Welcome to the 2019 annual letter. Our gain in net worth during the year was 30.5% compared with a gain of 24.8% for the All Ordinaries Index, our 16th straight year
of outperformance. This year our gains were driven by returns from our domestic and international equities more than offsetting further declines in the moribund Perth real estate market.
This year it finally dawned upon the legislators in Australia that the domestic economy is in trouble and in danger of a significant deceleration.
For the past several years I have opined that the inaction of Australian politicians was making Australia a ‘no-go’ zone for business.
High tax rates, welfare programs for seemingly everyone, excessive regulation and ‘best practice’ protocols for almost every aspect of business, has seen capital and talent flight
away from the country. When the GFC hit, local politicians were smug about how well Australia had navigated the crisis. There was a lot of self congratulatory cheers, fist bumps
and back slapping. The lucky country in reality was being propped up by a commodities boom in rapidly developing China.
Those days are over now and Australia’s unemployment rate is rising, wages growth has flatlined owing to our lack of global competitiveness.
Belatedly the RBA has started slashing interest rates and loosened restrictions on home lending. Quantitative easing is now on the horizon.
In contrast the US instituted QE immediately during the GFC, slashed interest rates to zero. Three years ago Donald Trump was elected and he set about cutting red tape for
business. Companies were deemed to have repatriated all the cash they had been hoarding overseas and given a reduced tax rate to bring the money back.
He then dropped the US corporate tax rate to 21%. Further, the US began imposing tariffs on other nations, in particular China. Business is rewarded for
operating in the US and penalised for moving plants offshore. Tax inversion mergers (setting up head office in foreign countries to reduce tax), a prominent feature during
the Obama administration, are now a thing of the past. The net effect is the US is now seen as business friendly and it is no surprise that cash is pouring into the United States
at an unprecedented rate. Correspondingly US share markets have been on fire for the past decade with a concomitant surge in the wealth of the populace
who all have exposure through their 401K accounts. The US dollar has also soared against international counterparts, something of an annoyance as it makes all things
American more expensive for us in Australia.
If the Australian government proceeds with a QE policy, I anticipate the Aussie dollar will fall further against the greenback.
I recall Willy Packer of Packer and Co stating that the only way Australia can regain global competitiveness is for either a significant fall in the currency or for wages to
be cut by half. Clearly the latter option is not a viable alternative and would represent political suicide for any party contemplating such a move.
Apparently Singapore was the only nation which asked its citizens to all take a pay cut during the GFC, but the ruling party there is far less a democracy than Australia.
What does all this mean for Kanday group?
We look at opportunities through the lens of value which includes currency implications. Long term competitive advantages override all else though in our evaluation.
We have identified a multitude of wonderful companies whose futures are bright and valuations are reasonable.
For the most part the only thing I have been guilty of is thumbsucking over valuation. Identifying quality has been on point.
The Australian sharemarket rallied this year taking many valuations to stratospheric levels. I believe this will presage the further fall in the currency, making
sense of the prices. The east coast property market has rebounded with the lowering of rates. Hopefully Perth will eventually begin to participate,
with prices being the lowest in the nation, a truly dramatic fall from grace considering prices were briefly at parity with Sydney in 2007.
| Calendar Year | Kanday | All Ords | +/- | |||
| 2003 | n/a | 11.10 | 3300 | n/a |
||
| 2004 | 62.20 | 22.60 | 39.60 | |||
| 2005 | 23.70 | 16.20 | 7.50 | |||
| 2006 | 60.20 | 20.00 | 40.20 | |||
| 2007 | 26.30 | 13.60 | 12.70 | |||
| 2008 | -16.40 | -43.00 | 26.60 | |||
| 2009 | 31.70 | 31.30 | 0.40 | |||
| 2010 | 24.84 | 1.4 | 23.44 | |||
| 2011 | 19.6 | -13.9 | 33.50 | |||
| 2012 | 12.4 | 10.8 | 1.60 | |||
| 2013 | 28.7 | 13.6 | 15.1 | |||
| 2014 | 15.8 | 1.2 | 14.6 | |||
| 2015 | 10.6 | -3.8 | 5344 | 14.4 | ||
| 2016 | 9.7 | 7 | 5719 | 2.7 | ||
| 2017 | 12.5 | 7.9 | 6167 | 4.6 | ||
| 2018 | 3.95 | -10.3 | 5533 | 14.3 | ||
| 2019 | 30.5 | 24.8 | 6906 | 5.7 | ||
| Cumulative Return | 2003-2019 | 1978% | 109% | |||
| Compound Annual Return | 2003-2019 | 20.88% | 4.72% |
Key Themes of 2019
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Warren Buffett
The about face by the US Fed on monetary policy set the stage for the rally in equity markets in 2019.
Fed Chair Jerome Powell reacted to plummeting markets at the end of 2018 (due to several rate increases), by lowering short term
interest rates by 0.25% three times in 2019.
This led to a sustained surge in equity markets around the world, recovering all the loss which occurred between October and December 2018.
US economic data continues to be strong, offset by the continued gyrations of the trade discussions and tariff tensions between the US
and China.
Australia finally decided to follow suit, responding to signals of an impending property slowdown on the east coast. The RBA cut rates
by 0.25% three times and the spectre of quantitative easing, US style, has been bandied around.
Perth property prices have failed to respond to the interest rate cuts, as Perth property continues its decline. 10 years ago, Perth real estate
was briefly the most expensive in the nation. Today, it is last, falling more than 20% from the peak whilst eastern states prices have risen
by 70% over the same period.
It is interesting to note that in 1990, the average wage in Australia was $21K per annum. The average price of a house in WA was $100K
and the average interest rate on a home loan was 12%. Assuming you borrowed all the money for a home, your interest costs would
be $12K per annum, a full 57% of your annual income.
Today, in Australia, the average wage is $68K. The average home price in Perth WA is $430K. A home buyer can get a mortgage
with an interest rate of 3%. Assuming 100% borrowing, the mortgage interest costs would be $12.9K, barely more than the servicing
cost of the loan in 1990. Importantly, this only represents 19% of annual income. If low rates persist, it appears homebuyers
are getting a great deal.
The Australian dollar has continued its slow decline against the US dollar, posing a headache to Kanday and its international
aspirations. Currency fair value is a topic I have deliberated previously and it still weighs in our decision making.
However, our purchases are still guided by the search for quality assets.
With asset prices rising all over the world, demanding quality in our purchases is more important than ever.
Goldilocks
“Due to the memory of the Great Depression, the central banks of today will do whatever it takes to engender inflation, including reducing
interest rates to zero and using quantitative easing (printing money) in order to stimulate economic activity. The alternative of deflation and
mass unemployment is unfathomable.”
Marcel Candeias
Has a Goldilocks scenario been brought about by technology?
Economic forecasters have been warning about the risks of rampant inflation since the Fed started QE after the GFC.
But instead inflation has been so muted that central banks around the world have taken interest rates to zero and even negative.
The latest reports show over $15 trillion of government bonds, 25% of the market, trading at negative yields, something never seen before.
The yield curve in the US inverted earlier in the year. This inversion has been predictive of past recessions, leading to forecasters declaring a
recession in the US is imminent.
The yield curve, rather than indicating recession, showed that the Fed funds rate was too high. Jerome Powell lowered the rate.
Trump’s trade war with China has hobbled the industrial economy but the US consumer appears stronger than ever, with full employment and
rising wages.
So have we reached a new nirvana with zero bound interest rates and accompanying near zero cost of capital, coupled with a healthy economy?
Rather than a recession, are we entering a period of prosperity driven by major productivity increases through technologic innovation?
Apparently the second industrial revolution from 1870 to 1890 had a similar impact as the world made the transition from agriculture to industrialisation.
Prices kept falling and established industries suffered, but the ‘new world’ prospered.
So today we find ourselves in a predicament where there is persistent deflation coupled with central bank determination to offset these forces.
I can think of many examples in day to day life where technology has boosted productivity dramatically. There is none more obvious than
smart phones introduced by Apple. I can bank from anywhere, communicate with anyone anywhere. In fact, we live in a world now where you
never need to leave your lounge chair and every imaginable good and service will be brought to you.
And according to tech industry leaders, we are just getting started.
History has proven that it pays to be an optimist and that is firmly the way that Kanday group is betting on the future.
The App store and Google
Warren Buffett’s Berkshire conglomerate owns a number of large businesses in many different industries. he receives data which no doubt gives
him a great insight into the state of the economy. One might say that he has an unfair advantage with all that information coming straight from
the coalface. How do we level the playing field? In the past you had to trudge down to the library (which is still useful) and look for relevant data in the archives.
Now the answer may be through the internet. With the advent of Google and other platforms like Twitter and
the Apple App store, we can get information about business with just a few clicks of the mouse. Just load up the App store and
you can quickly find which Apps are the most popular. Perform a keyword search on Google and instantly you have insight into which
companies everyone is searching for the most. Want up to the minute insights from prominent individuals (including the President). Check out Twitter.
Combine this information with your reading of financial reports and other research and
you will quickly gain a sense of which companies and industries are succeeding and who is not.
Even Warren was heard to say that he would pay a substantial sum of money to use the search services of Google. But the best news is
you can level the playing field on up to date data and this incredible service comes for free.
Does price really matter?
Does the price you pay really matter?
A lot of value investors are always poking around looking for ‘undervalued’ stocks, under the impression that this creates a margin of safety.
When the price of a stock falls they get excited at the prospect of getting in at a discount. Whilst price no doubt matters, I contend
that one should perhaps be more focussed on the economics of the business and the potential runway for long term growth.
Let’s look at an example.
You find a company being run by a promising investment manager from Omaha. It is 1990 and the share price is quoted at $7000 per share.
Sounds expensive. You wait. Your over eager friend buys in. Four months later and the share price drops to $5600, a 20% drop.
You were right it was too expensive. You feel vindicated as you buy in at a nice discount.
That company as you may have guessed is Berkshire Hathaway.
29 years later and the share price is $327,000.
Your friend’s compound rate of return is 14.17% per annum.
Your return is, wait for it, 15.06% per annum. But truth be told, being a value guy, you probably sold out long ago when you scored a double or a triple right!
Going back to 1990, even someone who paid $10,000 for Berkshire stock (almost 80% more than what you paid) would probably be very happy with their 12.8% annual
return if they had bought and held on.
When you find the right company, paying ‘fair’ value is more than adequate. With the tax system structured the way it is, you want to own a stock
which you never have to sell.
So, the next time you hear someone say that the share price of XYZ stock has gone up and they missed the opportunity, remind them of this example.
Warren Buffett purchased Coca Cola stock in the late 1980s, making it 40% of his equity portfolio, after following the company for over 20 years.
By the time he bought in, Coke had been around for 100 years and was already a $10B company.
You could argue that Warren was very late and that Coke was already a mature company. Well how did things work out?
10 years later Warren’s Coke investment had gone up 10x, an annualised return of 26% and the stuff investment legends are made of.
Why Trump is right
“It’s not always the most popular person who gets the job done.”
Gordon Gekko
“Show me the incentive and I will show you the outcome.”
Charlie Munger
When Donald Trump became the US President there was a great amount of fear mongering that he was going to destroy the US economy.
I was personally excited to see what could happen with a businessman rather than a career politician in charge for once.
From the get go it became clear that Trump would make decisions with a business first focus rather than pandering to special interest groups.
Just before releasing this letter, the US labor department released its monthly non-farm payrolls jobs report.
This comes at a time when Trump has been President for three years.
Jim Cramer and the talking heads at CNBC described the report as the best set of numbers they had ever seen in their careers, with 266,000 new jobs being created.
As Cramer said, like him or hate him, the numbers are the numbers. Unemployment is at record lows, minority groups employment is at
record highs, wages are rising, interest rates are at historic lows and inflation is muted. Of course it is not all due to Trump and his policies,
however the records will show that this goldilocks economy occured under his watch.
Trump’s business acumen is also helping in dealing with trade talks with other nations, notably China.
Trump recognises that the US wields the big stick in international affairs. Fortunately he is using trade tariffs aka financial pain , rather than
beating the war drum, in order to promote America’s interests. Trump understands that if your domestic economy is strong,
you have far greater leverage to compel your trading partners i.e suppliers to be good actors in order to do business fairly.
Why is having a business man as President contributing to this rosy set of data?
Business thrives because decisions are made to benefit customers, shareholders and suppliers alike. This leads to productivity gains as waste is
minimised. Efficiencies are sought after which will lower the costs for the customer and improve the quality of the product or service being offered.
Suppliers are held to account, driving improvements in their processes in order to be selected as the partner of choice.
In other words, business starts with a goal of maximising revenue and controlling expenditures in order to make a profit, all the while delighting
the customer and innovating to stay ahead of the competition.
Traditional government departments, on the other hand, start with a budget allocation. Their goal is to use the allocated funds in order to validate their
existence. If the money is not spent, then maybe next year there will be less allocated to them. Return on investment is not the priority. Rather, increased
spending is. This leads to waste, inefficiency and poor capital allocation, as beaurocrats cave in to the demands of special interest groups in order
to be re-elected.
Many politicians have very little business background. They rise through the party and when elected are suddenly tasked with spending
billions of dollars, something they are clearly ill-equipped to do. When it is not your money it is much easier to greenlight spending programs,
especially if spending it will help you to gain votes.
Kevin Rudd is an egregious example of what happens when a proponent of social democracy is elected with the stated ethos he would
“save capitalism from itself”.
In 935 days as Australia’s Prime Minister, from Dec2007 to June 2010, Kevin Rudd managed to hock Australia up in debt to the tune of $250B dollars.
That is an increase in debt of $267M dollars per day from the day Rudd was elected!
Under his stimulus measures, released to stave off the Great Recession, the Commonwealth balance sheet went from $44.8B in net assets
when Rudd took office, to a staggering $161.6B in net debt. And what were his qualifications to make such monumental spending decisions?
Well, Rudd has a degree in Chinese studies. Before entering politics, he worked as a diplomat, political staffer and public servant.
By electing a career politician, Australians will be paying the cost of Rudd’s profligacy for a long time to come.
Why you are rich already
“Savings = the gap between your ego and your income.”
Charlie Munger
“Do you want to be famous or do you want to be rich?”
Marcel Candeias
Do you thumb through your news feed, looking for updates on what the famous people in the world are doing? Do you follow Kim K, Kanye and Kendall on Instagram?
Influencing’ has become a lucrative career in and of itself, where beautiful people flaunt themselves in exotic locales around the world, wearing designer clothes
and sipping expensive champagne. I bet you see all this and privately think to yourself, ‘I wish that was me…I wish I could afford that lifestyle!’
Well, you can. Warren Buffett flies in a private jet. Jim Simons has perhaps the largest private boat in the world. Larry Ellison and Richard Branson both own an
island! How can you match that? Easy. Buy a first class ticket as a treat to yourself. Better yet book economy with your pregnant wife and if you are lucky,
they will bump you up to first class for free. Want a boat? How about booking a cruise on one of Norwegian or Carnival’s cruise liners. No private boat can
match the luxury. Oh, but I don’t own an island I hear you moan. Actually, for $50 you can catch a ferry to Rottnest just off the coast of Perth. Awaiting you
is an island paradise with all the amenities already there to service you. Desire some privacy? Just hop on a bicycle
and cycle around the island and soon you wiil feel like the only person there.
You can do everything the super rich do already, so stop viewing your money through the lens of consumption. You already have it all.
The only real difference between you and a wealthy person is that he doesn’t need to work anymore whereas you do. That is where your focus should be –
creating passive income streams to replace the income created from your labour. The end goal is financial freedom, the true definition of ‘rich’.
Why Rakesh Kapoor got tapped on the shoulder
“In my book, you either do it right , or you get eliminated.”
Gordon Gekko
Reckitt Benckiser is a consumer packaged goods company headquartered in Slough, UK.
It’s CEO, Rakesh Kapoor has been in the top job since 2011. Earlier this year it was announced that Mr. Kapoor would retire by year’s end. This process has been
expedited and Kapoor has now been replaced by Laxman Narasimhan. Let’s examine RB’s performance with Kapoor at the helm, to see if it gives us any clues
as to why he retired right in the middle of executing his vision for RB 2.0, a health and hygiene powerhouse. I prefer to make judgements on performance solely on the stated
financial results.
Firstly, when he was appointed the RB share price was 32 pounds. It is now around 59 pounds. After 8 years, that is about 8% per annum. Along with
a dividend yield of about 2.5%, that equates to about a 10.5% annual return. Not bad. But let’s dig deeper. Stock prices don’t always depict reality. I want to see RB’s financial
performance.
In 2011, RB reported net income of 1.745 billion pounds or 2.37 pounds per share. This was achieved using 3.40 pounds per share of debt and 7.85 pounds per share of equity.
This gives a reported return on equity of 30% and a return on capital of 22%. Outstanding.
RB has a long history of growing by acquiring ‘name’ brands and enhancing their value. Brands such as Dettol and Nurofen come to mind. Kapoor continued along this strategy
acquiring Schiff Nutrition in 2012 and infant formula maker Mead Johnson in 2017 in a blockbuster $16.6B deal.
To help fund the deal he also sold off the Frank’s Redhot sauce and French’s mustard brands, which have since become home runs for the acquirer McCormick.
The vision of a dominant health and hygiene franchise sounds promising but let’s look at the numbers at the time of Kapoor’s departure in 2019.
For the full year 2018, RB reported adjusted net income of 2.41 billion pounds or 3.40 pounds per share. Looking at the balance sheet, there was 16.75 pounds per share of debt
and 20.86 pounds per share of equity. This gives a reported return on equity of 16% and a return on capital of 10%.
With a retention ratio of about 50%, one can surmise that the return on incremental invested capital over the past 8 years has been approximately 2%.
As Kapoor departs, RB has a debt laden balance sheet with debt totalling 5 times net income and little to show for it.
Maybe the board of RB looked at the numbers like I did and came to the same conclusion.
I guess though Rakesh won’t feel so bad as he parachutes away with the 100 million pounds RB has paid him over the past 8 years!
Expected value analysis
“Everything comes down to payoffs. A horse with a 50% chance of winning might be a good bet, but it depends on the payoff. The same holds for a 100-to-1 longshot.
It’s not the frequency of winning but the magnitude of the win that matters.”
Steven Crist , “Bet with the Best”, Michael Mauboussin
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”
George Soros
Life is all about thinking in terms of probabilities. We learn through trial and error what works and what doesn’t. Over time we develop an innate probabilistic
framework through which we instinctively make decisions. That is why you are more likely to see a child bang his head than an adult. He hasn’t learnt to
think through the probabilities yet before acting. Successful investors have discovered that thinking in terms of probabilites has far more utility when
combined with expected value.
Expected value is the probability weighted average of all expected values. In simpler terms it tells you what is the expected reward from a particular course
of action.
For example, let’s say you are analysing a speculative penny stock. The probability of you increasing your money by 5 times is 20%. But the chance of losing
your investment is 80%. Should you buy it? The expected value is 5*0.2 + 0*0.8 = 1. This means that you expect to break-even, not a great idea.
On the other hand, suppose you are considering a stock with an 80% chance of doubling your money and a 20% chance of declining 50%.
The expected value is 2*0.8 + 0.5*0.2 = 1.7. The expectation of a 70% return seems far more appealing than the aforementioned penny dreadful.
But if the penny stock has a payoff of 20 times, the math becomes 20*0.2 + 0*0.8 = 4. Maybe you should allocate some of your portfolio to this idea.
“A few big successes compensate for dozens and dozens of things that didn’t work.”
Jeff Bezos
The most rational people in the world constantly think about expected value. They understand that the magnitude of correctness matters more than
the frequency of success. A few people have been coming out of the woodwork recently proclaiming that Buffett has lost his touch (not for the first time).
But I knew this was untrue when Warren unveiled his home run $50B bet on Apple. The expected value of this investment more than compensates
for the other recent smaller investments Warren has made which did not turn out as well. Both Warren and Jeff are the richest people in the world because
they think in terms of expected value.
Profiting from being a contrarian is harder than you think
“If everyone is going left, look right.”
Sam Zell
How often do you hear someone say, ‘I’m waiting for the market to drop and then I’ll back up the truck.’
Let’s explore the mechanics of putting that statement into action.
Say for example you are sitting on the sidelines with $100K in cash.
Firstly, as the market creeps higher, your opportunity cost of sitting in cash grows.
What if one year later, the market is 10% higher and you have been earning 1% in your checking account?
You are already 9% behind the market. Now after waiting patiently throughout that agonising melt-up, the market
finally starts to decline.
After the market falls 5% you decide to invest $20K, seeing this as your opportunity to dip your toes in the market.
You still have $80K on the sidelines which seems sensible since the market is still up on a year ago and it may fall further.
The market continues to decline another 5%, marking a decline back to where it was a year ago.
Remembering how painful it was to watch the market creep higher, you invest another $20K.
The market keeps declining another 5%. Doubts begin to creep into your mind. Damn, if only I had waited I could
have got in at a lower price. What if it declines further? But hey, I have only invested 40% of my cash. I am still good.
You invest another $20K.
The market keeps falling, dropping another 5%, now sitting at 10% lower than a year or so ago. You feel stupid.
Why didn’t I just wait? What do I do now? You feel paralysed with indecision. I was right all along. This market is
falling further. You decide to wait, promising yourself you will invest the rest of your cash if the market falls
another 10%. Instead, the market rebounds 10%, back to where it started about a year ago.
So how did you fare playing the contrarian.
You first $20k invested is now worth $19K
Your second $20K invested is still worth $20K
Your third $20K invested is worth about $21K
Your remaining cash pile is about $40K
At the end of the day, despite witnessing a top to bottom 20% decline in the market, your capital has remained unchanged at $100K.
The next time you here someone say they are waiting for the market to crash, recognise that even if it does, profiting from
the opportunity is not as easy as it seems.
Buy what you like
“Participate in the world if you want to know what to invest in.”
Marcel Candeias
What defines all of us? We are all consumers. From birth humans want more of everything. It takes a lot of education and re-training to convince
the average person that buying more stuff won’t necessarily make them any happier. Whilst our interests may be diverse, there are also many
similarities in the things we like. Have you ever wondered why you become interested in drinking non-dairy milk products
and then you suddenly notice that everyone else seems to be doing the same thing. Or you can’t wait to buy the next iphone. But wait,
everyone else seems to be queuing up to buy it too. We are communal creatures and subliminally through word of mouth and by observing
what others are wearing or eating or doing, we tend to copy each others behaviour in order to feel a part of the group. To feel cool. To feel
accepted and part of the ‘in crowd’.
Well, as an investor you can take advantage of this by trusting your instincts.
When I see my wife heading off to the gym in her funky Lululemon yoga gear, I know there is a pretty good chance that a lot of the other gym
goers will be wearing the same gear. She tells me passionately how good the clothes fit and the exceptional tailoring and durability. So
rather than gripe about how much she is spending on the work-out clothes, I bought Lululemon stock. Soon, the rally in the Lulu share price
had more than paid for all the clothes.
My son gets super excited when I tell him we are going to have take away pizza for dinner. He eats a whole
pizza by himself. I am pretty sure his friends are just the same. The market leader is Dominos. A position in Dominos was all that I needed to
cover the cost of all the times we have ever ordered take away pizza. Thanks to all those hard working folk who have provided my family with
free pizza for the past several years.
I like new technology. Everyones favourite store for shopping tech in Australia is JB Hi Fi. So I bought JB Hi Fi shares and now I get all the tech
gadgets I want from the constant dividend stream flowing from my JB shareholdings.
You get the picture. Use your common sense and trust that the things you like are likely popular with everyone else.
Invest accordingly, but don’t forget what Peter Lynch advises:
“Liking a store, a product, or a restaurant is a good reason to get interested in a company…but it’s not enough of a reason to own the stock!
Never invest in any company before you’ve done your homework on the company’s earnings prospects, financial condition, competitive
position, plans for expansion, and so forth.”
Peter Lynch
Bayesian Mathematics
“Past performance is the best predictor of success.”
Jim Simons from Renaissance Technologies
P(A/B) = P(B/A)*P(A) / P(B)
The probability of event A given B equals the probability of event B given A multiplied by the probability of event A, all divided by the
probability of event B.
In the real world nothing is fixed and the course of future events is uncertain.
Updating our expectations and probabilities of future events is an important element of sound reasoning.
For example, lets say the Lakers are playing the Spurs and Lebron James is suiting up for LA. We aren’t sure if Lebron will play tonight.
The P(Lakers win given Lebron plays) = P(Lebron played given the Lakers won) * P(Lakers win) / P (Lebron plays)
P(Lakers win) = 60%
P(Lebron plays) = 80%
P(Lakers win given Lebron plays) = 75%
P(Lebron played given Lakers won) = ?
So, 75% = P(Lebron played given Lakers won) * 60% / 80%
Therefore, the P(Lebron played given Lakers won) = 100%
Bayesian inference suggests that if we know that the Lakers won, we can conclude that Lebron must have played.
Jamie Dimon, the highly regarded CEO of JP Morgan was quoted as saying he was expecting interest rates to rise above 3% in 2018.
In fact, by the end of 2019 the US Fed had cut interest rates and the spectre of zero or negative interest rates is a real possibility.
Fed Chairman Jerome Powell performed an about face at the end of 2018 as sharemarkets dived on the prospect of future
rate rises. Was it the falling market which prompted Powell to reverse course? Or was it apparent to him in the data that the US
economy was rapidly slowing? Or was it pressure from president Trump to slash interest rates and make the US competitive with
other nations who have cut their interest rates to zero or negative?
How is it possible that two men at the coal face of business with so much pertinent data at their fingertips could be so oblivious as
to what was going on in the real economy? Divining the future may have as much to do with the past as anything else along with a dose of luck.
Our actions today will have an impact on what happens next. It is vital to adopt an investing approach which
takes into account variables which are fluid in nature, and seeks to profit no matter which way the market turns next.
Using Bayesian analysis, we can continuously narrow the broad range of possibilities we must contemplate.
I will communicate my thoughts again in a year’s time.
Yours Sincerely
Marcel Candeias