June 21, 2005 Notes from the book “In an Uncertain World,” by Robert E. Rubin
Reading this book has enabled me to be more confident in my research and techniques. I am a believer of long term investing, and I base my investing on the avoidance of short term noise. “Noise” can be defined as blips in historic norms. Blips could include wars, massive inflation, very high or very low interest rates, massive deflation and depressions. My basic temperament is one of value. I search for values in purchasing clothing, automobiles and investing. Robert Rubin said, ” There are no provable attributes, Once you have internalized this, you can judge odds in a better sense.”
1. Equanimity – Evenness of mind; calmness; composure; as, “to bear misfortunes with equanimity.”
Page 74, “But I was able both to apply myself intensely and, at the same time, to maintain a reasonable degree of equanimity.”
2. “Markets can remain irrational longer than you can remain solvent” John Maynard Keynes.
3. On page 82, he discusses an interesting concept. I liken it to be able to anticipating a change of direction. Again, this solidified my investment research and focus. “When markets turn sour, you have to forget your losses to date and do a fresh expected-value analysis based on the changed facts.” Robert Rubin.
4. This next quote from page 83, has helped me incredibly. I never was able to understand that people have traits that really can not be materially changed. Often in life, we will be surrounded by individuals that we would want to change. Perhaps, you feel someone is inherently lazy. Rubin says, “My general experience in life has been that most people can change only within a narrow range, if at all. Many people can acknowledge criticism and advice, but relatively few internalize it and alter their behavior in a significant way.” If I am not mistaken, Warren Buffett recently discussed this phenomena.
5. On page 196 he wrote the following. I think I saved it so that I could read about “the great Austrian émigré economist Joseph Schumpeter.” “..almost every transformative, productivity-enhancing development also results in financial market overreaction.” Joseph Schumpeter. As I linked this, I realized that his book was in my reading pile (woo hoo !!!) (imagine, this is how I have fun :-).
6. Page 264 Rubin writes, “Rule number 12: Reality is always more complex than concepts and models.”
7. On page 282 Rubin reminds us, in the beginning of 1998, lower-grade corporate debt had been yielding around 2.75% more than similar maturity Treasury bonds. In the fall of 1998, the spread became around 6%.
8. On page 285, he discusses how models can be a useful tool, but ultimately, reality is much more complicated, and even sophisticated models can not capture the ability to make judgments.
9. On page 323 he discusses that the average value of the stock market is about 1/2 that of our GDP. The value of the stock market had never risen above our GDP until 1996. At the 1929 peak the ratio was 81%.
10. How should people think about investing? Rubin writes on page 346, “The most important part of my answer is that investors should recognize the risks they are taking. Stocks outperformed bonds for every decade of the 20th century, except for the 1930’s and a roughly equal performance in the 1970’s.” He goes onto mention that this type of statistic hardly guarantees a replication of the future.
11. On pages 342 and 343 Rubin discusses risk management. He emphasizes that every investor must decide how much loss can be tolerated, both psychologically and financially. One must also be cognizant of remote contingencies. Remote contingencies must be assessed!
12. If you are contrarian, Rubin discusses that by going against the stampeded of a herd, you must recognize that the stampede can go on for a very long time.
13. On page 361 he discusses the first thing you learn in Introductory Economics is that supply and demand determine price. He emphasizes that when governments borrow, the pool of savings for private purposes shrinks and the price of capital – expressed as the interest rate – rises. If the Treasury ceases borrowing and instead begins paying down debt, the savings pool available to the private sector increases and interest rates go down.
14. On page 363 he writes, ” A key interest rate for most economists is the market rate of the ten-year bond adjusted for inflation, which is called the “real” interest rate.”
Let me see if I can interpret this. Today’s 10 year rate is 4.07 %. Inflation rate of 2.8%, according to graph at www.inflationdata.com . Hence real interest rate would be 1.27%.
If I am not mistaken (and I very well might be), is that 10 year interest rates are generally 3% over the inflation rate. If that were the case, then the 10 Year rate would be 5.80% and not the current 4.07%. I have also heard several arguments lately, thinking that the inflation rate is higher than being reported.
This last section, on what true interests should be over a long term period continues to confuse me. I need to figure this one out at some point.
15. On page 364 Rubin writes or hints if fiscal imprudence continues, at some point markets may become concerned about fiscal disarray. He hints that the government might rely on inflation rather than fiscal discipline to work out its long-term fiscal problems.