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Pragmatic Capitalism

Capital for Living a More Practical Life

‘How Things Work’

Why I Prefer to Think of Stocks as Bonds

Bonds have always struck me as fairly simple instruments. In general, you know what a (high quality) bond’s return will be and you know what its time horizon is. That makes investing in fixed income instruments much simpler than investing in stocks. After all, the most difficult part about the stock market is that you… Read More

The Alpha Paradox

Here are a few things we know about the financial markets: Beating the market or obtaining “alpha” (excess return) is extremely difficult as evidenced by the annual SPIVA Scorecards. Alpha doesn’t exist in the aggregate because we all hold what sums to one portfolio wherein we earn the after tax and after fee return of… Read More

How to Avoid the Problem of Short-Termism

If I had to pinpoint the biggest problem for most asset allocators I would probably say short-termism.  Short-termism is the tendency to judge financial markets in periods that are so short that it results in higher fees, higher taxes and lower average performance.  We’ve become accustomed to judging the financial markets in quarterly or annual periods… Read More

Why Equity Outperforms Credit

In my new paper on asset allocation I go into quite a bit of detail about why certain asset classes generate the returns they do. Understanding this is useful when thinking in a macro sense and trying to gauge why financial assets perform in certain ways in both the short-term and the long-term. It’s important to… Read More

Why Stock Market Declines are Good

James Bullard, the St Louis Fed President, gave an interview today discussing how the stock correction has been good because it has helped to prevent a bubble. He’s inferring that lower prices are bad in the short-term and good in the long-term.  And he’s totally right.  I’ll show you why. What happens when the stock… Read More

Why Would Anyone Buy a Negative Interest Bearing Bond?

Good question here from the Q&A section about negative yielding bonds: Hi Cullen. The Economist had a good article explaining why people buy negative yielding bonds. http://www.economist.com/blogs/economist-explains/2016/02/economist-explains-6 Do you agree with their explanation? The Economist’s explanation is a bit odd as it leaves out the main reason that someone might want to buy a negative… Read More

Central Banks Didn’t Eat Your Lunch

One of the consistent trends you’ll find in my econ and finance work is that I don’t think much about Central Banks. In other words, I think mainstream macro puts far too much emphasis on the efficacy of things that Central Bankers do.  This is why I said QE wouldn’t do much back in 2009… Read More