Klement on Investing

Klement on Investing provides insights on global financial markets, combining empirical data analysis with an exploration of human behavior in economics, investment strategies, and the impacts of geopolitical tensions and policy decisions on markets. It challenges conventional wisdom and promotes understanding of complex financial dynamics.

Financial Markets Human Behavior in Economics Investment Strategies Geopolitical Tensions Policy and Economic Impact Market Analysis Inflation and Deflation Commodity Prices Supply Chain Vulnerabilities Investor Psychology

The hottest Substack posts of Klement on Investing

And their main takeaways

Japan is the playbook, not the exception

3 implied HN points • 13 Mar 24
💰 Finance Central Banks Interest Rates
  1. Japan manages extremely high debt levels through financial repression techniques, like central banks purchasing government debt and influencing bond yields.
  2. The duration mismatch between government assets and liabilities incentivizes keeping interest rates low for financial stability.
  3. Artificially low long-term bond yields in Japan lead to wealth redistribution towards older, wealthier households, potentially causing social tension.

Increasing collective intelligence

3 implied HN points • 11 Mar 24
💼 Business Team Dynamics Hierarchy Collective Intelligence Gender Dynamics
  1. Collective intelligence of a team is more important than individual intelligence, and factors like emotional intelligence, team speaking behavior, and gender composition can enhance collective intelligence.
  2. Research suggests that team success hinges on 'collective attention,' wherein team members focus on shared goals rather than individual objectives, highlighting the significance of synchronized team efforts and equal contribution in meetings.
  3. Clear hierarchies in teams lead to higher levels of collective intelligence compared to flat hierarchies, as hierarchies reduce the need for constant status assertion and competition among team members, fostering better teamwork.

A waste of time and money

2 implied HN points • 15 Mar 24
💰 Finance Investing Influencers Market Performance Financial advice Social media
  1. A new study shows that financial influencers on StockTwits often provide recommendations that lead to underperformance in the market.
  2. Only a minority of financial influencers are able to outperform the market, with a significant portion actually having negative performance.
  3. Users tend to follow financial influencers who echo their own sentiments, leading to a cycle of poor recommendations and wasted time and money.

Why quality stocks perform so well

2 implied HN points • 14 Mar 24
💰 Finance Stocks Investing Market Analysis Risk Behavioral Finance
  1. Companies with higher profitability, known as 'quality stocks,' tend to outperform less profitable companies in the market.
  2. Highly profitable companies do not necessarily come with higher risks, as they have lower probability of share price crashes and tend to perform better in negative market conditions.
  3. The outperformance of highly profitable companies seems to be driven by systematic market mispricing rather than compensation for higher risks, making it a potentially persistent investment strategy.
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Stocks (and bonds) for the long run: Part 1

4 implied HN points • 14 Feb 24
💰 Finance Investing Stocks Bonds Risk Diversification
  1. The book 'Stocks for the Long Run' by Jeremy Siegel may present an overly positive view of equities as a fail-proof long-term investment. It's crucial to understand that investing in stocks comes with risks and uncertainties, even over longer periods.
  2. Historical data corrected by Professor McQuarrie reveals the importance of considering a wider range of factors like failures, defaults, and market conditions when evaluating equity investments' returns.
  3. While equities can be a rewarding long-term investment, they are not risk-free. International diversification is crucial to balance potential negative outcomes and ensure successful equity investing in the long run.

This is not what I normally do here…

2 implied HN points • 12 Mar 24
💰 Finance Interest Rates Fiscal policy
  1. Focus on empirical observations and data, rather than theoretical predictions, but sometimes theories need to be explored too.
  2. Countries with higher inflation rates tend to see their currencies depreciate over time, while carry tend to work in the short term with interest rate differentials.
  3. Aside from interest rates, fiscal policy can start to influence exchange rates, especially when countries aggressively reduce their deficits. This could potentially lead to a stronger Euro and Sterling against a weaker US Dollar.

Rate hikes and the damage to our national productivity

6 implied HN points • 18 Jan 24
💰 Finance Investing Monetary Policy Productivity Research & Development Stock Market
  1. Central banks have been implementing aggressive rate hikes to control inflation, leading to a reduction in investments in research and development (R&D).
  2. Rate hikes negatively impact corporate spending on R&D, resulting in a decline in innovation, lower productivity growth, and slower job creation.
  3. To counteract the adverse effects of rate hikes on R&D, fiscal policy measures supporting R&D efforts, like the Inflation Reduction Act, are crucial for boosting productivity and maintaining competitiveness.

A historic moment

3 implied HN points • 22 Feb 24
💰 Finance Investing Stock Market
  1. Japanese stock market's recovery to all-time highs after 34 years is a historic moment
  2. It's a cautionary tale of the risks of equity investments, despite long-term strategies
  3. Adjusting for inflation, the Nikkei 225 recovery is still below its peak

Stocks (and bonds) for the long run: Part 2

3 implied HN points • 21 Feb 24
💰 Finance Investing Stocks Bonds Portfolio Diversification
  1. Stocks may not always outperform bonds over long periods - research shows that stocks in the US did not consistently outperform bonds, except for specific time frames
  2. Data suggests that even over the longest investment horizons, there is a significant chance that bonds will outperform stocks
  3. Considering global trends, many countries show significant underperformance of stocks compared to bonds over 20 and 50 years, highlighting the importance of diversification

Only academics believe in efficient markets

7 implied HN points • 04 Jan 24
💰 Finance Investing Academics Behavioral Finance
  1. Academics believe in efficient markets where past news does not affect investment decisions.
  2. Non-academics like financial professionals and retail investors do change forecasts in response to old news.
  3. Real markets are not as efficient as academics think, incorporating psychology and fundamentals is important for investing success.

Retail investors and earnings surprises

2 implied HN points • 07 Mar 24
💰 Finance Investing Retail Stocks
  1. Retail investors often trade based on noise rather than fundamental information, impacting market efficiency.
  2. Retail investors tend to buy stocks with low price momentum and large earnings surprises, leading to market mispricing.
  3. Post earnings announcement drift is influenced by retail investors and can be seen in stocks with low institutional ownership.

Housing affordability around the globe and what really helps

2 implied HN points • 05 Mar 24
💰 Finance Housing Affordability Mortgages Government intervention Real Estate
  1. Data shows housing affordability has increased in most countries post the 2008 financial crisis due to low mortgage interest rates.
  2. National averages say the UK isn't as bad in housing affordability as perceived, with countries like Australia and France in a tougher spot.
  3. Analysis suggests government intervention, like offering housing benefits and building new homes, can notably improve housing affordability.

Geopolitical decoupling and commodity prices

6 implied HN points • 10 Jan 24
🌍 World Politics Geopolitics Commodities Trade Globalization
  1. Geopolitical tensions between the West, China, and Russia are leading to concerns about supply chain decoupling and rising commodity prices.
  2. Global supply chains are vulnerable, especially for critical raw materials like rare earth metals, impacting industrial production.
  3. An IMF research paper highlights the sensitivity of commodity prices to trade disruptions, showing potential surpluses and shortages in different regions.

From oil price speculation to higher inflation?

6 implied HN points • 09 Jan 24
💰 Finance Economics Markets Inflation Oil Speculation
  1. Speculators in commodity futures markets may increase price volatility but do not have a significant long-term impact on price levels.
  2. Rise in oil prices in 2021 and after the Russian invasion of Ukraine in February 2022 was a key driver of inflation spike in 2022 and 2023.
  3. Study suggests that oil price spike was partially due to excessive speculation by oil traders, which in turn contributed to an increase in US inflation.

Teams are more than just a collection of the best talent

2 implied HN points • 04 Mar 24
💼 Business Diversity Team performance Emotional Intelligence Work Culture
  1. Teams should not be selected solely based on individual talent, but on their ability to work collectively.
  2. Research shows that emotional intelligence, equal speaking behavior within a team, and gender balance all contribute to higher team performance.
  3. For businesses to succeed, it is essential to value team collaboration over individual performance and to prioritize hiring practices that reward team players.

Which economic surprises matter?

3 implied HN points • 15 Feb 24
💰 Finance Economic Indicators Interest Rates
  1. Markets react to surprises in economic data, not just the data itself. A deviation from consensus forecasts often triggers market movements.
  2. The size of the economic surprise matters. The impact can vary based on the type of data, with some like inflation having stronger effects.
  3. Economic indicators like inflation, unemployment, PMIs, and consumer confidence are crucial for investors to watch. Interest rates also play a significant role.

Mostly useless

2 implied HN points • 01 Mar 24
🇺🇸 U.S. Politics Presidential elections Stock Market
  1. Presidents don't significantly impact stock market performance. Reports suggesting otherwise are based on random data patterns.
  2. Analyses show that on average, Democrats outperform Republicans in terms of stock market returns, with exceptions due to external shocks like economic crises.
  3. The study by Yosef Bonaparte attempts to measure a President's stock market impact excluding external macro shocks, but results show overall uncertainty.

Oh those share price forecasts

6 implied HN points • 03 Jan 24
💰 Finance Investing Stock Market Forecasting
  1. Analyst forecasts and strategist forecasts often differ in predicting market outcomes.
  2. Strategists tend to be more pessimistic while analysts are generally overly optimistic.
  3. Relying on market forecasts for investment decisions may not be the best approach as accuracy is often low.

Stocks (and bonds) for the long run: Part 3

2 implied HN points • 28 Feb 24
💰 Finance Investing Stocks Bonds Portfolios Asset Classes
  1. Stocks are riskier in the long term than many investors believe, with fluctuating equity risk premiums influenced by economic drivers like interest rates and growth.
  2. Using longer historical data to predict equity risk premiums may not work, investors need to analyze the historical track record based on the current market regime.
  3. The correlation between stocks and bonds has varied over time, influenced by factors like inflation, interest rates, and economic growth, impacting the diversification benefits of stock/bond portfolios.

Narcissists vs. pushovers

2 implied HN points • 27 Feb 24
💼 Business Management Finance Research Behavior Analysis
  1. Narcissistic CFOs tend to manipulate equity analysts, especially those who are perceived as easily influenced.
  2. Narcissistic CFOs employ various persuasion tactics when meeting with analysts, focusing more on analysts deemed pushovers.
  3. Analysts are more likely to issue optimistic forecasts and better ratings for companies with narcissistic CFOs, potentially leading to less reliable information for investors.

Fighting corruption in Africa, one US law at a time

2 implied HN points • 26 Feb 24
🌍 World Politics Corruption Africa Enforcement Impact
  1. The US Foreign Corruption Practice Act (FCPA) applies globally to companies listed on American stock exchanges, impacting businesses engaging in corruption, bribery, etc.
  2. Stricter enforcement of FCPA since 2004 resulted in increased night-time brightness in communities near mines, indicating companies invested in local infrastructure and employment rather than engaging in bribery.
  3. After FCPA enforcement, local communities around mines saw improved infrastructure, reduced corruption perception, and more jobs, showcasing the positive impact of US regulations.

The investor experience with thematic funds

3 implied HN points • 07 Feb 24
💰 Finance Investing ETFs Performance
  1. Retail investors tend to switch between thematic funds, leading to a larger behavior gap.
  2. Trendy themes like tech result in a larger behavior gap as media influences investors.
  3. Thematic ETFs are easy to trade but cost more in performance due to frequent switching; the advice is to stick with a fund for many years.

Persistence > performance

1 implied HN point • 19 Mar 24
💰 Finance Investing Stocks Momentum Returns Strategies
  1. Persistence of performance is more important than pure price momentum in predicting future returns.
  2. The Directional High Minus Low (D-HML) strategy focuses on the persistence of positive returns to generate excess returns of around 1% per month.
  3. D-HML strategy offers more downside protection during extreme drawdowns compared to traditional momentum strategies.

A Protestant retirement ethic?

2 implied HN points • 23 Feb 24
💰 Finance Religion Retirement Economics Governance Regulation
  1. Max Weber's theory of the 'Protestant work ethic' suggests that religious beliefs can influence financial decisions
  2. Research shows countries with a higher share of Protestants tend to have better pension systems
  3. Better governance and focus on success in business among Protestants may contribute to well-funded pension funds

Home bias everywhere

1 implied HN point • 18 Mar 24
💰 Finance Investing Corporate Governance
  1. Investors tend to favor domestic companies over foreign ones not only in investment portfolios but also in shareholder voting decisions.
  2. Shareholders show a bias towards voting in favor of management proposals, especially in contentious issues, with a significant preference for domestic companies.
  3. Factors like potential business ties, governance rules, and information quality contribute to this home bias in voting behavior, making it challenging to hold domestic company managers accountable.

Reducing the factor zoo for bonds

2 implied HN points • 22 Feb 24
💰 Finance Investing Bonds Market Economy
  1. Market factor drives bond prices based on beta to the overall bond market.
  2. Steepness of the yield curve reflects expected economic conditions and influences performance of riskier vs. safer bonds.
  3. Understanding a few key factors like bond market beta and yield curve steepness can simplify bond selection and drive performance.

Now that rates start to fall again…

2 implied HN points • 20 Feb 24
💰 Finance Investing Interest Rates
  1. Companies with high operating leverage tend to benefit more from extended periods of lower interest rates.
  2. High operating leverage can lead to a larger increase in profits with a small rise in revenues but can also make companies more vulnerable when the economy slows down.
  3. Investors should consider looking for and investing in companies with high operating leverage as financial conditions become less constrained.

What will 2024 bring?

6 implied HN points • 14 Dec 23
💰 Finance Investment Market Analysis Charts Predictions
  1. Be cautious of historical comparisons in predicting the future of markets.
  2. Charts comparing past situations with present may not always be accurate or reliable.
  3. Rely on fundamental research and analysis rather than just comparing charts for investment decisions.

Prisoners of our genes or masters of our destiny?

2 implied HN points • 16 Feb 24
🔬 Science Psychology Genetics Econometrics Environment Behavior
  1. Our risk and time preferences are influenced by a mix of genetics and environment, with the unique environment playing a significant role.
  2. Despite genetic influences, the most crucial factor driving our preferences and decisions is our unique life experiences and choices.
  3. We have the power to shape our destiny regardless of genetic predispositions or shared environments. What we make of our lives is ultimately up to us.

Managing private equity portfolios

2 implied HN points • 13 Feb 24
💰 Finance Investments Private Equity Risk management
  1. Private equity managers have unique challenges in balancing portfolio concentration for high returns and diversification to manage risk.
  2. Private equity portfolio characteristics differ from those of listed equity funds, with smaller, riskier holdings often generating the most alpha.
  3. Performance in private equity is less about individual deals and more about portfolio construction, where fund manager skill plays a significant role.

Hay fever, the deadly allergy

1 implied HN point • 08 Mar 24
🏥 Health Politics Allergies Public Safety
  1. Hay fever affects about one in five people in the UK, with higher rates in countries like Brazil and Australia.
  2. Hay fever can lead to accidents and injuries, especially when operating heavy machinery or engaging in physical activities.
  3. A study in Japan estimated that a 10% increase in pollen count leads to thousands of additional accidents, costing the economy billions of dollars.

You hit my soft spot…

1 implied HN point • 07 Mar 24
💰 Finance Investing Funds Market Analysis
  1. Active fund management may have an advantage in less efficient markets like UK small- and mid-caps.
  2. Due to reduced research and liquidity, UK small- and mid-caps have become under-researched and may present opportunities for generating alpha.
  3. Shares in UK small- and mid-caps sometimes follow macro trends over fundamentals, but a shift can lead to significant outperformance.