Bitcoin and Other Notes From the CFA’s Financial Analysts Seminar
Thursday, July 26, 2018

Ahead of this year’s Financial Analyst Seminar (FAS), the CFA Institute sent attendees reading material for a case study on bitcoin. The case study centered around a hedge fund manager who was asked by a large client why he wasn’t allocating to bitcoin.

Keep in mind, this assignment was given to a group of investment professionals from across the globe. (I personally spoke with attendees from Canada, Slovenia and South Africa.) Out of approximately 70 attendees, only about five said they currently are or would hold bitcoin in their portfolios. I was not among those five.

Still, some interesting points came out of the discussions held in small breakout groups and later in a main session moderated by University of Virginia professor George (Yiorgos) Allayannis. First, bitcoin is hard to use as a currency because of its volatility and slow transaction speeds. Visa does offer a bitcoin debit card, but questions were raised about how easy it is to use the card. Second, like real estate, location matters greatly. The cost of electricity where bitcoin is mined and the exchange the cryptocurrency is sold on significantly impact your profits. Plus, because of both geographical (being in a place with cheap electricity) and liquidity hurdles (it’s often not easy to quickly move money from one exchange to another), taking advantage of the arbitrage opportunities that do exist is very difficult. Third, a few attendees pointed out that while bitcoin prices are being driven by supply and demand, the supply can change. A simple majority vote among bitcoin owners can either alter or remove the current limit on the number of coins than can be mined. Finally, bitcoin’s role in a portfolio is still unknown. Although it has been uncorrelated to all other asset classes so far, we don’t have enough history to know whether this will continue to be the case.

That bitcoin was a subject of two sessions, and that there was a third session focused on the future of blockchain during the four-day seminar, shows the amount of attention being paid to cryptocurrencies. It’s not just the CFA Institute either; for the first time ever, we are scheduling a session on cryptocurrencies at our Investor Conference, which will be held this October in Las Vegas.

None of this means that you should start allocating to cryptocurrencies. (I remain a skeptic.) Rather, it is simply a sign that the investment industry and investors are starting to look more closely at bitcoin. Whether cryptocurrencies will be worth paying attention to five or 10 years from now remains to be seen.

Moving on briefly to more traditional investments, James (“Jim”) O’Shaughnessy—who many of you know from his book “What Works on Wall Street” (McGraw-Hill Education, 1997)—discussed the shortcomings he sees with using the price-to-book (P/B) ratio. Specifically, he critiqued the price-to-book ratio for understating the value of long-term assets (brand, depreciated property such as real estate, etc.) and being affected by share repurchases. As such, he thinks there are many veiled value companies currently overlooked by traditional value strategies.

He does believe value still works. O’Shaughnessy said the profits from value strategies are realized when value investors sell what has appreciated in price and then turn around and invest the proceeds into what is cheap now. He also told attendees that the only way to beat the market is to have a portfolio that is very different than the market.

Sarah Jiang, a portfolio manager with AQR Capital, was asked during her presentation about whether valuation measures need to be adjusted. She responded by saying that while traditional measures such as price to book can be modified, they still work very well in their traditional format. Striking a diplomatic tone, she acknowledged the ability to gain a little extra return through modifications, but didn’t think doing so was necessary.

Ed Yardeni of Yardeni Research shared a few insights about the financial markets and the economy. He thinks a combination of globalization (due to reduced trade barriers), technology and demographics (e.g., baby boomers who are continuing to work instead of retiring) has kept inflation at low levels. He further attributed record levels of wealth (particularly wealthy investors desiring diversification) as well as foreign bond markets for keeping yields on U.S. government bonds low.

Regarding the stock market, he said predictions can be made if a person knows what the correct inputs for this formula are: price-earnings (P/E) ratio × forward 12-month earnings. The latter can be pulled from consensus estimates; the price-earnings ratio is dependent on assessing what investors will pay. One chart Yardeni displayed showed market tops occurring at forward P/Es between 20 and 25, and bottoms occurring when forward P/Es are between 10 and the low teens. As of this morning, Thomson Reuters calculates the forward P/E for the S&P 500 index as being 16.9.

More observations from the seminar, including some of the slides, can be viewed with the twitter hashtag #chicagofas. (You don’t have to be a twitter user to see the tweets.)

More on AAII.com

Highlights from this month's AAII Journal

The Week Ahead

It’s going to be a busy week.

Earnings season will remain in full swing with 142 S&P 500 companies reporting. Included in this group are five Dow Jones industrial average components: Caterpillar Inc. (CAT) on Monday; Apple Inc. (AAPL), Pfizer Inc. (PFE) and Procter & Gamble Co. (PG) on Tuesday; and DowDuPont Inc. (DWDP) on Thursday.

The Federal Open Market Committee will hold a two-day meeting starting on Tuesday. The meeting statement will be released on Wednesday, at 2:00 p.m. Eastern Time. No rate hike is expected to be announced at this meeting. The CME’s FedWatch Tool currently calculates the futures market as assigning a 91% probability to a rate hike being announced at the September meeting and a 65% chance of a fourth hike being announced in December.

The week’s first economic report will be June pending home sales, released on Monday. Tuesday will feature June personal income and spending, the second-quarter employment cost index, the May Case-Shiller home price index, the July Chicago Purchasing Managers’ Index (PMI) and the Conference Board’s July Consumer Confidence survey. July motor vehicle sales, the July ADP employment report, the July PMI manufacturing index, the July Institute for Supply Management (ISM) manufacturing index and June construction spending will be released on Wednesday. Thursday will feature June factory orders. July jobs data—including the change in nonfarm payrolls and the unemployment rate—as well as June international trade numbers and the July ISM non-manufacturing index will be released on Friday.

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AAII Sentiment Survey

The percentage of individual investors describing their short-term outlook for stocks as “neutral” stayed above 40% for a second consecutive week in the AAII Sentiment Survey. The latest results show a further decline in optimism and rise in pessimism.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 3.1 percentage points to 31.5%. The drop keeps optimism below its historical average of 38.5% for the fourth time in five weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.2 percentage points to 41.6%. This is a 10-week high. Neutral sentiment is above its historical average of 31.0% for the 22nd time in 23 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.0 percentage points to 26.9%. Even with the increase, pessimism is below its historical average of 30.5% for the 13th time in 15 weeks.

At its current level, neutral sentiment is at an unusually high level. The cutoff between a typical and unusually high reading is 40.0% (one standard deviation above average).

Most of this week’s results, including the responses to the special question, were tabulated before yesterday’s agreement between President Trump and European Commission President Jean-Claude Juncker to postpone implementing any new tariffs while negotiating trade policies. In response to a separate survey conducted last week, the overwhelming majority of AAII members said they have not altered their portfolios in anticipation of an all-out trade war occurring between the U.S. and China.

This week’s special question asked AAII members what factors were most influencing their six-month outlook for stocks. More than a quarter of all respondents (28%) say tariffs and the possibility of a trade war. Politics were close behind, with 19% of respondents specifically mentioning President Trump and an additional 7% listing the political environment and/or the November elections. Nearly 17% of respondents say economic growth, while 11% pointed toward interest rates. Also mentioned were valuations, corporate profits and the length of the current bull market. Some respondents listed more than one factor.

Here is a sampling of the responses:

  • “Policy missteps by President Trump and Congress.”
  • “The economy, so long as President Trump doesn’t screw it up with tariffs.”
  • “Interest rate movement and quarterly earnings.”
  • “Tax reform and Federal Reserve actions.”
  • “Company earnings are positive and in a growth mode for the most part.”
  • “The tariffs and the potential trade war with China keep me from being optimistic.”


This week’s Sentiment Survey results:

Bullish: 31.5%, down 3.1 points
Neutral: 41.6%, up 1.2 points
Bearish: 26.9%, up 2.0 points

Historical averages:

Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!