Wednesday, January 13, 2021

 When the Fringe Goes Mainstream 

When fringe ideas go mainstream lots of money can be made. Buckets full of money. The resulting services and products from what were once considered fringe ideas have fundamentally changed society when they were embraced by the mainstream. 

Consider the societal impacts of Bitcoin, electric vehicles, sports gambling, pot (rebranded cannabis), and even gourmet coffee. All of these products or services originated in previously fringe sectors of society. They were what the mathematical, specifically the statistical community, have labeled outliers.

Outliers traditionally have been considered data (or even people) that are significantly outside the average or median set of data. Consider the image directly above. The data clustered in the bottom left would equate with a point or even slope if it was two-dimensional on the graph. Notice the point on the upper right of the chart. In the study of statistics, this is know as the outlier.

An outlier is an extreme value that is either much higher or lower than other data points. Not to get too complicated, but the outlier typically skews the mean and median. Traditionally outliers are discarded from a data set because of this effect. My experience has been to embrace the outlier. As a matter of fact, I suggest investors keep an eye out for outliers. 

The case for keeping outliers on your investing radar screen is strong, because as alluded to in the first paragraph mucho dinero can be made getting in on trends early. That is typically when prices are low, because demand is virtually non-existent. In fact, the trend may be so early there may not even be a way to monetize the idea into a product or service yet. That makes investing in a nascent idea tricky. Often investors will pony up benjis for corollary product or service that aren't necessary the real thing.

In any industry created from a fringe idea, the birthing process is difficult and fraught with failure. The commercialization process of converting a fringe idea into a business can be best summed up as loony. It's like the primordial proteins, enzymes, heat, pressure, and time aligning to create a new life form, which of course is what a fringe idea converted into a new product or service most resembles. It is at this point when its product or service is launched and ownership can be had, whether in private equity or via purchasing the asset directly (Bitcoin), or licensing it (McDonald's franchise) that an investor can now gain exposure.

Ideas aren't two dimensional like most data on a chart. They aren't even three dimensional. The bridge between mathematics and ideas is tenuous at best. Ideas embrace at least length, area, volume, and time. The world as we know it has three dimension; length, width, and depth plus one dimension of time. String theory postulates that the universe operates with many more dimensions. Ideas are definitely at least three dimensional, consequently traditional statistics has been a poor utility to identify fringe ideas that will become mainstream. A better litmus test is needed that incorporates both mathematics and humanistics. Arthur Schopenhauer famously said "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." 

Since I am not as smart as Schopenhauer, I use something called the "Laugh Test." The "Laugh Test" is if I laugh out loud when presented with a fringe idea. I almost immediately put that new idea on my investing radar. The "Laugh Test" for me has proven to be an accurate predictor of potentially ground-breaking products or services, plus it also has produced countless failures. This litmus test, however, is also why I think certain environments are fertile ground to create new products and services, and also why AI will have trouble cloning this distinctly human gut reaction to what is funny, what is love, what is scary, etc. Emotions are a key factor in converting a fringe idea into a mainstream product or service. And once the mainstream embraces a fringe idea, its products and services typically change the course of history.

Tuesday, January 5, 2021

 Georgia On My Mind

As Ray Charles put it so eloquently, "Georgia On My Mind" is the theme for today, tomorrow, and the future of the United States. Not to get too peachy, but the significance of today's Senate runoff race cannot be overstated. 

The Republicans currently enjoy a 50-48 lead in the Senate, with Vice President Mike Pence acting as the 101st vote if needed as his duel roll as the President of the Senate. This could all change by tonight. Democrats need to win both seats to take control, a split victory will lock in the win for the Republicans. 

The stakes are especially high given that a Senate victory for the Democrats will ensure complete control of the legislative and executive branches of the government. In theory they will have de facto power to pass and enforce legislation at will. California is a good roadmap of what could happen if this scenario plays out; unchecked political power has completely wrapped this blue state in red tape. Victims of this hegemony are fleeing California en masse.

The flip side of this coin is that if Republicans win at least one of the two seats then the GOP will have the ability to stymie Democratic government control. In this scenario we would have an actual two-party legislative government.

Single party government control rarely turns out well, as the minority party is steamrolled and builds angst amongst the minority coalition of voters who have to endure authoritarian regime(s). Almost inevitably, single party control is vigorously overturned the next cycle. Consider: Reagan-Reagan-Bush-Clinton-Clinton-Bush-Bush-Obama-Obama-Trump-Biden.

The universe seeks balance. The recent political scene has been anything but balance; it has become highly polarized in terms of candidates and ideology, brother against brother and friend against friend aligning along their political beliefs. Sadly, what has been lost is ability to view life in grayscale; rarely are issues ever just black or white. The results of this senate race will for a long time leave "Georgia On My Mind."

Georgia On My Mind
Ray Charles

Monday, January 4, 2021

 Where is Jack Ma?

Is Jack Ma still alive? After voicing criticism over China's financial sector, the wildly successful billionaire hasn't been seen in public for over 2 months now. Some wonder whether he is still alive. Many wonder what Chairman Xi has done with this man...Jack Ma has "gone missing."

As China projects its hegemony across the globe, it has become quite apparent that speaking against "the State" is grounds for termination. And if they can do this to a billionaire, well imagine what's really going on behind the scenes. Fang Fang was recalled after her cover as a handler was blown. Hundreds of "grad students" with access to cutting edge research at our top universities simply board a plane and are never heard from again.

An interesting corollary to Jack Ma's disappearance is the disappearance of Chinese stocks on U.S. stock exchanges. The Trump Administration's final days are being spent shoring up American exchanges from Chinese corporations with questionable financial ties, money laundering, and corruption. Parts of the FBI still seem to care...other parts seemed completely compromised. The "President-Elect" has financial ties to China that are troubling to say the least. Condon's "The Manchurian Candidate" quickly comes to mind.

Almost any global tech exec will give you an earful of the trade stipulations China has put on the sector; namely originators, inventors, and makers of technology are required (yes you read that correctly) to provide their Chinese "partners" with the necessary IP to industrialize China. The rust belt is testament to what happens on a large scale when this is employed; machines go first, then their operators aren't far behind. Silicon Valley should wake up to this reality, but I fear the greed is blinding right now.

What would it take for an American billionaire to be "disappeared?" That is an interesting question. It happened to Carlos Ghosn when he landed in Japan. It seem reasonable that the average billionaire might be "disappeared" off a yacht in the Med at any given time. Civil rights seem to disappear when you leave the United States and step foot on foreign land. Even in the United States now, billionaires are hedging their bets by championing the policies of the ruling elite. I guess you can never be too careful.

Why has Jack Ma "gone missing?" Linked is Jack Ma's Bund Finance Summit Speech, it may have cost him his life. Freedom is never free my friends.

Friday, January 1, 2021

 Join the R.I.S.E. Movement!

Retirement Income Starts Early

New day, new year! Have you joined the R.I.S.E. Movement? Retirement Income Starts Early (R.I.S.E.) is a new movement helping people around the world better understand and prepare for financial security. Although tailored to my readers in the United States, the R.I.S.E. Movement's mathematical and psychological principles are universal.

Depending on where you live, however, there are either some distinct advantages or disadvantages to financial security. The R.I.S.E. Movement is most effective in geographies with established rules of law protecting property rights, the ability to own assets, and the ability to migrate with those assets to other regions. Simply put, the R.I.S.E. Movement works best in democracies because they typically allow for the two great advantages of compounding wealth, namely time and owning the asset!

Let's get right into it. For the vast majority of both young and older readers of this blog I have stressed the importance of "Investing Like A Farmer," and by that there are ample descriptions of the value of buying compounding assets. The R.I.S.E. Movement is an implementation of those writings unified into a financial roadmap. There are several key tenets that I think are essential to both understanding and applying to your financial preparation.

First, happiness in life (at least from a financial perspective) is positive cash flow. What is joyous is passive positive cash flow. The ultimate goal of the R.I.S.E. Movement is to help you construct a portfolio with recurring and increasing passive positive cash flow.

Second, the cavalry is not coming. You're on your own in this life in terms of creating this portfolio. It is a bad assumption to rely on a friend, relative, or (gasp) the government to bail you out in time of need. As Johnny Cash once sang "Son, this world is rough. And if a man's gonna make it, he's gotta be tough."

Third, basket weaving is underrated. College students who take basket weaving to help boost their GPA get a bad rap, because not only is basket weaving quite useful it is also quite educational. From a financial perspective, the basket we're weaving is our portfolio. It is composed of many different reeds and together they will form a strong basket to hold our wealth and generate cash flow.

When is the Best Time to Start Saving?

As most financial companies will tell you, the earlier you start saving the better. This is because one of our greatest resources in life is time. The more time you have the more compounding can occur.

The chart above helps visually illustrate the value of compounding interest, that is interest upon interest upon interest ad infinitum. The real "juice" savers get is from the compounding effect of interest. But that chart, however, only tells part of the story. It is based on a single initial lump sum that isn't touched for 20 years. Let's take a look at a little more of a real world example, in which case we start with some small sum of money and then add to it over the years. (Click to Enlarge.) 

Obviously the take-away from contributing regularly over time is that a decent chunk of change can be generated assuming we get a modest rate of return and do not touch the funds thus allowing them to grow.

HUGE challenge of course is NOT touching the growing asset base. It is virtually impossible, however, for most R.I.S.E. Movement members to accomplish this goal because life, especially over a (hopefully) very, very long time will throw significant challenges at all of us; it could be health problems, education costs, vehicle breakdowns, children, parents, taxation, etc. There are literally thousands of challenges that arise over time which require utilization of our assets. That's the major flaw in most financial roadmaps, there is zero accounting for life itself.

This brings us back to the initial question posed, when is the best time to start saving? The best time to start saving is before you are born.

Weaving the Basket

Starting to save before you are born is difficult, because you don't have many of the educational tools yet to land a job. Obviously I'm writing to all the parents out there. And grandparents. The R.I.S.E. Movement champions independence, but there are significant advantages provided to those starting out in life who are able to leapfrog twenty years into the future. And what I mean by that is nearly every wealthy family has resources put aside for their heirs; whether it is cash, gold, real estate, the family business, etc. in either a Trust Account, 529 plan, life insurance, or other mechanism. The path to creating a solid asset base that can generate cash flow starts early

Now for those of you who weren't able to choose your parents or the country you were born in, well there is good news. If you're reading this then you probably have a vested interest in improving your lot in life, possibly to a significant degree. Read on.

As we've already discussed, time is one of the greatest commodities in life. Another one is education. Education allows people to transcend from their existing condition. This can result in a better job. A better job typically means more salary. That's a good beginning. With a decent salary excess income can be applied to building your asset base. Depending on how good of a salary, you can then start compressing time.

Wait, did he just say "compressing time?" Yes. The more excess income (income that exceeds your cost of living expenses) you have the more assets you can purchase. What is an asset anyway? An asset is something that pays you to own it. The world is full of assets just waiting to be purchased! There are dividend paying stocks, small businesses, real estate, mining claims, etc. The list goes on and on and on.

Whether young or old, there are certain tips I'd like to share in regards to "weaving your basket." Just as a little can be turned into a lot over time, the inverse is also true...namely a lot can be turned into a little quickly. The construction of your basket is going to be unique for almost all of us, but there are common elements to success. 

Create moats. By that I mean have different types of assets which are not correlated, not held in the same place, and are secure. For example, "diversification" isn't just having an Index Fund. Consider owning dividend paying stocks, bonds, real estate, gold, and a small business. Together they form a sturdy basket to hold the totality of your asset base, yet are not held in the same place. 

No single event should (or could) destroy your basket. Barring a meteorite or health pandemic of Biblical proportions, your basket should be able to withstand the test of time and what life has in store for you. See the paragraph directly above regarding creating moats. Chain reactions can be very, very nasty. Having liquidity on hand is a good thing (think cash money.)

Building a castle or a spaceship or a robot starts with one Lego. Remember that. Young or old we all have a certain amount of time left, act accordingly. Buy assets. Live. Add to your assets. Live. Buy more assets. Live. Use income from assets to buy more assets. Live. Get more education. Live. Use excess income to buy more assets. Live. Teach others. Live.

Your Future Starts Today

In the preamble of this post I mentioned that the R.I.S.E. Movement was tailored to my readers in the USA, but applicable to readers around the world. Each country will have its advantages and disadvantages in terms of educational opportunities, health care, and freedoms.

Generally speaking, the greater the educational opportunity, better the health care, and more freedom one has the greater your ability to harness all the facets of the R.I.S.E. Movement will be over time. Luck and hard work, however, can and often do trump many of the advantages of living in a democratic country with wealthy parents, opportunities for education, health care, and fundamental freedoms. If you have the self-discipline and motivation to harness the power of time you can compound opportunities.

Monday, December 28, 2020

 Roaring 20s

With free money and pent-up demand ready for release, the economy is poised to repeat the Roaring 20s all over again...this time with booze legal!

We are on the cusp of a Gatsbyesque epoch. The Fed has already declared they will not raise rates until 2023 at the minimum. Three (or is it four now?) major pharmaceutical companies have their Covid vaccines approved. There is an excess of over $2T sitting in savings accounts in the United States alone. The world is awash with capital...and all if it is looking for a home. Cue the big band music.

Traditional outlets of excess liquidity have been fulfillment of hedonistic impulses. The 2020s look like they will be no different as pent-up demand for physical relationships will undoubtedly result in a Baby Boom on par with the end of WWII. Plus, there are significantly reduced societal norms defining what a relationship should be...many couples live together for years, purchase homes/condos together, and begin their families without a thought of marriage. 

Loose money and loosened moral norms will accelerate natural trends to their apogee. It took approximately a decade for the "Lost Generation" to finally party themselves out of energy. The fireworks most likely will start in the United States. From there, it will spread in lockstep with vaccine rollout, monoclonal antibody therapies, and ICU/treatment capability.

What's going to be catalyst that pushes the country into the Roaring 20s again? Already signs of it are becoming apparent. High end liquor sales are creeping up. Second homes in vacation areas are becoming primary homes. Household wealth is up considerably. Real estate prices are soaring. Stocks are soaring. But the great litmus test is going to be an increase in the birth rate. That will be the lagging indicator that the Roaring 20s are upon us again and the good times are already rolling. Hopefully this time, however, a modicum of prudence learned from the Great Recession will let some air out of the balloon before it pops. But of course, nobody ever says "Enough!" So be sure to take some off the table on the way up.

Saturday, December 26, 2020

 Animal Spirits

John Maynard Keynes coined the term "animal spirts" to describe the financial decision making process during times of turmoil. Their release is an apt catalyst in our current situation.

The original passage by Keynes reads: "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over may days to come, can only be taken as the result of animal spirits--a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitive probabilities."

The pandemic has unleashed the animal spirits, with the strongest of all, survival, being most relevant in the time of chaos. It has accelerated the adoption of multiple technology platforms (internet retail sales, logistics, working from home, education from home, and telemedicine to name a few.) And oddly enough, the virus that has killed millions may have inadvertently increased productivity.

What does this all mean? I believe we are on the cusp of 2 major trends: 1) The Roaring 20s are about to occur all over again, or put better by one of my favorite philosophers Yogi Berra, "It's like deja vu all over again." Ditto for the second trend: 2) A Baby Boom of epic proportions is on the horizon as pent-up emotions are released across the world. An "end of WWII" scenario isn't out of the question.

Investors with ready capital can take advantage of these 2 major trends by identifying companies (or better yet, starting companies) that have the potential to unleash animal spirits. This is a key litmus test I use when looking to buy assets. Does the target company unleash animal spirits? Has this product or service created a paradigm shift in consumption, utility, economy, trust, etc.? Buying the future today has often proven to be extremely lucrative tomorrow.

Monday, December 14, 2020

 Asset Inflation

Headlines abound with terms like "mania" and "exuberance" in regards to recent stock market IPOs, journalists should rather focus on the collapse of the dollar.

With Fed Funds rate at essentially 0% consumers aren't stupid. Money is flowing like lava from a Hawaiian volcano into real estate and stocks (especially platforms.) Why? Well the chart above helps to illustrate approximately 100 years of the dollar's decline. Granted, a lot of things have become cheaper, or weren't even available to purchase a century ago (iPhone anyone?), but some things never change: the flight of dollars into real estate, gold, and businesses has been real.

What does this mean for the average investor? Well the average investor, one who typically does not receive pre-IPO shares or hold significant private equity wealth, is troubling. Given the market's recent spike to all-time highs it can be argued that stocks are frothy. Same thing with real estate. Gold may still offers value, in my opinion, to say Bitcoin.

Bitcoin has eaten up the traditional safe-haven status of gold. Bitcoin is an asset that is easily traceable, easily seizable, extremely tax-inefficient, hard to do business with, and limited in supply to 21 million units. Obviously ILAF isn't a fan.

What is a prudent investor to do? Where else can money be allocated? It is hard to believe bonds or CDs offer anything greater than an arena of cash storage with most likely a real yield that is negative...that's right, you are paying a bank to hold your money. They in return offer you protection on the amount (not the value) of the declining asset. Your opportunity cost is the true victim.

A good farmer, and investor coincidently enough, weighs the opportunity cost in making a decision. The future is nebulous, but the past often provides a looking glass into what has worked in prior situations. Most notably, I would turn your attention to the 1918-1920 time period in global history. The Spanish Flu most coincides with our current predicament.

With 50 million dead in the span of several years, which also coincided with World War I, Spanish Flu could arguably be categorized as humanity's singular worse disaster. Technology has offered some relief today. The world is also significantly more unified in a response (Operation Warp Speed should clearly be the Nobel Peace Prize Winner.) So politically, medically, and financially the "world" has acted considerably more in concert than 100 years ago. If the current scenario plays out similarly to the 1920s (which I think it will) prepare yourself for even more asset price gains...think Roaring 20s all over again, and a baby boom to rival the end of WWII.

Bottom line? After covering your monthly nut for housing, medical, education, etc. turn those remaining dollars into ownership in something more sustainable than cash...real estate, gold, business ownership, etc. Oh yeah, and don't forget to save something for the Big Guy! Trump Tax Cuts are 1st on the chopping block under the new Joe Biden regime.

Wednesday, December 9, 2020

 Bob Dylan, Capitalist?

As reported in the Wall Street Journal yesterday, Bob Dylan sold his entire music catalog to Universal Music Publishing Group. This comes on the heels of Stevie Nicks selling her publishing catalog last month for $100 million. Mr. Dylan's deal is likely closer to a billion dollars based on higher-end royalty metrics, historical significance, and artist premium.

While the actual deal value has not been revealed, the timing is impeccable. With the Biden administration poised to sack the Trump Tax Cuts on day one, there has been a flurry of deals and IPOs (428 to date, not including the largest of them all, the upcoming Airbnb offering expected to hit the tape tomorrow.) It's no coincidence Mr. Dylan pulled the trigger when he did.

The savings of monetizing in 2020 are vast. Consider in Mr. Dylan's case, he'll likely pay ~24% in a one-time capital gains tax for his catalog (plus state taxes) versus the recurring ~37% (plus state taxes) on the annual income his music catalog generates. It is a savvy move, especially since a decent portion of his music right are *probably* slipping through his fingers via social media apps using his music without paying the vig (TikTok, anyone?)

Universal brings corporate muscle to the catalog, and the ability to further monetize new technology as well as expanding the innate Americana Dylan brings to the table with perhaps more mainstream television adverting in big market events (think Super Bowl.) Mr. Dylan's iconic status and vast potential of licensing deals arguably justifies whatever premium Universal paid to acquire the entire music catalog that spans decades.

All of this talk about monetization, however, leaves many music aficionados wondering if they have been left blowin' in the wind. It smells like capitalism, something Mr. Dylan has railed against his entire career. It begs the question, can a champion of progressive liberalism morally be...gasp...a fiscal conservative with this own money?