On Nuggets of Investing Wisdom and the Microbiome – Part 2!

From: aditya rana
Date: Sat, Jul 6, 2013 at 2:27 PM
Subject: On Nuggets of Investing Wisdom and the Microbiome – Part 2!

Hi!,

With summer holidays approaching, it is perhaps a good time to reflect on the core principles of investing and with that aim in mind, I summarise below a note by the veteran financial journalist and writer, Jason Zweig, containing many nuggets of investing wisdom which should be an integral part of any investment method.

-Good advice rarely changes, while markets change constantly. People constantly want to hear advice which sounds good rather than good advice.

-The advice which sounds good in the short run is always dangerous in the long run, with investors chasing returns of the hottest assets while ignoring underperforming assets – "when the ducks quack, feed ’em".

-The media pushed internet stocks in 1999 and early 2000, how to "flip" houses in 2005 and 2006, dump stocks in 2009 and buy "leveraged inverse" ETFs which bet against the market and buy income assets such as bonds together with dividend and "low volatility" stocks.

-Research by the psychologist Paul Andreassen has clearly shown that investors who receive frequent updates on their investments underperform those who receive no information.

-As Benjamin Graham wrote in 1949, “The investor’s chief problem – and even his worst enemy – is likely to be himself".

-Based on his many years of experience, he has concluded that "regression to mean" is the iron law of financial markets with periods of above-average returns being followed by below-average returns and sub-par periods by stellar performances.

-Humans have a natural tendency to perceive reality in short-term streaks, and struggle to maintain a long term perspective, thinking that every short term blip is an extended opportunity.

-He believes his role is to try and convince investors to bet on regression to mean, and that 99% of the time doing nothing is actually the best strategy. This requires a thick skin as going against the current trend is unpopular, making its proponent subject to much opprobrium.

-He has had first-hand experience of this – while suggesting people not to invest in internet stocks in 1999 and 2000, asking investors to hold onto their stocks in 2008 and 2009, being sceptical of gold in 2011 and recently warning against real estate investment trusts, high dividend and "low volatility" following hints of a tighter Fed policy.

-History always rhymes and human nature never changes – be sceptical of any asset whose price has recently soared, and be interested in any asset which has suffered a large price drop.

-While the words of the great Danish philosopher Kierkegaard " no individual can assist or save the age" ring true, it is important to make the attempt to do so and thereby bring some dignity and meaning our lives -" the greater the odds, the greater the obligation to try and beat them".

Wise observations indeed – being a contrarian investor has historically proven to be successful strategy but requires discipline and patience (and a thick skin!). Reflect well on them during the summer break and look at assets which have recently suffered sharp drops – EM stocks, bonds and currencies, peripheral Europe stocks and bonds, U.S. treasury and credit bonds and perhaps even gold?!

Turning to the markets – the two important events from the previous week were the statements from the ECB and the BOE regarding an extended period of monetary easing. As Cumberland Advisors noted:

"The Bank of England has launched a "forward guidance" approach and committed itself to very low short-term interest rates for an extended period of time. The ECB has done the same. ECB President Mario Draghi’s comments parallel an earlier period of Federal Reserve history when Alan Greenspan used the words "extended period" to denote an open-ended stimulative phase.

Here we are with all G4 central banks involved in forward guidance, a commitment to very low short-term interest rates, and with an extended period lasting for the next several years. The G4 is important. The euro, yen, pound, and dollar are now aligned at a near-zero interest rate. They are all committed to forward guidance and have determined in various ways that change in this policy is not likely to occur before 2015. Remember that “tapering” continues these very low interest rates and is still a form of stimulus.

This course has enormous implications for investors. It is important to realize that these four currencies – along with those that are (1) aligned, (2) have managed currency arrangements, or (3) have currencies linked with them –constitute about 85% of the world’s capital markets. The G4 is now publicly and profoundly committed to near-zero, short-term interest rates for at least two more years. That commitment might turn out to be longer. It won’t be shorter. This development is bullish for investors. It means rising asset prices will continue and the short end of worldwide yield curves will remain anchored near zero."

While there are likely to periods of volatility going forward, particularly as we approach the Fed meeting and the German elections in September, it would make sense to continue with a diversified portfolio of stocks through ETFs (select U.S., Japan, peripheral Europe, EM, commodities), credit bonds (U.S., Europe, EM), EM local currency bonds, cash and even some gold (gold probably has more downside over the next few months but continued global easing and physical demand from EM should provide a base for upside into 2014).

On the Microbiome-Part 2:

The cutting edge of current medical research is to look into how the vast amounts of microbes in our bodies influence our health – as long as we are able to maintain the diversity and balance of this "ecosystem" we remain healthy and if it gets out of whack, we fall prey to a host of illnesses. In this regard, summarised below are some key points from a fascinating article on the subject by a Berkeley professor, Michael Pollan:

-By comparing gut communities of populations across the globe some interesting patterns are emerging – the diversity of the gut microbia in rural populations across the world is greater than the gut diversity in the Western world. In addition, the dominant bacterial strains differ between the two groups.

-Rural populations, being largely vegetarian, have preponderance of bacteria which have an affinity for whole grains and plant fibre, while Western guts have more bacteria which can digest animal protein and simple carbohydrates from processed food. The difference results from the diet as well as a greater reliance on antibiotics, environmental toxins and less exposure to bacteria in daily life in the West.

-This might explain why these rural populations have greater exposure to infectious diseases and lower life expectations, but also lower incidences of chronic diseases like heart disease, diabetes and allergies.

-A person’s microbial community stabilizes by age 3, and while a change in diet or an antibiotic course may cause a shift in the relative populations of bacteria, the resident bacteria tends to resist newcomers. While the initial microbes are acquired from parents, and the rest come from the environment.

-The microbial system performs a host of very important functions – i.e. keeping away pathogens, manufacturing neurotransmitters, enzymes, vitamins (mainly Bs and K), other essential nutrients (amino acids and short-chain fatty acids) and signalling molecules which influence the immune and metabolic systems as well as our stress levels and temperament.

-The interaction of our immune system with the microbes (in our bodies, our diet and environment) is critical to our health – and it seems to regard the resident bacteria as our "own self". The absence of this constructive engagement between our immune system and the microbes maybe behind the rise of auto immune diseases in the West.

– Because microbes evolve very rapidly (a new generation every 20 minutes in some cases), and can respond (and adapt to) to changes in the environment much faster than we can, they play a very useful role in helping our bodies to respond to changes in the environment.

-Some bacteria – like H. pylori play a dual role – having been implicated in peptic ulcers and stomach cancer, but they are also critical in regulating the production of stomach acid, inflammation and the appetite hormone. However, with focus on only its negative aspects (which largely appear only after age 40) has led to its dramatic decline in the human population, resulting in rising rates of obesity, allergies, asthma and acid reflux.

-The prevalence of antibiotics (as medicine, in our food and in everyday life) is doing considerable damage to the microbiome – and particularly to our immune system and weight. For example, farmers have been giving very small doses of antibiotics to cows for many years to make them gain weight. While they have served a very useful purpose in terms of dealing with infectious diseases and increasing our life span, they appear to have some unintended consequences as well.

-A growing number of researchers are coming to the conclusion the inflammation is the root cause of a variety of chronic diseases like heart disease, diabetes, obesity and cancer. Recent research points to low-grade inflammation over time causing metabolic syndrome which is linked to the above mentioned chronic diseases.

-The problem seems to lie with the gut – in particular the epithelium which lines our digestive tract. The microbiota plays a critical role in maintaining the health of the epithelium, by enhancing its function as well as nourishing it by producing the short-chain fatty acids from the fermentation of plant fibre in the large intestine.

-If the epithelial bacteria is not properly nourished, it can become more permeable, allowing toxins to be released into the bloodstream and thereby causing the body’s immune system to launch an inflammatory response, which over time leads to metabolic syndrome and chronic diseases.

-The main issue with the Western diet is that it only feeds the upper G.I. (i.e. swiftly absorbed sugar, fats and protein) but not the lower G.I. where the fermentation of plant and whole grain fibre takes place, supplying the critical short-chain fatty acids to nourish the gut barrier and prevent inflammation.

-Changes in diet and lifestyles can help in keeping a healthy microbiome – effective probiotics and prebiotics (which feed the bacteria – i.e. fermented foods like yoghurt and kimchi), less antibiotics, relaxing sanitary regimens at homes, increased fibre intake through plants, fruits and whole grains, and eliminating processed food.

Here’s to contrarian investing and having more whole grains, fruits and plants (and minimal antibiotics) to keep the microbiome healthy.

Regards,

Aditya

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