Monday, May 30, 2022

Lives Unlived

 Lives Unlived

Look to your right and look to your left, and all around you too...those are the invisible lives unlived. On this Memorial Day pause to remember the so many lives lost in wars. Young lives unlived, so full of dreams and potential. A hundred Jonas Salks. A thousand Neil Armstrongs. Millions of fathers, mothers, son, daughters. Entire generations never to be lived. That is the true cost of war.

Sunday, May 29, 2022

Market Timing

 Market Timing

Conventional wisdom suggests that market timing is impossible, because a high or low is only made in timing is only in the realm of Monday morning quarterbacks. "Impossible" may be too harsh a word though as market timing, like rocket science, might just be really, really challenging.

Literally billions of dollars, yen, euros, and every other currency is spent each year trying to forecast economic outcomes before they happen; ie how much will the Fed raise rates? What will consumer sentiment come in at? What's the unemployment number? etc., etc. And each of these metrics can have serious impacts on the global markets.

To accurately predict a market outcome one would need almost God-like knowledge of both the dataset and corresponding behavioral reaction. And that assumes the behavior reaction is rational. Often it isn't. And that's what makes successful market timing the Holy Grail of investing. 

Imagine be long (owning) stocks when the market is on an uptrend, and then quick as a cat being short (betting against) stocks when the market is on a down treat. It is financial nirvana for an investor capable of precisely timing the market. Consider the title chart above.

This example chart illustrates the hypothetical possibility of precisely timing the market from Apr 2007 through Mar 2012. The investor who perfectly timed the market would have pocketed a 120% return while the poor Buy-and Holder would have suffered a 10% loss.*

*There are a couple caveats to keep in mind dear readers before selling the farm and pawning the family heirlooms to become signal traders. First, you need perfect (or extremely accurate signals.) Signal source is paramount to success. Junk data will produce...well...the part of the farm that stinks. There's no way around it; junk in, junk out.

Second, there are signifiant tax implications to taking down short-term trades. So although the data may be good, and you may act on it, that hypothetical 120% return might be reduced by some 40% (or more!) Third, the "Wash Sale Rule" is always looking to put the hurt on you. Familiarized yourself with it immediately.

With that said, signal trading might be a compelling strategy for a disciplined trader(s) willing to address the above concerns.

Saturday, May 28, 2022



A 40-year chart of the DJIA obscures an almost infinite number of non-linear events. Judged over time by the eye, stock market volatility looks benign and performance linear. It looks resoundingly positive, and it is, but zooming in on almost any short period reveals intense periods of volatility. How can this be?

Statistically speaking, the long-term stock market performance may be the finest example of linear regression next to species genetics. In many ways there are similar. Multiple non-linear events occurring simultaneously over longer periods of time result in many economic failures, and also several sustaining successes. Consider the private equity world.

In the private equity world (PE for the pros) for every Apple, Facebook, Google, Uber, Amazon, success story there are probably 1,000,000X or perhaps even 1,000,000,000X failures to reach fruition. Put another way, investing works best when you own the survivors. A great example is the S&P 500 Index. 

The companies in an S&P 500 Index are not static; ie losers drop out and off the face of the Earth, while winners survive and populate the index. By default, investors are buying a basket of winners. To be a member of the S&P 500 Index, at this very snapshot moment, you must be a non-linear survivor. The failures by default are members of the S&P 1T failure index...that has a value of zero.

The Navy Seals have many excellent quips, one of my favorites is "It pays to be a winner." You got that right! The all-weather mentality of being in the stock market through thick and thin is a tough one to adhere to when volatility spikes and misery ensues. But being a winner means surviving and thriving, just like a member of the S&P 500.  

By default the longer an investor is in the stock market the greater her fortune should be (as evidenced by the 40-year chart above.)  The danger then becomes one of timing...more to come on that next post. 

Tuesday, May 10, 2022

Wall Street Perspective

Wall Street Perspective

As Financial Farmers we must be wary of svengalis constantly whispering doom and gloom, because it is vital to have a long-term Wall Street perspective and remember all finance is behavioral finance.

First, why is it vital to have a long-term Wall Street perspective? Over a long enough time period, as Zero Hedge has popularly quipped, we're all dead. BUT, a counterpoint to this morbid fact, is that innovation over time has propelled the economy and society to greater productivity. And the stock market has been along for the ride.

The second reason to question a svengali is that behavioral finance drives a LOT (most?) of the market's near-term volatility, trading, and returns. Sustained movements are the result of earnings, growth, innovation and major societal changes.

At this point in the economic cycle (most likely we're either in or on the cusp of a recession), the corporate picture isn't exactly bright. We've witnessed massive selloffs in tech companies and the only winners seem to be "boring" consumer staples anchored by a dividend. A lot of money has flowed out of the market into cash. Or real estate. So the bloom is off the rose for the time being.

For those entering the market, opportunity abounds. With multiple companies well off their highs and solidly into bear market territory. Many have been completely vaporized and sit some 60%, 70%, 80% or more off of their  highs from just a couple months ago. For those who have been long-term holders, the past six months has been horrific, watching gains for the past two years getting destroyed. Even "blue chip" companies haven't been spared. Carnage is everywhere.

What's an investor to do? Stay focused on what matters; earnings, branding, growth, innovation, integrity, and cash flow. Have emergency cash on the sidelines. Look for opportunities and be patient. The last bit is perhaps the hardest. Many older investors in the stock market don't think they'll live to see a Bull Market again. But it is hard to believe that this great country, which has weathered so much in the past, could be permanently hobbled by inept leadership today for very long. So we're in a waiting game now.

Similar to economic cycles, the political pendulum swings and very few Presidents or political parties survive recessions intact. New blood focused on innovation, growth, and stability rises to the moment. Remember dear readers, the business of America is business. In the meantime, a fallow field presents many, many opportunities for a farmer with a keen eye.

Monday, May 2, 2022

Biden Bonds

 Biden Bonds

It was the best of times, it was the worst of times. Record low unemployment. Free healthcare for all. Open borders. Employment unionization. Limited law enforcement. And 9.62% I Bonds! Who could ask for more?

As CNBC proudly touts, the Series I Bonds available all this month are "virtually risk-free." Hmmm...let's ponder that fellow financial farmers. Why are the Series I Bonds pricing at 9.62% in the first place? Wouldn't that imply raging inflation? Why yes dear reader it would. And what is the I Bond's inflation component based on? Ahhh...CPI. Now what if the average American doesn't consume tons of soybeans or compute data in terabytes, but actually EATS and DRIVES on a daily basis? Might that skew CPI even higher?

To the shill writers at CNBC who are apparently fully endorsed by a government not-so-quite-on-the-level, obviously there is tremendous risk in the sense that you potentially are LOSING purchasing power due to inflation. How much? This author estimates Americans are losing approximately 2% PER MONTH (assuming you eat food and drive using a..gasp...fossil fuel car!)

Let me slide my Nobel Prize in Economics aside and grab my dusty calculator behind it....OK so 2% per month is like...hmm...24% annually! Wow. Maybe that 9.62% isn't such a good deal after all? Where is all that money going? Hint: Free ain't cheap.

One of my heroes, and an American statesman par excellence, Art Laffer wrote this AM in the WSJ: "The current 8.5% inflation rate is the highest in 40 years. But few policy makers or Federal Reserve governors seem to have learned the lessons from the last bout of surging prices--how it started, the economic wreckage it caused, and how to get out of it. We wince when we hear investment gurus arguing that because inflation often means rising consumer demand, it is good for the economy and stock market."

Quite the opposite is true. Both investors and workers care about REAL returns, ie stripping out inflation and seeing nominal growth...when purchasing power collapses (think high gas prices, high healthcare costs if you pay for healthcare, high education costs, high housing costs, high food costs, etc. etc.) larceny at a grand scale is occurring via inflation. Hence the worst of times.

So as investors back up the truck on Biden Bonds, consider for a moment WHY Series I Bonds are yielding 9.62% and pray that the limit isn't raised from $10K per person to $100K. It would mean the utter collapse of capitalism and the government would become all. Because, really why take the risk of getting out of bed in the morning if you can get a juicy 9.62% from Uncle Joe?