Tag Archives: investing

Very amateur investing, yellow-tinted glasses edition

(originally written Oct 2, 2011.  Part of Great Upload of 2013.)

I find it amusing that, while many of my fellow Vancouverites are attending places of worship this Sunday morning, I’m taking a break from work to muse about money, that root of all kinds of evil.  :)

Right now, the stock market is a relatively cheery (I said relatively) topic for me, since I’ve fared so badly in my first few attempts at Fate of the World, a computer game in the “Civilization” genre where you, at the head of a UN-like agency, attempt to prevent catastrophic global warming.

Designed in conjunction with climate researchers, you need to shrewdly manage your budget by enacting effective climate legislation, while appeasing locals on each continent just enough that they don’t kick you out and pursue their own path.  :)

In addition to the well-known options like cap-and-trade, renewables, biofuels, nuclear and efficiency policies, you can do more exotic things like legislate organic farming, enforce a vegetarian diet (cows burp a lot), spray aerosols to reflect sunlight, or use a Tobin Tax on financial speculation to raise funds.

Meanwhile, back in Reality…

While the planet (or at least, Texas) burns, stock markets hit an important milestone recently, with dividend yields from American blue-chip companies surpassing the yields on US gov’t bonds.  This hasn’t happened for a very long time, and is a signal that in several years, the price of most stocks (relative to earnings) will reach the point where even your financial advisor can invest your money for a decent rate-of-return.  ;)

This is due to the fact that — for whatever reason — stock market prices tend to cycle between too-optimistic (1929, 1966) and too-pessimistic (1947, 1980).  We came off a too-optimistic high around 2000, so one would reasonably expect that after about five more years of investment purgatory, stock price trends will slant upwards again.

In the absence of catastrophic global warming, that is.  :P

Gold

Gold feeds off stock market pessimism, so one would expect that maybe sometime between the next two Winter Olympics, it will spike upwards in a manner that dwarfs the frenzy that happened in August.  I guess I’ll insert yesterday’s Dilbert cartoon here:

Dilbert Oct 1 2011

Gold has properly dropped for the past month, but past precedent has such hangovers lasting two.  Too many enthusiasts are still humming “don’t stop believing”.  ;)

The corporate locusts known as gold mining stocks didn’t go up much earlier this year, and as such are likely to enjoy a big run-up through next spring.  [note from 2013: this totally didn’t happen.  By which I mean, the absolute opposite happened.]  The main reason is that companies’ profit margins have now gone through the roof, which means they’ll increase dividends, which in turn will attract pension funds and other big money pools.

It’s worth wondering why the stocks would rise with the metal in winter but not in summer.  The most plausible explanation I’ve encountered, is that when a commodity price rises to unprecedented levels (as gold did in the summer) no one thinks they’ll stay there for long.  After all, it’s unprecedented…!

A Tim Thomas tangent

Taking a hockey example, goalie Tim Thomas had a great year in 2008-2009.  But since he was 35 at the time, and had never really shone before, a lot of people thought it was a fluke.  Especially since he had a ho-hum year in 2009-2010, even losing the starting goalie position to Tukka Rask.

But if a commodity starts creeping upwards a second time to hitherto-unprecedented levels, stock analysts start revising their price assumptions upwards; companies get valued much more richly; and thanks to stock options, mediocre executives get valued most richly of all.  ;)

Back to hockey, Tim Thomas did the impossible and put up better-than-Dominik-Hasek numbers in 2010-2011; what with his 2008-2009 performance, everyone now expects him to the best goalie in the league, and he was probably the first goalie picked in every hockey pool this fall.  This, despite the fact that at 38, he can’t have that many good years left in him.  Such are our human foibles.

On Expert Foxes and Hedgehogs

We recently covered a book (Future Babble) in our work book club about the uselessness of expert predictions for the future.  The author argued that experts who present themselves (over)confidently — that is to say, expert “hedgehogs” — are more likely to be wrong than the ones who hedge their predictions (expert “foxes”).  A good pairing here would be that of Dennis Gartman and Richard Russell.  …and the argument holds!

Gartman, a bombastic investment newsletter writer, made the mistake of enabling skeptics (such as me) to follow his performance, by allowing an exchange-traded fund to follow his instructions.  It was outperformed by 98% of mutual funds in 2009, and 82% of funds in 2010.  I’m looking for a three-peat come December.  :)  [note from 2013: I think Gartman actually did above-average in 2011 among mutual funds.  But not compared to the index, of course.  :)  ]

Richard Russell has been writing his financial newsletter writer almost as long as Elizabeth II has been the Queen of England.  Apart from beating his drum about decadal trends, he doesn’t claim to know much about where things are going.  But he takes subscribers’ money anyways.  ;)

He’s credited with recommending buying stocks at the bottom in 1974, switching from gold to stocks in 1980, and then switching back in 1999, all of which were prescient.  I remember reading something he wrote around 2003, suggesting that by the time gold finished rising, one ounce would almost buy the Dow.  Emphasizing his reluctance to predict the number, he suggested that if absolutely forced to guess he’d say $3000, but that he wasn’t confident in it.  (It was about $300/oz at the time.)

At the time I thought, “must be nice to have rich-person problems”.  Actually, come to think of it, I still do… :)

The Black Swan’s Thanksgiving Turkey

(originally written Nov 24, 2011.  Part of Great Upload of 2013.)

It came to my attention that Naseem Nicholas Taleb, who authored The Black Swan (surprisingly, not about a ballet dancer, but about financial crises) discussed other avians in his book, among them the Thanksgiving turkey.  Per the Wikipedia page, he seems to’ve co-opted the idea from a turkey anecdote by philosopher Bertrand Russell, whose atheism doubtless led antagonists to brand him cuckoo.  ;)

The abrupt change in the turkey’s situation is part of an argument that it’s ridiculous to project present trends very far into the future, because, well, things change.  Hockey-wise, the Gretzky-led Edmonton Oilers of the 1980’s inspired a high-scoring decade for the NHL.  This was followed by a low-scoring decade inflicted on fans by the New Jersey Devils’ success with the neutral-zone trap in 1994-1995.  (As per the viral video most of you’ve doubtless seen, the Tampa Bay Lightning are going retro with their 1-3-1 system.  Lightning GM Steve Yzerman was part of the Red Wings team the Devils upset in the 1995 Stanley Cup Finals.)

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The world (of investing) according to Dante

(originally written Oct 21, 2011.  Part of Great Upload of 2013.)

It seems like the financial markets will have an “upwards bias” for the next few months, despite the circling-the-drain quality of the macroeconomic picture, which inspired this magazine cover from the Oct 1 issue of The Economist magazine.

20111001_CNA400[1]

If there’s anything I’ve learned over my years watching stocks (and, to be perfectly honest, there isn’t  ;) )  it’s to do the opposite of what The Economist says on its cover, a phenomenon known as the magazine cover indicator:

  • you’d’ve tripled your money in Ford in about two years by buying them after the July 2009 “Detroitosaurus Rex” issue
  • a couple months prior to that, the cover story “The Jobs Crisis” coincided with the bottom of the stock markets
  • of course, their timing is occasionally off; they did an oil-barrel cover in May 2008, and the price increased several percent into July before plummeting.

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Goodness, the biggest bull market in history is about to begin — eventually! :)

(originally written May 8, 2012.  Part of my “Great Upload of 2013”)

There was a great article in the Globe & Mail investment section about one John Maudlin’s predictions that after the stock market moves down for awhile, it will move up.  Which, I’m sure you’ll agree, is brilliant stuff — blindingly insightful.  Worth every penny!  (Mainly because his online newsletter is free.  :)  )

Alas, as much as I’d like to skewer his ideas, there’s a maddeningly good chance that he’ll be right.  If stocks actually start rising “for good” five years from now, there will have been a 17-year period where the stock indexes stayed flat, finishing at roughly the level where they started (2000-2017).  This was preceded by an 18-year period where stocks kept moving up (1982-2000) which was itself preceded by a 16-year period of relative flatness (1966-1982) which was preceded by a 17-year period… well, you get the picture: tide goes in, tide goes out.*

With this kind of self-reinforcing 17-year cycle, you would think the stock market’s mascot would be a cicada.  But no, they inexplicably chose a bull and a bear; about the only thing they have in common, is tapeworms.

Of course, bold predictions don’t always turn out well, as gold mutual fund runner Charles Oliver found out last month.  Having bet his hair in April 2008 that gold would hit $2000 by last month, he now sports the Lex Luthor look.  Mercifully declining to go double-or-nothing, he maintains a confidence that gold would hit the big 2-0-0-0 by year’s end.  As of this morning [in May 2012], he’s “only” got $400 to go.  ;)

I’d imagine the two aforementioned predictions will interrelate, because bad times float gold’s boat, while in good times it drops like the rock it is.  (And that generally means platinum gets cheaper, so yay, fuel cells!)  Dr. Evil above foresees ongoing misery pushing gold upwards, and Mr. M sees it keeping stocks down.  But whenever we go through the looking glass to prosperous times, gold is likely to lose its allure.  So I plan to be decidedly dismissive towards the stuff from roughly 2017 to, let’s see… 2034.  ;)

Good times ’til the mid-twenty-thirties would be nice for guys like me, who would be pushing sixty; it would imply that our retirement savings could be in reasonably good shape — even if the retirement age will be something like 80 by then.  :)  (I wonder how long until London Life changes its product name to “Freedom 65”?)  Of course, this all depends on one’s being in the position of being able to save money, something that commentators often forget, because that’s generally not their problem.

Upon achieving crotchety old geezerdom, I for one am particularly looking forward to regaling young-folk with boring stories about how much better things were when I was young — once you factor out the lesser technology, widespread poverty, appalling injustice and environmental wreckage.  ;)

Of course, I’ll want to emphasize how much tougher we were as kids.  For example, we attended seismically unsound schools: the Vancouver School Board recently announced plans to raze my earthquake-vulnerable elementary-school alma mater, L’Ecole Bilingue, and replace it with something a bit less crumbly.  Of course, having been built long before bilingualism — back in 1912, when BC was led by Premier Dick McBride (seriously) — for the first few decades it went by its maiden name, “Cecil Rhodes School”.

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* there’s nothing magical about 17 years, except for the fact that since it’s happened a few times before, enough people are likely to expect it to happen again, causing a self-reinforcing cycle.  More mundanely, if the stock market is still at current levels five years from now, dividends and profits are likely to be attractive enough that “value investor” types come out of hibernation and shovel gobs of money into stocks, eventually driving them upwards.  :)

Dinner with the Overclass (II) (“Great Upload of 2013”)

(written April 10, 2012 – part of my Great Upload of 2013)

So I got special, spousal dispensation to go to a mutual fund dinner the other night.  As a thank-you for generating a lot of fees for the company, attendees got dinner (including drinks — pity that I don’t), a pen, paper pad, mints, and chocolate wrapped up to look like a silver bar.  (Milk chocolate; they didn’t spring for the good stuff.  Even financial houses have their limits, I suppose.)  I guess it’s kind of like how some credit cards offer a cash-back option, which kicks back a fraction of the interest their victims clients pay them!

I met my account representative for the first time, as well; and discovered to my great pleasure that I’m taller than him.  (There’s a complex in there somewhere, I’m sure of it. :) )  The funny thing is, I think he was assigned to me because the company thought I was Jewish — the tip-off being when they sent me a New Year’s greeting last September, in time for Rosh Hashanah.  I wonder whether, given the economic strength of the Chinese ethnic minority in south-east Asia, financial advisor types over there send Lunar New Year cards to clientele with Chinese-sounding last names?

Goooooold

Summer came early to many parts of the US this spring; in March, record high temperatures outpaced lows by a 35:1 margin, and a couple states even broke their month-of-April temperature records!  It also came early to the precious metals markets, starting with a suspiciously-instantaneous $50 drop in gold on Feb 29.  (What self-interested seller would unload so much product so suddenly as to crater the prices they can get for it?)  Up ’til then, copper’s curiously-coveted cousins had followed their usual pattern of floating upwards until roughly summertime blockbuster-movie season, leaving me sitting giddily (and smiling Cheshire-ly) in the catbird seat.  Two months on, it feels more like a litter-box.  :)

A couple weeks back, things got so aberrationally low that I even sold the company stock that I bought last year, netting a vanishingly small profit of about $120 after fees.  (Timbits for everybody!  Whee!)  The money was reallocated to a gold-related mutual fund, which promptly moved… floor-ward.  (Timbits offer postponed.)  As pleasing as it is to get stuff on discount, there’s always a twang of regret when you see a lower clearance price, later!  Of course, there’s nothing much to do but wait for the “sale” to end, and regular prices to return.  Such is the nature of the “long game”.  :)

(Note: “buying and waiting for the sale to end” is an astonishingly poorly-advised strategy when it comes to individual companies, but works fairly well on an index-of-companies basis.  While individual companies are prone to bankruptcy, stock indexes tend to bounce back: they tend to include not just weakened companies going out of business, but the stronger ones driving the weak ones into extinction!)

How to miscalculate debts owing…

During the evening, one of the gold-pushing, silver-tongued speakers made a cringe-worthy comment to the effect that the US has a $12 trillion economy, but had outstanding obligations of $100 trillion.  This meme has been making the rounds, and the reader/listener is generally supposed to conclude either that the US dollar is doomed (so they should stampede into gold as a store of value), or that the welfare state is doomed (and so we have to cut taxes on the rich.  Wait, what?).

Here, the magician’s trick is to compare the size of this year’s economy, with the cumulative cost of every expense reaching decades into the future.  It would be as if we told Leo, “our household annual income is X; the cost to raise you for the next 18 years is way bigger, so here’s a copy of Oliver Twist, keep in touch”.  Similar chicanery is used in “tax freedom day” calculations, which overlook the fact that the yin of taxes paid is matched by the yang of public services.

Of course, I shouldn’t be overly critical of the low-taxation philosophy pushed by right-wing American think-tanks and their Canadian franchisees (e.g. the Fraser Institute).  If a recent book is to be believed, one of the reasons Canada even exists today is that when the Americans tried to manifest their destiny in the War of 1812, American hawks refused to raise taxes enough to pay for a proper army, making it possible for a combination of British soldiers, Canadian militiamen, First Nations warriors, and Laura Secord, to repel them.  :)

A toast to low taxes … in America, that is!

So, this coming barbeque season, on the bicentennial our southern cousins’ northern invasion, feel free to raise an occasional glass to toast the role that low taxes — another country’s low taxes — played, in the history of how Canada came to be the nation it is today!  :)

The biology of phishing

Some nefarious group recently made a phishing attempt against me, trying to lure me into providing bank account information in response to an Official Looking email.

Presumably, the combination of spam filters and alert consumers means phishing has a very, very low success rate.  Fortunately for criminals, email has virtually no incremental cost: you can send a million phishing messages almost as easily as you can send a thousand, or ten.  In contrast, con men can only be in one place at a time, and probably need to invest a lot of time per victim, so they need a much much higher success rate.

That brought to mind r/K selection theory, from biology:

– in r-type reproduction, creatures create zillions of offspring.  In stable ecosystems, almost all the offspring will die before reproducing, giving a (near-infinite offspring x near-zero success rate) arrangement.  Examples include insects, fish, and dandelions.  By analogy, phishing would fit this category.

– in K-type reproduction, creatures create few offspring, but the survival rate is much higher.  Basically, it’s a (near-zero offspring x near-100% success rate) type arrangement.  Examples include bears, elephants and whales.  By analogy, con men would fit here.



And this got me wondering how businesses look, when viewed through the r/K lens.  (It also got me sending emails to the local university asking if any researchers have been looking at this topic; we’ll see if anything pops up.  :)  )

By and large, virtual goods seemed to follow r-type behaviour, and physical goods, K-type.

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Bankers uber alles

A few weeks into a planned three-month stint as a full-time parent, I’m amazed at how much less time I have; the only breaks I get in the day, are when our son naps! In contrast, I could reliably eke in minutes here and there throughout the workday; if I had a meeting in four minutes, or was waiting for a kettle to boil to refill my tea, I could whip out a paragraph or two, no problem.  You could think of it as the typing equivalent of the scam in Office Space where the heroes skim a half-cent off everyone’s hourly wages, into a slush fund.  The movie referenced Richard Pryor pulling the same scam in Superman 3, a movie with which our elder (or less-hip) readers may be more familiar.  ;)

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There was a recent IMF study not too long ago which concluded that a too-big financial sector was an impediment to growth.  The explanation is that when the financial sector gets too bit, it causes the misallocation of capital.  Which I’m guessing, based on recent experience, is code for “derivatives” and other highfalutin forms of gambling.

One sign that more financial innovation is worse-not-better, come from high-frequency trading algorithms — an example of which is the software “glitch” that caused Knights Capital to lose $440 million in 45 minutes last week.  And that wasn’t market capitalization, that was basically cash-on-the-books!  :)

High-frequency trading algorithms have flourished in the past few years, as under-regulation made way for un-regulation.  These enabled financial behemoths to make huge trading profits virtually every day, off of their customers, by “front-running”.  Which, as I understand it, is a fancy way of saying they inserted themselves as middle-men into every trade.  HFT is defended as the latest in financial innovation, which is a like saying bridge tolls are the latest in automobile technology.  ;)

HFT algorithms submit bids-to-buy and offers-to-sell hundreds of times per second (see here for pretty graphs) in various patterns to determine exactly what price sellers and buyers are seeking, and are willing to accept.  The bids and offers would be near-immediately cancelled, because the investment banks had no interest in actually following through with them — for all intents and purposes, these were fake bids and offers.  (Which would make HFT trading a form of quote-stuffing.)  The brokerage firms would then run-in-front of the buyers (hence “front-running”) to buy the stock first, then immediately turn around and sell it to the other buyers for just a bit more.  The other buyers, in many cases, being the brokerage house’s clients.  How does that saying go?  “Do unto others before they can do unto you”?  :)

Putting it in real-world terms, if a mutual fund wanted to buy a million shares of BigCorp at $10, but were willing to pay $10.05 per share, in an earlier era they might have gotten an average price of $10.02.  Thanks to HFT front-running, their average price might be in the whereabouts of, say, $10.025.   As the guys in Office Space proved, getting a fraction of a cent off of zillions of transactions, can be really lucrative!

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The usefulness of a big financial sector may actually get some discussion in this year’s US elections, since Mitt Romney made his fortune as a financier.  His company, Bain Capital, would purchase companies, loot everything of value, then shut the doors.  Kind of a profit-through-bankruptcy model.  Romney was caught a few months back saying “corporations are people”, inspiring Stephen Colbert’s SuperPAC to air an ad comparing Romney to a serial killer (Mitt killed a lot of companies; companies are people; therefore Mitt is a serial killer).

Of course, Colbert is exaggerating for effect.  :)  Romney wasn’t so much a serial killer, as a guy who bought people and turned a profit by selling off their organs; if they died, that was unfortunate, but… hey, wait, that meant there would be more organs to sell!  It’s a kind of “the sum of the parts is greater than the whole” philosophy.

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It’s well-known that Romney is a Mormon; and congratulations to those guys for getting one of their own on the Presidential ticket.  Despite this, I think Hinduism is the most illuminating lens through which to understand the Presidentially-aspiring Romneys.  (Mitt’s father George tried to get the Republican leadership nomination in the 1960’s.)  While George Romney led a car company, American Motors, that created jobs and prosperity for employees and suppliers alike, Mitt Romney was a corporate raider whose company, Bain Capital (fitting, that) would buy other companies, extract the wealth, and let them go under, causing misery.

Applying a Hindu overcoat to the Mormon Romneys, we might say that George Romney was the Brahma (“the creator”) to Mitt Romney’s Shiva (“the destroyer”).  ;)

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As an appended aside, the fact that Bain was allowed to continue doing what it did, may reflect the fact that for the past generation the US has followed a policy of deliberate deindustrialization in favour of a service economy.  Pity then, that too much finance isn’t good for you, eh?  One definitely gets the impression that industry in Germany, other European countries, and Japan remains healtheir than in the Anglo-capitalist countries have (US, UK, Canada, Australia).)

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Still, the foibles of Knights Capital, Bain Capital, and even HFT front-running, are beer-league infractions compared to the scandal surrounding LIBOR — the London InterBank Offered Rate — which investment bankers have been manipulating to their benefit since 1991 or earlier.  That’s so long ago, the Soviet Union was still around!!

Just as the central bank’s prime rate is the reference rate for mortgages in many countries, LIBOR has been a reference rate for probably trillions of dollars of loans and investment products (“interest rate swaps”) over the years.  So LIBOR manipulation is a Very Big Deal — conceivably, in a just world, every affected party could sue for damages.  And according to Matt Taibbi, the floodgates may have started

Fortunately for those involved, we don’t live in a just world, and the principals involved seem as likely to go to jail, as the Washington Generals are, to beat the Harlem Globetrotters…  :P

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The acknowledgement of LIBOR manipulation gives credence to gold enthusiasts’ long-held insistence that gold prices are also manipulated.  Of course, given that prices have gone up five-fold in 12 years, it can be hard to feel empathetic.  ;)  There’s also the reality that the world is ruled by is’s, not should’s.  Enbridge might think the Northern Gateway pipeline should get built; whether it is built, is another thing entirely.  Titans and insiders should play fair, but alas, in life, that’s not the way to bet.  :)

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The chart which probably best shows why gold bugs have been up in arms for years, is the following.  It shows daily price movements, on a percentage basis, over the course of four years (from 2006 to 2010).  Visually, you can see that in each two-minute span, prices generally move a maximum of about ± 0.004%.  Except for one wee anomaly at -0.018%.  Which occurs exactly when markets close in London.  Where brokerage houses have been coincidentally manipulating LIBOR for the past twenty years.  Smoke, meet fire; fire, smoke.  ;)

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I don’t think such price charts follow a “normal distribution” as defined by statistics, but if for our purposes we pretend they do, and we assume that one standard deviation is ±0.003%, that would mean 99.7% of the data would fall within ±0.009%, which looks roughly right.  This would also mean that the -0.018% datapoint represents six standard deviations, which screams “special cause” as opposed to “nothing to see here, but normal variation”.

I can’t pretend to know these apparent chicaneries’ intricacies, but it would appear that gold has a habit of dropping violently on options expiry dates, when extraordinary quantities of the stuff seem to enter the market.  Adding to the sense of Something Very Awry, the CFTC may apparently drop a four-year investigation into price-fixing in silver futures, without publishing their findings.

Still, for all of that, it would seem the precious metals will continue to be a reasonably good investment class, at least until stocks’ P/E ratios reach “end of bear market / start of bull market” territory.  After all, if years of possible manipulation can’t stop a five-fold rise, how likely is it to prevent further increases going forward?