write ‘we’ I do not mean the reader of this blog. If you are reading this, you are likely to be a discerning individual who is taking the time and interest to look into political matters. You are highly unlikely to be a floating voter who is politically uninformed. Nor do you make political decisions based on an amorphous viewpoint that is adjusted by an ongoing mental agglomeration of a series of sound bites on television.  I suspect that elections are decided by the latter.

Indeed, the work of Todorov, according to Daniel Kahneman in ‘Thinking, fast and slow’ is that in the US

This result was confirmed in many other countries. Notably, competence was a far better predicator than likeability. Voters are seen as combining an image of strength and trustworthiness to formulate an opinion on competency. And ultimately, it is competency that counts to the kind of floating voter that will decide the US presidential election.

‘70% of the races for senator, congressman, and governor, the election winner was the candidate whose face had earned a higher rating of competence’

Romney’s opponents are doing him a favor!   



Source:

Kahneman, Daniel  'Thinking, fast and slow' , Penguin Group 2011