It's becoming unavoidably obvious that the current global order is unraveling. Add investor fears that we've ignored warning signs of slower growth, particularly in Europe, and that the easy-money days of quantitative easing may finally be coming to an end, and it didn't take much to send equity markets plunging last month. ... A distracted, war-weary America is no longer willing and able to provide global leadership, and no other country is stepping up to take its place. The U.S.'s international disengagement and seemingly improvised foreign policy are leaving allies, distracted by their own problems, looking to hedge their bets. Meanwhile, developing countries have become powerful enough to block U.S.-led plans but are not yet coordinated, motivated or influential enough to offer alternatives. Fast-changing China, revisionist Russia and a host of emerging markets with competing priorities and different political and economic systems leave us with too many major powers with too many divergent interests. The result is a global power vacuum - and markets are afraid of what might come next. ... We've now reached a crossroads where the outcomes of four combustible geopolitical crises could begin to reshape the global economy. Two of these crises are already reaching a critical point. The conflict between Russia and the west will rage in and around Ukraine, on Russia's borders with other neighbors, in energy markets, in financial markets, in the defense budgets of countries on both sides, in cyberspace - and anywhere else Moscow may try to undermine what remains of American global leadership. ... In the Middle East the battle with ISIS has just begun. ... Two other crises, not yet dominating headlines, are very much in play. Chinese leader Xi Jinping has his hands full with transformational economic reforms that will reshape the Chinese market and his country's global standing. But as its economic agenda comes under pressure, Beijing will look to deflect frustration and attention onto foreign companies, neighborhood adversaries or Washington. ... Second, new fissures in the U.S.-Europe alliance are taking shape. Divisions among European countries as well as global challenges that disproportionately threaten Europe are widening a structural divide between Europe and America.
As career paths of professional investors go, Katherine Collins, CFA, certainly has a diverse one. Formerly a portfolio manager and head of US equity research at Fidelity Management & Research Company, Collins later attended Harvard Divinity School before launching her own biomimicry-based research firm, Honeybee Capital. In The Nature of Investing: Resilient Investment Strategies through Bio - mimicry , Collins examines how a better understanding of the natural world can lead to optimal decision making. In this interview, Collins discusses why honeybees are such good decision makers, the mechanization of the investment industry, and how preparing for uncertainty is different from preparing for risk. ... Biomimicry is the conscious emulation of natural wisdom in our products, processes, and designs. Many people think if you’re just using something from nature, that’s biomimicry. That’s not quite it. It’s the process of looking to nature as a model and a measure of our own endeavors, interwoven in every step of the process.
Statistically speaking, 2013 was a strange year indeed. The US reported very modest consumer price inflation of 1.5%, whereas the European Union and Japan came in even lower, at 0.86% and 0.36%, respectively. But during the same period, a painting by Francis Bacon called “Three Studies of Lucian Freud” sold for $142.4 million, the highest price ever paid for a painting at auction; a 59-carat diamond sold for $83.2 million, the highest price ever paid for a diamond at auction; trophy real estate prices in Manhattan, London, Sydney, and many other places soared past previous records; a limited-edition batch of Kentucky sour mash whiskey sold out at nearly $4,000 per bottle; and, of course, most developed-world equity markets marched in lockstep to new highs. ... The emergence of so many bubble-like niches in an ostensibly low-inflation world is curious. For instance, if the value of such major cur- rencies as the dollar and euro is stable, why were all these assets becoming so much more pricey? That is, after all, the same thing as saying that when valued in fine art or London penthouses, the world’s major currencies were actually plunging. Either those hot asset classes were simply random bits of foam in a vast, otherwise calm, disinflationary sea or the generally accepted definition of inflation is, in some fundamental way, flawed.
Over the past 15 years, the global economy has operated under two different growth models. Between 1999 and 2007, the growth model operated through ever larger trade imbalances between emerging market and commodity exporting countries – who ran larger and larger surpluses – and a group of rich countries – first and foremost the U.S. – who ran larger and larger trade deficits. Global imbalances were then seen as a problem by some, but they were really a symptom of the global geographic distribution of aggregate supply and demand, with excess supply in the high-saving emerging market countries and excess demand in some low-saving rich countries (and with energy exporting countries doing quite well as they exported to both). These supply-demand and saving-investment imbalances generated huge international capital flows that were sufficient to bring global demand into line with abundant global supply of goods at something approximating the full employment of global resources. ... That growth model obviously broke down in the global financial crisis years of 2007–2009 as global imbalances shrunk in line with global aggregate demand. From 2009–2014, the global economy has operated under stimulus from “nontraditional” monetary policies that pushed policy rates to zero and ballooned central bank balance sheets through massive “chunks” of quantitative easing. Also, the global policymakers “went Keynesian” for a couple of years during and following the crisis by delivering a large dose of fiscal stimulus. The good news is that, as a result, the global economy avoided depression and deflation. But that’s all they did or could reasonably do. The reality is that now, five years after the global financial crisis, average growth in the global economy is modest and the level of global GDP remains below potential. The global economy has not as of today found a growth model that can generate and distribute global aggregate demand sufficient to absorb bountiful global aggregate supply. Unless and until it does, we will be operating in a multi-speed world with countries converging to historically modest trend rates of potential growth with low inflation. 0% neutral real policy rates for many developed and some developing countries will likely be the investment outcome.
The index fund pioneer’s low fees have driven down costs but is its success a cyclical phenomenon? ... It passed the $3tn mark in assets under management globally last year, as international growth spurted alongside the US; today the total is $3.4tn. ... if there are vulnerabilities, they are in three areas: the shift to passive investing may prove to be partly a cyclical phenomenon; Vanguard’s move into giving financial advice could cause friction; and regulators could decide to step in to stop the firm becoming too big to fail. ... Instead of having outside shareholders, Vanguard is owned by its funds, which means that instead of having to charge fees high enough to generate a profit for shareholders, it operates “at cost” and charges only enough to cover expenses and business investment. ... The Financial Stability Board, based in Basel, Switzerland, has suggested designating every fund with over $100bn in assets as a “systemically important” organisation and subjecting them to tougher oversight and perhaps other requirements, all of which would raise costs.
Soon after Bill Erbey and his wife Elaine moved last year to St. Croix, in the U.S. Virgin Islands, they ran up a $2,000 electric bill. They turned down the air conditioning in an effort to cut costs and Erbey, who is 64 and overweight, sat around sweating. ... "He lives a lifestyle that, if he lived for 2,000 years he couldn't spend his net worth," says Orin Kramer, general partner of hedge fund Boston Provident. "It's one of the things that makes someone comfortable as an investor, because he's always focused on the dark side." ... Focusing on the dark side was, of course, a good thing to be doing ahead of the subprime housing crisis. It's one reason Erbey, who is the chairman of Ocwen Financial and four other publicly-traded companies, has managed to quintuple his net worth to $2.3 billion over the past two years.
The demographic and macroeconomic backdrop in sub-Saharan Africa resembles that of East Asia in the early 1980s, says Arnold Dubin-Green. How many astute investors among us would love to say they invested in Asia when the Tigers were cubs? … “The hopeless continent.” This was the Economist’s front-page reference to Africa in May 2000. Hopeless Africa; asphyxiated by civil war, corruption and political instability. … Investors ran a mile at the mere mention of Ghana, Kenya or Rwanda. Today, returns in more expensive developed markets threaten to be low for years to come. Slow global growth and low yields are the norm. Jumping off the US fiscal cliff and euro crisis, these headlines motivate investors to seek markets with higher yields and stronger fundamentals. … Fundamentals are better placed than in many developed markets. Africa is now the continent on their lips; a market that is a significant and growing part of the global economy with plenty of room for productivity gains, favourable demographics, commodity richness and recent history of fiscal and monetary reforms.
The asset management industry is about to experience another shake-up, as the investment universe expands to include new asset classes that involve direct loans to the economy rather than financial securities. … This report provides an insight into a new world of unlisted assets. Just as there is a market for private equity (unlisted shares), a market for private bonds and loans is developing as a result of the current large-scale disintermediation process. The report is intended to be instructive and seeks to explain this market using simple language. The editorial covers issues arising from macroeconomic disintermediation in the US and Europe, but also takes a microeconomic view by looking at the asset management industry in Europe, the US and Japan.
In this report, we look at five markets through which investors can lend directly to the economy, each corresponding to a new asset class:
1) Loans guaranteed by export finance agencies
2) Commercial real-estate loans
3) Loans for financing energy-related projects
4) Loans for financing transport-related projects
5) Loans to SMEs and intermediate-sized enterprises (ETIs)
Altman, 30, had been a marginal figure in Silicon Valley until February 2014, when he was named president of YC and instantly became a tech celebrity. "There are these surreal moments when people come up to me and ask, ‘What’s it like to run the most powerful startup organization in the world?’ " says Altman, who now receives 400 meeting requests a week from founders and investors. What they want, mostly, is access—an introduction to a current YC–backed hotshot or a YC partner, or a chance to enter the program themselves. Founders who are accepted relocate to the Bay Area for three months, giving Altman’s firm 7% of their companies in exchange for $120,000 and the chance to be advised by a stable of tech bigwigs. The best graduates can expect to attract hundreds of millions of dollars in venture capital, to hire the best engineers, to get any meeting they ask for—in short, to be made men and women of Silicon Valley. ... There’s audacity here, and hubris too. Y Combinator was, for years, a one-man show, fueled by the charisma of its founder. Now Altman has to prove he can turn it into an institution.
- Also: Financial Times - Interview: Mike Judge < 5min
- Also: Forbes - How Super Angel Chris Sacca Made Billions, Burned Bridges And Crafted The Best Seed Portfolio Ever 5-15min
- Repeat: Business Insider - A 21-Year-Old Stanford Kid Got $30 Million, Then Everything Blew Up 5-15min
- Repeat: The New Yorker - Bay Watched 5-15min
Prem Watsa was rushing down Bloor Street in downtown Toronto one morning in 1974 to get to a job interview at an insurance company called Confederation Life. He was fresh from earning his MBA and looking for his first job in finance in his adopted country. The street was filled with police officers searching for suspects in a bank robbery that had just occurred, and one of them grabbed Watsa, a 23-year-old Indian immigrant, and pinned him against a police cruiser. He protested his innocence, explaining that he was hurrying because he didn’t want to be late for an important meeting. A few minutes later, the cops let him go. … Watsa ultimately got the job and, after 10 years working as an analyst and a money manager at Confederation Life, began building a company that would become Fairfax Financial Holdings, now a C$9 billion ($8.8 billion) conglomerate.
In four quick years, the concept of the "new normal" has gone from being viewed as unlikely by most analysts and policymakers to becoming consensus. The popular application of the phrase now extends well beyond its original conceptualization that simply encompassed economic and financial prospects. It has also been used to describe medical procedures, unusual weather patterns and geopolitical shifts. It even gave rise to a television series. ... Yet all is not well for the concept of the new normal. Yes, its popularity has expanded. Yes, it has become conventional wisdom in most policy and market circles. And yes, the concept has proven consequential for evaluating the effectiveness of policies and the potency of traditional investment approaches. But there is also an important qualification: The concept itself is morphing, evolving to describe a contextual configuration that is less stable and more unpredictable. ... The purpose of this paper is to analyze what lies ahead for the new normal, and why.
The global obesity epidemic and related nutritional issues are arguably this century’s primary social health concern. With breakthroughs in the field of medicine, huge leaps in cancer research and diseases such as smallpox and polio largely eradicated, people around the globe are, on average, living much longer and healthier than they were decades ago. The focus on well-being has shifted from disease to diet. The whole concept of healthy living is a key pillar of our Credit Suisse Mega - trends framework – themes we consider crucial in the evolution of the investment world. In this report, we specifically explore the impact of “sugar and sweeteners” on our diets. ... Although medical research is yet to prove conclusively that sugar is in fact the leading cause of obesity, diabetes type II or metabolic syndrome, we compare and contrast various studies on its metabolic effects and nutritional impact. Alongside this, we question some of the accepted wisdom as to what is perceived as “good” and “bad” when it comes to sugar consumption, namely as to whether a calorie consumed is the same regardless of where it is derived from – sugar, fats, or protein – and whether solid foods are “nutritionally different” to liquids. ... What can we expect in the future? What should investors focus on? Although a major consumer shift away from sugar and high-fructose corn syrup may be some years away, and outright taxation and regulation a delicate process, there is now a trend developing. From the expansion of “high-intensity” natural sweeteners to an increase in social responsibility mes - sages from the beverage manufacturers, we see green shoots for dietary changes and social health advancement. Ultimately, we expect consumers, doctors, manufacturers and legislators to all play a crucial role in changing the status quo for sugar.
- Also: Financial Times - Sugar as the new tobacco? 5-15min
- Also: The Atlantic - The Power of Sugar < 5min
- Also: Wall Street Journal - Cheaper Sugar Sends Candy Makers Abroad < 5min
- Also: Wall Street Journal - Sugar Processors Seen Defaulting on Federal Loans < 5min
- Also: Financial Times - London’s commodity lawyers hit by sugar rush < 5min
Markets are meeting places where people come together (not necessarily physically) to exchange one thing (usually money) for another. Markets have a number of functions, one of which is to eliminate opportunities for excess returns. ... The bottom line is that first- level thinkers see what’s on the surface, react to it simplistically, and buy or sell on the basis of their reactions. They don’t understand their setting as a marketplace where asset prices reflect and depend on the expectations of the participants. They ignore the part that others play in how prices change. And they fail to understand the implications of all this for the route to success. ... The investor’s basic goal of buying desirable assets at fair prices is sensible and straightforward. But the deeper you look, the more you see how many aspects of successful investing are counterintuitive and how much of what seems obvious is wrong. ... The truth is, the best buys are usually found in the things most people don’t understand or believe in. These might be securities, investment approaches or investing concepts, but the fact that something isn’t widely accepted usually serves as a green light to those who’re perceptive (and contrary) enough to see it. ... Confidence is one of the key emotions, and I attribute a lot of the market’s recent volatility to a swing from too much of it a short while ago to too little more recently. The swing may have resulted from disillusionment: it’s particularly painful when investors recognize that they know far less than they had thought about how the world works.
So the Fed has chosen to hold off on their goal of normalizing interest rates and the ECB has countered with the threat of extending their scheduled QE with more checks and more negative interest rates and the investment community wonders how long can this keep goin’ on. For a long time I suppose, as evidenced by history at least. ... zero bound interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment. Why that is true is not immediately apparent. If companies can borrow close to zero, why wouldn’t they invest the proceeds in the real economy? The evidence of recent years is that they have not. Instead they have plowed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage. But more importantly, zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society. These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8% over the long term. Now with corporate bonds at 2-3%, it is obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10% a year to meet the targeted assumption. That, of course, is a stretch of some accountant’s or actuary’s imagination.
If everyone believes it’s a bargain, how can it not have been bought up by the crowd and had its price lifted to non-bargain status as a result? You and I know the things all investors find desirable are unlikely to represent good investment opportunities. But aren’t most bubbles driven by the belief that they do? ... Logically speaking, the bargains that everyone has come to believe in can’t still be bargains . . . but that doesn’t stop people from falling in love with them nevertheless. Yogi was right in indirectly highlighting the illogicality of “common knowledge.” As long as people’s reactions to things fail to be reasonable and measured, the spoils will go to those who are able to recognize this contradiction. ... Smart fantasy football participants understand that the goal isn’t to acquire the best players, or players with the lowest absolute price tags, but players whose “salaries” understate their merit – those who are underpriced relative to their potential and might amass more points in the next game than the cost to draft them reflects. Likewise, smart investors know the goal isn’t to find the best companies, or stocks with the lowest absolute dollar prices or p/e ratios, but the ones whose potential isn’t fully reflected in their price. In both of these competitive arenas, the prize goes to those who see value others miss. ... rather than judge a decision solely on the basis of the outcome, you have to consider (a) the quality of the process that led to the decision, (b) the a priori probability that the decision would work (which is very different from the question of whether it did work), (c) the other decisions that could have been made, (d) all of the events that reasonably could have unfolded, and thus (e) which of the decisions had the highest probability of success.
Humans are social and generally want to be part of the crowd. Studies of social conformity suggest that the group’s view may shape how we perceive a situation. Those individuals who remain independent show activity in a part of the brain associated with fear. ... We are natural pattern seekers and see them even where none exist. Our brains are keen to make causal inferences, which can lead to faulty conclusions. ... Standard economic theory assumes that one discount rate allows us to translate value in the future to value in the present, and vice versa. Yet humans often use a high discount rate in the short term and a low one in the long term. This may be because different parts of the brain mediate short- and long-term decisions. ... We suffer losses more than we enjoy gains of comparable size. But the magnitude of loss aversion varies across the population and even for each individual based on recent experience. As a result, we sometimes forgo attractive opportunities because the fear of loss looms too large.
Byron Trott has long been a trusted advisor to clients with names like Buffett, Walton, and Pritzker. Now the ultra-discreet financier is raising his profile by investing alongside them. ... “Not a lot usually shakes me, but I was scared to death when I walked in,” says Trott, who prepared for the meeting by reading all of Berkshire Hathaway’s annual reports. The two hit it off, and the get-to-know-each-other session, scheduled for an hour, ran to three. Before it was over, Trott had a fee-generating assignment from Buffett, who is notoriously stingy about paying investment bankers. “I did what I do with most clients for the first time,” says Trott. “I say, ‘Give me your toughest problem. What have you not been able to accomplish?’ ” ... “Let us understand you, your company, your long-term objectives, and let us help you by being a true solutions-based adviser on your side of the table, not the kind of idea-of-the-day, dialing-for-dollars banker,” he says, summarizing his approach. ... What sets Trott apart, along with his unique clientele, is his ability to sit on every side of the table. By stressing discretion, confidentiality, and patience, Trott and his colleagues repeatedly do what few other bankers can: They advise multiple parties to the same transaction—and then invest capital in some of the deals they’ve just brokered. In this fashion BDT has raised two funds, worth $8 billion, in five years and acquired stakes in companies that include Tory Burch, Peet’s Coffee, and the Pilot Flying J truck stop business. The capital comes largely from BDT’s own employees and the families in its network, who essentially are providing patient investment dollars to one another.
Future business activity will reflect two economic realities: 1) the over-indebted state of the U.S. economy and the world; and 2) the inability of the Federal Reserve to initiate policies to promote growth in this environment. ... The first reality has been widely acknowledged, as developed and developing countries both have debt-to-GDP ratios sufficiently large to argue for a slowing growth outlook. ... The second economic reality is the failure of the Federal Reserve to produce economic progress despite years of wide-ranging efforts. The Fed’s zero interest rate policy (ZIRP) and quantitative easing (QE) have been ineffectual, if not a net negative, for the economy’s growth path. ... The evidence speaks for itself: the Fed cannot print money. The Fed does not have the authority or the mechanism to print money. They have not, they are not and they will not print money under present laws.
In our view, successfully divining the trajectory of markets today has a great deal to do with properly separating the bountiful amounts of information and data we have access to into that which is genuinely useful and that which serves to distract. As a case in point, while we have indeed weighed in on this debate ourselves, the endless discussions about the precise timing of Federal Reserve policy rate lift-off receive far too much attention from investors and the media. Indeed, we think less of a focus on transitory issue like this, and more attention paid to longer-term market influences such as demographic trends and technological change can go some distance toward improving an investment process longer-term. To that end, in this edition of our market outlook we briefly examine a set of influences on markets that we think hold meaningful importance longer-term (demographics, technology, policy evolution and risk, liquidity, and valuation), while at the same time dispelling a set of assertions that we believe are either over-emphasized or mistaken. ... The days of a simple risk-on/risk-off dynamic, depending on whether policy stimulus was waxing or waning, are likely behind us. ... the time may finally have come when carry-focused investments may now be priced as attractively as beta (or down-the-capital-stack) instruments, so investors can selectively search for opportunities there. As described above, though, there are some tail risks in markets, so care is still required. And, perhaps most importantly, investors would do well to tune out the endless streams of noise generated by financial market commentators and focus on the secular themes likely to both endure and help create long-term value.
Intelligence quotient (IQ) and rationality quotient (RQ) are distinct. Think of IQ as the horsepower of an engine and RQ as the output. ... We share the results of a classic test of calibration, which is an important facet of rationality. Well calibrated people know what they know and know what they don’t know. ... Consistent with past research, we find that participants overestimate their accuracy as their subjective probability estimates tend to be higher than the actual percent correct. ... Investors and executives can improve their rationality by keeping score, asking about others, using base rates, and updating probabilities. ... A large-scale forecasting project has shown that the best forecasters use inductive and numerical reasoning, have cognitive control and a growth mindset, and are open-minded and effective working as part of a team.
It has always baffled me how the financial industry in general, and financial newspapers in particular, appear to be hell-bent on forecasting this or that in early January. I actually find it outright laughable when someone projects the FTSE100 to be at 7,000 by Christmas time, or for the U.S. 10-year T-bond to hit 2.5% by midsummer. How on earth do they know? The generally poor predictive record proves they don’t, I suppose. On the other hand, that is perhaps what the majority of investors want. If you belong to that majority, there is no need to read any further. You will be wasting your time. ... If you see any forecasts from me (and you do), you will note that (i) they are very long term in nature, and (ii) they are based on structural trends, not tactical (cyclical) trends. Why is that? Partly because I think short-term forecasting is a sucker’s game, and partly because I know for certain that the structural trends that we have identified will happen. It is only a question of when, but more about that later. ... You can hardly open a newspaper these days without some commentator looking to buy fame by attempting to predict the next crisis but, as I just pointed out, the last one isn’t over yet. Therefore a far more relevant question is: What is likely to be the next leg of the GFC? ... I think three topics are particularly likely to steal the limelight in 2016:
- All sanctions against Russia to be lifted and trade relationships to be normalised.
- The EM crisis widens as commodity prices continue to fall.
- The credit market is spoiling the party again.
Is it any wonder investors are questioning why they allocate to emerging markets in the first place? Even going beyond the woes of emerging, we are starting to hear some investors asking whether holding non-U.S. stocks is at all necessary. As market historians we can say that the timing of such sentiments tends to be bad – no one seems to ever decide to give up on an asset class after it has just had good performance, and the last burst of “why bother with non-U.S. stocks” occurred just before the top for the S&P 500 in 2000. But just complaining that investors got it wrong last time they voiced these sentiments does not qualify as thoughtful analysis. ... while emerging markets “deserved” some of their bad luck over the last several years and the outperformance of the U.S. has made some sense, we do not believe that emerging is a value trap, nor do we believe that the U.S. has proved itself particularly extraordinary. ... In total, we can surmise that emerging currencies are a “risk asset” of sorts and that they have delivered a return above U.S. cash over time and should probably continue to do so given the capital needs and vulnerabilities of emerging economies. ... even if the U.S. has somehow managed to unlock the secret to permanently high profits and the economy remains solid, it seems unlikely that the secret will remain an entirely U.S. phenomenon. If we imagine a world in which U.S. profitability is able to remain well above historical levels, we would expect non-U.S. companies to begin to copy their American counterparts, similar to the way profitability converged from the 1970s to the early 2000s. ... we have seen an impressive expansion of American profitability that has not been mirrored in the rest of the world, and U.S. stocks have duly outperformed. This has, not surprisingly, led investors to try to convince themselves of the inherent superiority of U.S. stocks to justify continuing to hold them. We cannot completely reject the possibility that those arguments are correct, but the evidence seems pretty thin.
Hard realities in these three fields are inconvenient for vested interests and because the day of reckoning can always be seen as “later,” politicians can always find a way to postpone necessary actions, as can we all: “Because markets are efficient, these high prices must be reflecting the remarkable potential of the internet”; “the U.S. housing market largely reflects a strong U.S. economy”; “the climate has always changed”; “how could mere mortals change something as immense as the weather”; “we have nearly infinite resources, it is only a question of price”; “the infinite capacity of the human brain will always solve our problems.” ... Having realized the seriousness of this bias over the last few decades, I have noticed how hard it is to effectively pass on a warning for the same reason: No one wants to hear this bad news. So a while ago I came up with a list of propositions that are widely accepted by an educated business audience. They are widely accepted but totally wrong. It is my attempt to bring home how extreme is our preference for good news over accurate news. When you have run through this list you may be a little more aware of how dangerous our wishful thinking can be in investing and in the much more important fields of resource (especially food) limitations and the potentially life-threatening risks of climate damage. Wishful thinking and denial of unpleasant facts are simply not survival characteristics.
This memo is my attempt to send the markets to the psychiatrist’s couch, and an exploration of what might be learned there. ... One of the most notable behavioral traits among investors is their tendency to overlook negatives or understate their significance for a while, and then eventually to capitulate and overreact to them on the downside. ... “Everyone knew” for years that the Chinese economy had been overstimulated with cheap financing, and that this had led to excessive investment in fixed assets. … One of the most significant factors keeping investors from reaching appropriate conclusions is their tendency to assess the world with emotionalism rather than objectivity. Their failings take two primary forms: selective perception and skewed interpretation. ... The bottom line is that investor psychology rarely gives equal weight to both favorable and unfavorable developments. Likewise, investors’ interpretation of events is usually biased by their emotional reaction to whatever is going on at the moment. ... in the real world, things generally fluctuate between “pretty good” and “not so hot.” But in the world of investing, perception often swings from “flawless” to “hopeless.” ... There is a general sense among my colleagues that investors have gone from evaluating securities based on the attractiveness of their yield (with company fundamentals viewed optimistically) to judging them on the basis of the likely recovery in a restructuring (with fundamentals viewed pessimistically).
All told, the company spent more than $600 million. In its brief time in operation, it generated $2.3 million in revenue; when it filed for bankruptcy it listed assets of $58.3 million. ... The next generation of biofuels, made from plants and biowaste (so-called cellulosic materials), which have lower carbon emissions than oil, were a particular passion. Khosla invested hundreds of millions of dollars in about a dozen biofuel and biochemical companies. ... His ambitions were audacious. Khosla declared “a war on oil.” As he wrote in 2006, “I believe we can replace most of our gasoline needs in 25 years with biomass.” He dismissed incumbent energy companies in a 2007 interview as not investing heavily in biofuels because they weren’t “used to innovation and the rate of innovation we are likely to see in this business.” ... Unlike most failed startups, KiOR hasn’t just shut its doors and disappeared into oblivion. Today recriminations, investigations, and litigation continue to surround it. The Securities and Exchange Commission has been examining whether the company made false statements, including on a critical point: the yield of its biofuel (the amount that can be made per ton of wood chips). Two KiOR executives and Khosla himself are also facing a class action suit alleging that company executives misled investors about production volumes and yield. ... The state of Mississippi is also suing Khosla and key KiOR executives on similar grounds, claiming they hoodwinked the state to obtain a $75 million loan.