CFA Institute Contributors

Editor’s Note: This is the first of several responses to the question “what is the difference between investment and speculation?” If you are If you are compelled, we invite you to comment below, tweet us @cfainvestored, or reach out to us via email.The word “speculation” is commonly applied to risky investments. And the word “risky” is usually used by the masses to describe investments in assets of low quality or uncertain outlook. On the other hand, “safe investment” is commonly associated with assets of high quality and/or those with a positive outlook. However, because of these desirable characteristics, so-called “safe investments” usually sell at high prices. And high prices have the potential to turn high quality assets into risky investments. The more insightful investor knows that: “High quality” and “favorable outlook” are in no way synonymous with “good investment,” and certainly not with “safe investment.” It’s easy to lose money on high-quality assets; people have been doing it for years. Rather than quality, the greatest determinant of a safe (and profitable) investment is cheapness. Buying high-quality assets at high prices can be very risky. Low-quality speculations are usually looked down upon. But widespread derision usually results in low prices, which can make for high
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Editor’s note: Today, we are doing something different. Robert approached us with a question that we found interesting, so we decided to pose it to some professional investors. In addition to our regular coverage, we are pleased to feature his framing of an interesting debate. We will be publishing select responses to the question over the next few days. If you are compelled, we invite you to comment below, tweet us @cfainvestored, or reach out to us via email. What is the difference between investing and speculation? At first, you think the answer is simple because the distinction is obvious — that is, until you actually put pen to paper and try to answer the question. Go ahead; take a few seconds and think about it. Write down “investing.” Now write the definition. Do the same for “speculation.” If you are like me, frustration quickly builds because the answers do not come quickly or easily, and they should. After all, these terms have been a part of the financial lexicon since Joseph de la Vega wrote Confusion of Confusions in 1688, the oldest book ever written on the stock exchange business. In his famous dialogues, de la Vega observed three classes of men.
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We are just one month into 2013, and investors have already seen the relentless run in high-yield (HY) bonds continue. Despite a backup in the last week of January, HY has notched a total return of 1.39% so far this year using the JPM US HY Index data. This has been a rally in terms of both spread and absolute price. HY spreads have contracted from 613 bps in mid-November to 513 bps on 1 February. Loomis Sayles’s Dan Fuss, CFA, held little back in his recent comments to Barron’s: “High yield is as overbought as I have ever seen it,” Fuss said. “This is absolutely, from a valuation point, ridiculous.” When a person like Fuss makes comments that strong, it’s usually worth digging a little deeper. In this post, I look at two characteristics of the high-yield market that have changed over the past few years without many investors realizing it. Price appreciation has largely run its course: As we see from the chart, high-yield bonds are starting to exhibit negative convexity, with prices exceeding 105 cents on the dollar. In other words, future price appreciation is capped because of the callability of the bonds. As Loomis Sayles’s Matt
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Editor’s note: This is part of an interview series with charterholders around the world. We met up with Christian Faitz, CFA, who heads chemicals equity research for Europe at Macquarie Securities in Frankfurt to ask some quick questions. He has been covering the sector for more than 16 years. CFA Institute: What do investors need to know about the European chemicals sector? Christian Faitz, CFA: The chemicals sector in Europe is one that has heavily restructured. Almost all of the listed companies have sold off their basic chemical parts, either to private equity or to Middle Eastern companies. They have concentrated on higher value-added chemicals that are closer to the end consumer. This is a move we’ve seen over the past 15 years. The chemicals industry is in pretty good shape because of the restructuring, and that makes it interesting. Are there fundamental trends that are driving the numbers? The European chemicals industry has been faring exceptionally well over the past three years. It has had strong pricing power and volume growth. It’s driven by growing demand from car manufacturers that want to replace metal parts in engines with plastic ones. In Asia, and in China specifically, people are buying premium cars
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Our recent presentation on Oaktree (OAK) has generated significant interest from friends and investors, and so we’d like to address a few follow-up questions we’ve received and add some more color to our original analysis. Because Howard Marks, CFA, is an active member of CFA Institute, I thought it was quite fitting to do so through a conversation with Inside Investing. CFA Institute: If we strip out 2013 incentive fees from your valuation, the company is now trading at close to intrinsic value. What needs to happen to generate $2.83 per share in incentive income in 2013? Has Oaktree given a sense of where it thinks those returns will come from? Christopher R. Pavese, CFA: Before we detail our thinking on 2013 specifically, let’s step back and review the “value of carry,” to which the market assigns little value today. Marks recently elaborated on this subject at a Goldman Sachs Financial Services conference. His main points: Oaktree Capital Group LLC (NYSE:OAK) recognizes and receives carry only after LPs (limited partners) have received their capital back and met their preferred return. This point is called “crossover.” To date, $2.1 billion of gross carry ($1.3 billion net of compensation expense) has already been accrued on OAK’s books (roughly
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