Oct 31, 2016
Norton Reamer is the former Chief Investment Officer and CEO of
Putnam Investments. He also founded and ran United Asset Management
for 20 years. He has 50 years of experience on Wall Street. Today,
Michael and Norton talk about his new book, “Investment: A
History.” It is a detailed anthology on investment.
Norton stresses that everyone has a responsibility to understand
their investments and to educate themselves to know what they are
getting themselves into. Most people seem daunted by the challenges
of investing. Real ownership, seeking a value, the role of
leverage, and resource allocation are four key points of investment
that Norton lays out in his book. When someone makes an investment,
they need to really own that investment. It isn’t just a piece of
paper.
Michael moves the conversation to economic bubbles and asks, “What
are some of the timeless lessons that can be learned from bubbles
you have witnessed in your lifetime?” Norton’s favorite bubble to
have witnessed in his 80+ years is the latest bubble that popped in
2008. It was the way in which the bubble was created that
fascinated him. He relates it to the great depression and discusses
the similarities in recovering from it.
Next, Norton gives his perspective on efficient markets vs. the
behavioral school. He says that it is a conundrum that has not yet
been solved. Survivorship bias is the next controversial topic.
They discuss the success of Warren Buffett and the “survivorship
bias” argument that has been attached to him. Buffett has been
around for many decades and both men agree that there is much that
can be learned from Buffett. On the other side of the spectrum is
Bernie Madoff. Norton explains how an operation like Madoff would
be almost impossible to pull off in today’s markets. He also agrees
with Michael in saying, “I would be deeply skeptical of someone
producing 1% returns every month. You need risk to have returns
like that.”
Michael brings up tail risk next. Norton describes tail risk as, “A
one in a one hundred year event.” Things can be rare and unlikely
but it is not the same as saying something is impossible.
Conditions can always get extreme and produce “a one in a one
hundred year event” and wipe you out. Norton uses Long Term Capital
Management as a great example. Michael and Norton finish the
podcast stressing that people can never be too cautious when
investing in the markets. Educate yourself and prepare for risk
adequately.
In this episode of Trend Following Radio:
- Personal responsibility in the stock market
- The role of financial leverage
- Resource allocation
- The suspension of diligence during economic booms
- Efficient markets vs. Behavioral markets
- Warren Buffett and survivorship bias
- Tail risk
- Quant and momentum style trading
- Practicing caution in the markets
- What impact does interest rates have on the value of assets