In theory there is no difference between theory and practice. In practice there is. Yogi Berra
In a week where the world found out how far some people will go to gain admittance for their kids at the most prestigious academic institutions in the land, it might be a good time to consider what takes place at these bastions of higher education. For the privilege of paying somewhere in the neighborhood of fifty thousand bucks a year, a hard working student typically takes two years of required studies, and then the last few years specializes in a field they are considering as their profession. In those first few years, and the last two as well, you learn many different theories and established principles. In education, it might be operant conditioning, in economics it would include the law of diminishing returns, and in psychology, you will get plenty of Sigmund Freud’s penis envy (such trash!). Exposure to the fundamental theories of an area of study will be part of any higher education at any college one attends. I would point out that many people go through this process and wind up majoring in a specific area, and then go out into the world and discover they actually hate what they are doing. I speak out of personal experience (teaching, not economics), and know of many who experienced a similar situation. In the investment world, much attention is given to academic credentials, and academia has always held a prominent place for the investment practice. Gee, do you think it is those massive endowments and what good investors can do for the capital spending plans of an academic institution? Go gander at the endowments of Harvard, Yale, Stanford, and Princeton and you will get your answer. Anyway, let’s look at a few specific examples of theory versus real world examples to see how Yogi might think about the investment world.
Probably the most discussed question in the investment world is the idea of indexing versus active money management. Standard dogma holds that it is impossible to have investment results better than an index over a long period of time. The most revered investor in history, Warren Buffet, has outperformed the S&P 500 Index over a fifty year period by over 10% a year (here is a link to the actual results-https://berkshirehathaway.com/letters/2018ltr.pdf). Naturally, Mr. Buffet now recommends index investing, although his partner Mr. Munger, while acknowledging it is a very difficult task, believes with a lot of work beating the market can be accomplished. Recently, another theory versus real world example has been in the news, that being the idea of Modern Monetary Theory (MMT for short). Essentially, the progressive part of the Democratic party, led by Bernie Sanders, Alexandria Ocasio-Cortez, and others, believes that as long as a government can print money in its own currency, employment and inflation issues can be handled by the governments control of monetary policy. Interestingly, Jeff Gundlach (manager of the largest bond fund in the globe), Jerome Powell (Chairman of the Federal Reserve Board), and our friend Mr. Buffet have recently commented on the, shall we say, deficiencies of MMT. Quite simply, they think it is balderdash that using monetary instruments in larger and larger quantities can correct structural issues, like say trillion dollar budget deficits and nearly one hundred trillion of unfunded liabilities. Hmm, does that sound like a specific scenario to consider? In case you were not paying attention, it is precisely the one the United States finds itself in. Imagine that. Not that Republicans have any answer either, as who can forget Dick Cheney, the ex VP and skeet shooting officianado, remarking that ‘Reagan proved deficits don’t matter.’ These politicians, clearly experts in both theory and practice, right? If ever there was a quote that could be applied accurately to a situation, Yogi’s sums it up quite well with regard to theory, economics, and investment.
In the markets this week, the big story was oil. With reports out of the Permian that domestic production might slow down just a touch, a draw in supplies combined with OPEC’s production cuts and the ongoing tragedy in Venezuela, the price of black crude rose to over 65 bucks a barrel from 63 (Brent). Houston was the home of the annual CERAweek oil conference where energy executives convened and hobnobbed with investors, media, and those interested in the always controversial topic. Elsewhere, Adobe and Oracle reported earnings that beat estimates but left investors disappointed in guidance. Disney will close on its acquisition of 21st Century Fox next week. Do you think the brass at Netflix are paying attention? Globally, the world was focused on the tragedy in New Zealand, as it should be. With spring in the air and rapidly approaching, I hope your flowers are beginning to bloom.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.