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Regime-Based Investing
The Idea Farm
March 03, 2024
“Easy money means only one thing when it means money that has come easy: It means money goes even more easily than it came.”
Research
Man Institute - Regime-Based Investing (11 pages)
This paper walks through seven regime definitions and how six assets and strategies perform in the various states. Don’t miss the nine observations from the data at the end of the paper (and below).
Inflation is probably the most predictable of the regime frameworks, in terms of the magnitude of returns and the persistence of direction. If you are only allowed to use one economic datapoint to guide your decisions, US headline CPI should be it.
On my definition, there has not been a real growth boom since the 1990s. Fingers crossed for the AI productivity miracle.
L/S Equity Value is consistently one of the hardest investment strategies to fit into a regime framework. It is a myth, for example, that it consistently benefits from high and rising inflation, even if it did so in the recent episode. Indeed, the only heuristic I think you can take from the above is don’t touch it when the yield curve is bull flattening.
Equity bull markets are 80% of history. Don’t forget the simple lessons…
Bonds are positive (in real terms) in little more than half of equity bear markets. Historically there have been better defensive diversifiers than the traditional equity foil.
Equities have ALMOST ALWAYS worked when real growth is booming and when monetary policy is being loosened. Trend has ALMOST ALWAYS worked when Value is in the ascendant. These are fat pitches.
Trend and Commodities have ALWAYS worked in states of high and rising inflation. Bonds have ALWAYS worked in deflationary environments, as well as when monetary policy is being loosened. These are obese pitches.
L/S Equity XS Mom. has historically done 10% real in states where Value is underperforming, versus 1% in the opposite. There’s a reason you often see these two as bedfellows.
The consistency of momentum, both time series and cross-sectional. In almost all frameworks, L/S Equity XS Mom. and Trend are positive more than half the time in all states. This is partly by design, given that for many of our regime definitions we include the constraint that a regime cannot be shorter than six months. But it also hints that, if you can hold through initial reversals, patterns often reassert.
Read Warren Buffett’s annual letter, which begins with a tribute to Charlie Munger.
“In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”
Bonus Content
"From 1965 through 2023, $100 invested in Berkshire grew to $4,255,516. The same $100 invested in the S&P 500 is only $30,811. That means Berkshire can lose 99.3% and only then just match the index over 59 years." Link
Walmart now does $100 billion per year in e-commerce sales. Link
“Last year, Norway’s $1.5tn sovereign wealth fund revealed that it had lost NKr980mn, roughly $92mn, on an error relating to how it calculated its mandated benchmark.” Link
The number of custodial accounts at Charles Schwab increased from 120,000 in 2019 to more than 300,000 in 2023. Link
$743 billion worth of merchandise was returned in 2023. Link
The top 10% of stocks by size versus the entire US stock market hasn’t been this high in almost a century.
Foreign holdings of US stocks have only been this high two times in the past 70 years.
Japan’s stock market hit a record high on February 22, 2024 after 34 years of waiting. Link
Bloomberg highlighting the impact of fees on investor returns. Link
Birth rates are declining across the globe, but varies by geography. Link
Podcasts
 2/13/2024 - 49 minutes | Singerman talks about working at legendary VC firm, the need to adapt or die, and where he sees opportunities today. |
 2/15/24 - 50 minutes | Chanos discusses closing his main hedge funds, the role of short sellers, and how to ensure fair and transparent markets. |
 1/3/24 - 113 minutes | Ben and Marc delve into actions that existing institutions can take to improve their situations. They also discuss some startup opportunities. |
What Else Is Happening
Did you miss last week’s email?
Meb Faber spoke with Whitney Baker about the US bubble, the challenge the Fed faces and the opportunity in emerging markets.