Divorces and Deteriorating Returns
I sleep in a racing car, do you?
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G’day guys, gals and galahs. Issue #41. Shorter one this week as I’ve had a big week (looking at you AFL grand final). A quote from old mate Warren Buffett to start:
Smart doesn’t always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you.
Here’s the format of today’s email:
Part 1: Divorces and Deteriorating Returns
Part 2: Bonus Quirky Content - Something to Read, Watch, and Listen
Divorces and Deteriorating Returns
Graham Rhodes got me thinking (and shoutout to reader Jiawei too!) about how life outside investing affects how you perform inside the investing world. And it makes complete sense. What LeBron does away from the court1, is just as important as what he does on it. Here’s what Graham mentioned in our recent chat:
good investor also means having all these healthy habits. […]
I definitely can’t sing enough praise for the virtues of exercise or good sleep or eating healthy. I think if you can try to control the stresses that you’re facing elsewhere, they’ll definitely make you a much more resilient person as an investor.
So today’s focus is a brief look at the effects of divorce on investing. I should start with I’m not here to take pot shots on anyone’s relationship choices or to make jokes at their expense. Relationships are tough and divorce even tougher. I just want to look at it from the lens of investing. I will joke don’t get me wrong, but not directly at anyone’s expense.
So it’s not an earth-shattering insight that money is a leading contributor to divorces. But what happens when one partner happens to be a money manager in charge of billions of dollars? Paul Tudor Jones’ thoughts:
one of my #1 rules as an investor is as soon as my manager, if I find out that manager is going through divorce, redeem immediately. Because the emotional distraction that comes from divorce is so overwhelming. The idea that you could think straight for 60 seconds and be able to make a rational decision is impossible, particularly when their kids are involved. You can automatically subtract 10 to 20% from any manager if he is going through divorce.
It’s a toughie. I can totally see PTJ’s point of view. But imagine being the manager? The missus has left you, custody over kids is messy, and the personal financial situation is up in the air. And then a large investor redeems? What a kick in the guts.
Now I know how Kirk van Houten feels…
Kirk: You're letting me go?
Boss: Kirk, crackers are a family food. Happy families.
Maybe single people eat crackers. We don't know.
Frankly, we don't want to know. It's a market we can do without.
Kirk: So that's it after 20 years-- so long, good luck?
Boss: I don't recall saying "good luck."
Paul Tudor Jones has also said:
You can automatically subtract 10% to 20% from any manager when he is going through a divorce.
And the stats may just back him up on this one…
Limited Attention, Marital Events and Hedge Funds [Link]
Basically, for the three months before and three after divorce, performance will lag by an annualized 4.3 percentage points versus performance in the period before the divorce. The key point though, since states like New York and Massachusetts don’t release marriage records publicly, their results weren’t included in this study. It’s only from 13 states in the US they analysed. But still:
marriages and divorces are associated with significantly lower fund alpha, during the six–month period surrounding and the two-year period after the event. Busy managers who manage multiple funds and who are not part of a team are more affected by marital transitions. Inattentive managers place fewer active bets relative to their style peers, load more on index stocks, exhibit higher R–squareds with respect to systematic factors, and are more prone to the disposition effect.
Other key takeaways:
During the six-month period surrounding a marriage, fund alpha falls by 8.50% per annum.
During the six-month period around a divorce, fund alpha drops by 7.39 % per annum.
Hedge fund managers are susceptible to the disposition effect during the six-month period surrounding a marriage, they realize 51.1% of their gains but only 45.2% of their losses.
My own shoddy, quick research…
Bill Ackman was one I looked at…
And David Einhorn has been in struggle town of late…
And John Paulson who only recently announced his divorce has gone from managing $38 billion in 2011 to $9 billion in 2019 to handing back his investors’ cashback and turning his firm into a family office. All related? I won’t make that stretch. Played some tiny role? I wouldn’t bet against it.
But hey, being married ain’t no guarantee of success either…
How do I even wrap this up? With a Simpsons quote of course:
Kirk Van Houten: Singles life is great, Homer. I can do whatever I want. Today I drank a beer in the bathroom.
Homer: The one down the hall.
Kirk: Yeah! And another great thing, you get your own bed. I sleep in a racing car, do you?
Homer: I sleep in a big bed with my wife.
Kirk: Oh. Yeah.
Something to read: How a white-collar criminal made $7 million while sitting on the toilet at work [Link]
Absolute belter of a story.
Two blokes go to Uni together
One bloke is the win at all costs finance type (you know the one). The other joins the Australian Bureau of Statistics (Need I say more? just kidding lmao don’t break my balls)
Surprise surprise, the bloke at ABS gets bored.
Boom. Insider trading starts. ABS bloke rings win-at-all-costs (WAAC) guy and gives him ABS data before it’s released.
WAAC guy proceeds to trade those tips on the toilet on FOREX.
Toilet trader inevitably gets greedy and gets them both caught.
Far out I swear all these stories end the same: “And I would have gotten away with it if it wasn’t for my incessant greed!”
Something to read: The Stages of Economic Development from an Opportunity Perspective: Rostow Extended [Link]
An incredible primer in understanding the growth of economies. Ok, I’ll admit it’s a giant wall of text, but the info is too good to ignore.
Something to listen to: The Full Story of MrBeast [Link]
Now, I don’t watch MrBeast’s videos, but I know enough to realise his success is no accident. The dude is literally obsessed with YouTube. But he raises so many great points throughout on how he managed to get to where he is today. But most of all I loved his thoughts on how important it was for him to have a community of creator friends:
Beyond important. Imagine a world where its just you working solo, and you work 12 hours a day every day for like a year. And you’re just grinding, you make mistake, you learn from it. You grind, you make mistakes, you learn from it. And you do that for like a year.
Then imagine a different world where you have 4 friends who are also equally grinding in something similar. Friend #1 makes a mistake on Friday, he teaches the other 4 people. Friend #2 makes a mistake the next week, teaches everyone. Then you’re like all learning from each others mistakes. You’re all constantly studying 24/7 and downloading each other. Like, after a year you’re like 2 years ahead of the guy who’s just solo. It really does make a difference.
This has been my experience 110%. I was lucky enough to be included in a group chat of fellow writers and creatives, and it’s seriously hands down the best thing I’ve done. I’m lucky in that I view it as friends rather than just work-related, but it’s seriously the best thing ever. I highly recommend that people go find similar people to what they’re doing and reach out, get a group chat going and help each other.
Something to listen to (from me): Graham Rhodes on Compounding Curiosity [Transcript] [Apple Link]
Graham was so fun to talk to. And even my mum recommends this episode! But seriously, we need more people like Graham in the world and his enthusiasm and passion for investing is infectious. I still can’t believe I get to do these for free!
I learned more reading Warren Buffett’s letters than I did in four years doing a BCom hands down. And I was able to do that in a couple of weeks. But you think about places like YouTube or Twitter again, where just the volume of people sharing and the diversity of what they’re sharing and the expertise that they’re sharing. It’s just unparalleled, I think in human history, the volume of knowledge into which you can tap. So long answer short, look outside of the classroom for your learning.
My takeaways from our conversation:
Asia’s mobile-first gaming culture is poised to take over the world. Meaning Asian gaming companies are set to benefit either directly or by helping foreign companies adjust to this new model.
Have a good life outside investing and it’ll make life as an investor easier. I’ve already used this quote but it’s important so needs to be said again:
“I definitely can’t sing enough praise for the virtues of exercise or good sleep or eating healthy. I think if you can try to control the stresses that you’re facing elsewhere, they’ll definitely make you a much more resilient person as an investor.”
Form a group made up of friends doing similar things!
“I find it’s a great way to break out of the loneliness of investing because so often we’re barred doing reading on our own. And I think having friends to join you on that journey is really quite nice actually. So again, building emotional resiliency, just having some companionship I find quite good.”
Bonus links that don’t fit anywhere else:
My Top 10 Rules for Building a Blog [Link]
I’m always looking to improve :)
Bombard the headquarters: Xi Jinping's crackdown keeps growing [Link]
“It is hard to pin the crackdown on one event or trigger, and most of the individual actions have their own dynamic and logic.
It is in part regulatory, because of the overreach of privately owned tech giants; in part political, because of the need by the party to stay in control of the economy and eliminate alternative power centers; and in part geopolitical, driven by the policy to decouple key sectors from the U.S.”
Until the next day that starts with a W, have a good one!