It has been a long, if fascinating, year in the markets, politics and in culture. Fortunately, there's been no shortage of books, magazine articles and podcasts to help us make sense of the world we inhabit. Here are some of our favourites from 2016:
Superforecasters: Successful forecasting requires not just smarts but also curiosity and a mind where "beliefs are hypotheses to be tested, not treasures to be guarded," as authors Phil Tetlock and Dan Gardner write. The best investors and analysts embody this mindset. They also answer seemingly unanswerable questions, such as "How may piano tuners are there in Chicago?" by breaking them into smaller, more answerable ones. Taking a step back from the question at hand--How many piano tuners do other similarly-sized cities have?--helps.
"Alpha or Assets": Investment managers want to outperform and pull in hefty amounts of investor cash, but as researcher Patrick O'Shaughnessy explained in his blog The Investor's Field Guide, these goals are at odds. In a back test of stocks in the S&P 500 Index, O'Shaughnessy finds concentrated, equal-weighted portfolios holding cheap stocks outperform broad market-cap weighted alternatives. The hitch: These strategies rack up heavy trading costs if assets balloon beyond modest levels, underscoring the importance of investing with managers that prioritize performance over asset growth. O'Shaughnessy also deserves a shout-out for his podcast, Invest Like the Best, which launched in 2016.
The Most Important Thing: This collection of essays by Oaktree Capital's Howard Marks is a must-read for many investors for good reason. Marks writes in a clear, engaging style, and though he is a high-yield bond specialist, his wisdom applies to investors of all stripes. Value investors will recognize his core investment principles, such as the importance of margin of safety and thinking differently than the crowd. It's Marks's description of investing as management of risks rather than return that stands out most.
"Indexing Makes Markets and Economies More Efficient": Critics of passive management are right when they point out that markets wouldn't work if everyone indexed. It logically follows that fewer active managers means markets are less efficient. In this lengthy but digestible post on his blog Philosophical Economics, Jessie Livermore explains why that's not so, noting it's become harder to outperform as investors have flocked to index funds over the past decade. That may be because indexing has crowded out less-talented managers, leaving the strongest to compete against each other. Livermore convincingly demonstrates why active management is a zero-sum game even when active and passive managers trade with one another.
"Machine Bias": ProPublica's analysis of software used in courtrooms to identify repeat offenders identified a disturbing pattern of racial discrimination. The authors discovered black defendants in the U.S. were far more likely than whites to be identified as future criminals even after accounting for factors like criminal history, age, sex and income. Quantitatively driven processes, whether applied to criminal justice or investment strategy, may help correct some behavioural biases, but they still can suffer from the flaws of their human creators.
"Econtalk—Ending Medical Reversal": Medical practices considered good for you today might be considered useless or worse tomorrow. One example: Post-menopausal women were routinely treated with estrogen until later research demonstrated doing so dramatically increased risk of heart attack and stroke. In this Econtalk podcast, guest Adam Cifu, a professor at the University of Chicago School of Medicine, explained why such reversals happen. Often, it's the case when the prevailing practice makes theoretical sense. (It was true in the case of treating menopause with estrogen.) If with the benefit of double-blind research--the gold standard methodology--medicine still gets things wrong, findings based on the messy world of markets deserve extra skepticism.
"Theranos Whistleblower Shook the Company—and His Family": Theranos, a one-time Silicon Valley darling, lured luminaries like former U.S. Secretaries of State Henry Kissinger and George Shultz to its board of directors with a charismatic CEO and a promise to revolutionize blood testing. The Wall Street Journal's John Carrefour brought to light its fraudulent business practices with the help of Shultz's grandson, who as an employee saw the firm bury evidence its tests were wildly inaccurate. Shultz resisted pressures to keep mum from his grandfather and threats from Theranos's high-calibre legal team to hold the powerful accountable.
