A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.
Stop Worrying About the Stock Market Crashing! (Mark Hulbert, @MktwHulbert, Barron’s)
Since the beginning of the Dow Jones Industrial Average in 1896 there have been more than 32,000 trading sessions. Over this time, the probability of a large single day market crash has been 0.79%. But investors polled by the National Bureau of Economic Research believe there is a “one-in-five chance of a huge crash at some point in the next six months.” That is a pretty large discrepancy between expectations and reality.
Most Americans Don’t Know About Ride-Sharing and the ‘Gig Economy’ (Josh Zumbrun, @JoshZumbrun, WSJ)
According to new research from Pew Research Center, only 15% of Americans have ridden in an Uber and only 6% have ordered groceries online. For those of us living in the Bay Area, where the sharing and on-demand economies are so prominent, it’s important to remember that most of the country is hardly using these services.
Employment, construction, and the cost of San Francisco apartments (Eric Fischer, @enf, Experimental Geography)
Eric Fisher used historical information to compile an incredible amount of data to extend the median San Francisco rent from 1979 to 1948. This additional data combined with his analysis of construction and income, shows that the long term average rental increase in SF is 6.6% per year. It may be surprising for some San Francisco renters, but the current prices are actually in-line with the long term trend, not a short term spurt. He concludes, “In the long run, San Francisco’s CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year. In the long run, San Francisco’s CPI-adjusted average income is growing by 1.72% per year, and the number of employed people is growing by 0.326% per year, which together (if you believe the first model) will raise CPI-adjusted housing costs by 3.8% per year.”
Position Sizing in Value Investing (whattheheckaboom, Journeys of a Bumbling Trader)
Although there has been little research done on the optimal way to size positions within a portfolio, this article is a comprehensive review of the practices of great investors from Seth Klarman to Warren Buffett. These successful investors used a focused strategy rather than the broad diversification advocated for by academic research and pushed by Wall Street. They recognized that there is typically a large difference in your return expectation between your best idea and your hundredth best idea. Investing in that hundredth best idea causes you to diversify away the return and alpha from your best ideas.
The intraday price of oil on Thursday topped $50. Year to date oil has rallied 33%. This looks like a big rally, but take a step back and look at the 5-year chart to see how the price of oil is still deep in a correction.
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