Investing

Depression 2020?

Posted by Peter on May 14, 2020
Posted in: Economics, Investing, U.S. Politics. Tagged: , , .

In this post, I make some conjectures about U.S. economic growth over the next year or two.

Many people expect a depression, due to the current high unemployment numbers. But depressions aren’t caused by unemployment – that’s a symptom, with little predictive power.

The main cause of poor economic growth has been an inability to alter wages so that the supply of and demand for labor are in balance. That typically means deflation, or a large, unexpected decline in the inflation rate, combined with sticky wages.

So I’ll mostly focus on guessing whether we’ll have inflation or deflation.

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The Coronavirus Stock Market Crash

Posted by Peter on March 1, 2020
Posted in: Investing. Tagged: , , , , .

The stock market crash of the past two weeks looks like an over-reaction to COVID-19.

Is COVID-19 really the reason for the crash? I can’t find any other news that would explain the timing and which stocks were hit hardest.

Here’s a sample of some of the harder hit stocks, all travel-related (Friday’s close compared to the highest close in February):

  • -37% Hertz (HTZ)
  • -36% Avis (CAR)
  • -29% World Fuel Services Corp (INT)
  • -24% Carnival (cruise line) (CCL)
  • -22% Delta Air Lines (DAL)
  • (compare to the S&P 500: -12.4%)

It is, of course, possible that the market was in a mild bubble in early February, and the virus merely triggered a return to sanity. There were enough high-priced stocks that I’ll guess that’s explains a little of what happened. Hertz and Avis are maybe high-risk stocks due to the risks associated with the upcoming transition to robocars. But the others that I listed did not at all fit my stereotype of overpriced stocks.

And the stocks that I had been thinking were overpriced, in industries that don’t look to be especially hurt by the virus, declined roughly in line with the market.

Outside of travel-related stocks, it mostly looks like a general shift in preferences to more cash, and away from stock. I.e. a general increase in risk aversion.

The gold market is confused as to which direction a pandemic should move it. I agree. I’m confused as to how gold should react.

What scenario could explain the decline? Maybe a two month shutdown of 90+% of U.S. air travel? A multi-year reduction in travel of 10%? It would take something like that for the market reaction to make much sense. Yet I’d bet at roughly 10:1 odds against any one of those scenarios happening.

Metaculus is currently predicting 195k COVID-19 deaths this year.

Metaculus forecast trends ought to look a good deal like random walks, yet the charts I see there look more like exponential growth.

Metaculus is likely to be a more objective source of information than the news media storyteller industry or social media. But it’s likely more susceptible to selection effects and hype than are markets that have lots of money at stake. (Metaculus has token prizes, structured in a way that may encourage more extreme bets than a regular market would).

None of this implies much about where other reactions to the virus are sensible. There’s a much different asymmetry between getting sick versus being paranoid than there is between losing money due to a pandemic versus losing money due to selling on a false alarm.

I’ve got about a month’s supply of food, but that’s my normal preparation for a variety of disasters. I have no special insights about whether the current risks justify staying home.

P.S. Chinese stocks are supporting the view that the situation in China has improved over the past month.

Nifty 50 Stocks

Posted by Peter on September 26, 2019
Posted in: Investing, Uncategorized. Tagged: .

There are a number of investment ideas that pop up about once per generation, work well for years, and then investors get reminded of why they’re not so good, and they get ignored for long enough that the average investor doesn’t remember that the idea has been tried.

The idea I’m remembering this month is known by the phrase Nifty Fifty, meaning that there were about 50 stocks that were considered safe investments, whose reliable growth enabled investors to ignore standard valuation measures such as price/earnings ratios, dividend yields, and price to book value.

The spirit behind the Nifty Fifty was characterized by this line from a cryonaut in Woody Allen’s Sleeper (1973): “I bought Polaroid at seven, it’s probably up millions by now!”.

There was nothing particularly wrong with the belief that those were good companies. The main mistakes were to believe that their earnings would grow forever, and/or that growing earnings would imply growing stock prices, no matter how high the current stock price is.

I’ve seen a number of stocks recently that seem to fit this pattern, with Amazon and Salesforce mostly clearly fitting the stereotype. I also ran into one person a few months ago who believed that Amazon was a good investment because it’s a reliable source of 15+% growth. I also visited Salesforce Park last month, and the wealth that it radiated weakly suggests the kind of overconfidence that’s associated with an overpriced stock market.

I took a stab at quantifying my intuitions, and came up with a list of 50 companies (shown below) based on data from SI Pro as of 2019-09-20, filtered by these criteria:

  • pe_ey1 > 30 (price more that 30 times next year’s forecast earnings)
  • mktcap > 5000 (market capitalization more than $5 billion)
  • prp_2yh > 75 (price more than 75% of its 2 year high)
  • rsales_g5f > 50 (5 year sales growth above the median stock in the database)
  • sales_y1 < 0.33333*mktcap (market capitalization more than 3 times last year’s sales)
  • yield < 3 (dividend yield less than 3%)
  • pbvps > 5 (price more than 5 times book value)
  • epsdc_y2 > 0 (it earned money the year before last)

I did a half-assed search over the past 20 years, and it looks like there were more companies meeting these criteria in the dot com bubble (my data for that period isn’t fully comparable), but during 2005-2015 there were generally less than a dozen companies meeting these criteria.

The companies on this list aren’t as widely known as I’d expected, which weakens the stereotype a bit, but otherwise they fit the Nifty Fifty pattern of the market seeming confident that their earnings will grow something like 20% per year for the next decade.

There were some other companies that arguably belonged on the list, but which the filter excluded mainly due to their forward price/earnings ratio being less than 30: BABA (Alibaba Group Holding Ltd), FB (Facebook), and GOOGL (Alphabet). Maybe I should have used a threshold less than 30, or maybe I should take their price/earnings ratio as evidence that the market is evaluating them sensibly.

This looks like a stock market bubble, but a significantly less dramatic one than the dot com bubble. The market is doing a decent job of distinguishing good companies from bad ones (much more so than in the dot com era), and is merely getting a bit overconfident about how long the good ones will be able to maintain their relative quality.

How much longer will these stocks rise? I’m guessing until the next major bear market. No, I’m sorry, I don’t have any prediction for when that bear market will occur or what will trigger it. It will likely be triggered by something that’s not specific to the new nifty fifty.

I’m currently short EQIX. I expect to short more of these stocks someday, but probably not this year.

ticker company pe_ey1 mktcap sales_y1 yield pbvps
AMT American Tower Corp 52 100520 7440.1 1.7 18.21
AMZN Amazon.com, Inc. 54 901016 232887 0 16.67
ANSS ANSYS, Inc. 31.8 18422.3 1293.6 0 6.46
AZPN Aspen Technology, Inc. 30.5 8820.8 598.3 0 22.2
BFAM Bright Horizons Family Solutio 37.2 9181.8 1903.2 0 10.21
CMG Chipotle Mexican Grill, Inc. 48 23067.9 4865 0 15.04
CRM salesforce.com, inc. 50.1 134707 13282 0 7.02
CSGP CoStar Group Inc 49.3 21878.4 1191.8 0 6.74
DASTY Dassault Systemes SE (ADR) 32.9 37683.3 3839 1 7.05
DXCM DexCom, Inc. 110.3 14132.9 1031.6 0 20.44
EQIX Equinix Inc 70.2 48264.7 5071.7 1.7 5.46
ETSY Etsy Inc 61.7 7115.6 603.7 0 16.42
EW Edwards Lifesciences Corp 36.7 44736.3 3722.8 0 13.06
FICO Fair Isaac Corporation 36.5 9275.5 1032.5 0 33.71
FIVE Five Below Inc 33.6 7152.1 1559.6 0 10.86
FTNT Fortinet Inc 31.6 13409.2 1801.2 0 11.93
GDDY Godaddy Inc 67.2 11976.7 2660.1 0 12.41
GWRE Guidewire Software Inc 70.3 8835.9 652.8 0 5.84
HEI Heico Corp 49.3 15277.3 1777.7 0.1 10.58
HUBS HubSpot Inc 94.6 6877.4 513 0 10.93
IAC IAC/InterActiveCorp 38.3 19642.5 4262.9 0 6.51
IDXX IDEXX Laboratories, Inc. 49.3 23570.6 2213.2 0 138.03
ILMN Illumina, Inc. 44.3 44864.4 3333 0 10.5
INTU Intuit Inc. 31.6 70225.1 6784 0.8 18.67
INXN InterXion Holding NV 106.8 5995.1 620.2 0 7.95
ISRG Intuitive Surgical, Inc. 38.8 61020.9 3724.2 0 8.44
LULU Lululemon Athletica inc. 33.7 25222.7 3288.3 0 16.36
MA Mastercard Inc 30.1 276768 14950 0.5 55.23
MASI Masimo Corporation 41.8 8078.9 858.3 0 7.8
MDSO Medidata Solutions Inc 43.4 5734.1 635.7 0 8.35
MELI Mercadolibre Inc 285.4 27306.2 1439.7 0 12.59
MKTX MarketAxess Holdings Inc. 56.7 12941.1 435.6 0.6 18.93
MPWR Monolithic Power Systems, Inc. 31.5 6761.2 582.4 1 9.44
MTCH Match Group Inc 38.4 22264.7 1729.9 0 105.51
OLED Universal Display Corporation 45.5 8622.8 247.4 0.2 11.36
PAYC Paycom Software Inc 51.3 12812.8 566.3 0 28.6
PCTY Paylocity Holding Corp 47.6 5150.5 467.6 0 17.01
PEGA Pegasystems Inc. 167.2 5686.4 891.6 0.2 10.14
PEN Penumbra Inc 134 5142.8 444.9 0 11.3
RMD ResMed Inc. 30.6 19181.5 2606.6 1.2 9.33
RNG RingCentral Inc 139.4 11062.4 673.6 0 30.93
ROL Rollins, Inc. 43.6 11383.4 1821.6 1.2 15.04
RP RealPage Inc 31.3 6084.5 869.5 0 5.3
TAL TAL Education Group (ADR) 39.4 21326.2 2563 0 8.45
TECH BIO-TECHNE Corp 34.6 7483.8 714 0.6 6.52
TREX Trex Company Inc 30.2 5074.2 684.3 0 13.05
TYL Tyler Technologies, Inc. 43.5 10004.5 935.3 0 6.98
VEEV Veeva Systems Inc 62 21366.2 862.2 0 15.27
VRSK Verisk Analytics, Inc. 32.3 25948.4 2395.1 0.6 11.73
ZAYO Zayo Group Holdings Inc 42.5 7997.8 2578 0 5.95

Ray Dalio’s Principles

Posted by Peter on February 25, 2019
Posted in: Book Reviews, Investing, The Human Mind. Tagged: , , , , .

Book review: Principles: Life and Work, by Ray Dalio.

Most popular books get that way by having an engaging style. Yet this book’s style is mundane, almost forgetable.

Some books become bestsellers by being controversial. Others become bestsellers by manipulating reader’s emotions, e.g. by being fun to read, or by getting the reader to overestimate how profound the book is. Principles definitely doesn’t fit those patterns.

Some books become bestsellers because the author became famous for reasons other than his writings (e.g. Stephen Hawking, Donald Trump, and Bill Gates). Principles fits this pattern somewhat well: if an obscure person had published it, nothing about it would have triggered a pattern of readers enthusiastically urging their friends to read it. I suspect the average book in this category is rather pathetic, but I also expect there’s a very large variance in the quality of books in this category.

Principles contains an unusual amount of wisdom. But it’s unclear whether that’s enough to make it a good book, because it’s unclear whether it will convince readers to follow the advice. Much of the advice sounds like ideas that most of us agree with already. The wisdom comes more in selecting the most underutilized ideas, without being particularly novel. The main benefit is likely to be that people who were already on the verge of adopting the book’s advice will get one more nudge from an authority, providing the social reassurance they need.

Advice

Some of why I trust the book’s advice is that it overlaps a good deal with other sources from which I’ve gotten value, e.g. CFAR.

Key ideas include:

  • be honest with yourself
  • be open-minded
  • focus on identifying and fixing your most important weaknesses

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Piketty

Posted by Peter on July 31, 2018
Posted in: Book Reviews, Economics, Investing, Politics. Tagged: , , .

Book review: Capital in the Twenty-First Century, by Thomas Piketty.

Capital in the Twenty-First Century is decent at history, mediocre at economics, unimpressive at forecasting, and gives policy advice that is thoughtfully adapted to his somewhat controversial goals. His goals involve a rather different set of priorities than I endorse, but the book mostly doesn’t try to persuade us to adopt his goals, so I won’t say much here about why I have different priorities.

That qualifies as a good deal less dumbed-down-for-popularity than I expected from a bestseller.

Even when he makes mistakes, he is often sufficiently thoughtful and clear to be somewhat entertaining.

Piketty provides a comprehensive view of changes in financial inequality since the start of the industrial revolution.

Piketty’s main story is that we’ve experienced moderately steady increases in inequality, as long as conditions remained somewhat normal. There was a big break in that trend associated with WW1, WW2, and to lesser extents the Great Depression and baby boom. Those equalizing forces (mainly decreases in wealth) seem unlikely to repeat. We’re back on a trend of increasing inequality, with no end in sight.

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Another housing bubble?

Posted by Peter on March 24, 2018
Posted in: Economics, Investing. Tagged: , .

Scott Sumner asks whether those of us[1] who talked about a housing bubble are predicting another one now.

Sumner asks “Is it possible that the housing boom was not a bubble?”.

It’s certainly possible to define the word bubble so that it wasn’t. But I take the standard meaning of bubble in this context to mean something like a prediction that prices will be lower a few years after the time of the prediction.

Of course, most such claims aren’t worth the electrons they’re written on, for any market that’s moderately efficient. And we shouldn’t expect the news media to select for competent predictions.

Sumner’s use of the word “bubble” isn’t of much use to me as an investor. If prices look like a bubble for a decade after their peak, that’s a good reason to have sold at the peak, regardless of what happens a decade later.

If I understand Sumner’s definition correctly, he’d say that the 1929 stock market peak looked for 25 years like it might have been a bubble, then in the mid 1950s he would decide that it had been shown not to be a bubble. That seems a bit strange.

Even if I intended to hold an investment for decades, I’d care a fair amount about the option value of selling sooner.

2.

The U.S. is not currently experiencing a housing bubble. I can imagine a small housing bubble developing in a year or two, but I’m reasonably confident that housing prices will be higher 18 months from now than they are today.

Several signs from 2005/2006 that I haven’t seen recently:

I mostly used to attribute the great recession to the foolish leverage of the banking system and homebuyers, who underestimated the risks of a significant decline in housing prices.

I’ve somewhat changed my mind after reading Sumner’s writings, and I now think the Fed had the power to prevent most of the decline in gdp, unless it was constrained by some unannounced limit on the size of its balance sheet. But I still think it’s worth asking why we needed unusual Fed actions. The fluctuations in leverage caused unusual changes in demand for money, and the Fed would have needed to cause unusual changes in the money supply to handle that well. So I think the housing bubble provides a good explanation for the timing of the recession, although that explanation is incomplete without some reference to the limits to either the Fed’s power or the Fed’s competence.

[1] – he’s mainly talking about pundits who blamed the great recession on the housing bubble. I don’t think I ever claimed there was a direct connection between them, but I did imply an indirect connection via banking system problems.

Warnings

Posted by Peter on January 22, 2018
Posted in: Artificial Intelligence, Book Reviews, Investing, Mideast, Miscellaneous, Politics. Tagged: , , , , .

Book review: Warnings: Finding Cassandras to Stop Catastrophes, by Richard A. Clarke and R.P. Eddy.

This book is moderately addictive softcore version of outrage porn. Only small portions of the book attempt to describe how to recognize valuable warnings and ignore the rest. Large parts of the book seem written mainly to tell us which of the people portrayed in the book we should be outraged at, and which we should praise.

Normally I wouldn’t get around to finishing and reviewing a book containing this little information value, but this one was entertaining enough that I couldn’t stop.

The authors show above-average competence at selecting which warnings to investigate, but don’t convince me that they articulated how they accomplished that.

I’ll start with warnings on which I have the most expertise. I’ll focus a majority of my review on their advice for deciding which warnings matter, even though that may give the false impression that much of the book is about such advice.
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Cryptocurrencies

Posted by Peter on January 16, 2018
Posted in: Investing. Tagged: .

I’ve donated/sold more than 80% of my cryptocurrency holdings (Ripple and Bitcoin) over the past two weeks, after holding them without trading for around 4 years.

When I last blogged about Bitcoin, I said I would buy Bitcoin soon. That plan failed because I didn’t manage to convince the appropriate company that I’d documented my identity, so I didn’t find a way to transfer money from a bank to an account from which I could buy Bitcoin. (Difficulties like that were one reason why cryptocurrencies used to be priced too low). I procrastinated for two years, then found a convenient opportunity when MIRI needed to unload some Ripple.

My guess is that the leading cryptocurrencies will be somewhat higher a decade or two from now, but the prospects over the next year or two seem fairly poor compared to the risks.

Much of my expected value for the cryptocurrencies used to come from a 2+% chance of a hundred-fold rise. But a hundred-fold rise from current levels seems a bit less than 1% likely.

I compare cryptocurrency trends mainly to the gold bubble of 1980, since gold is primarily a store of value that pays no income, and is occasionally used as a currency.

I made some money once before by predicting that an unusual market pattern would repeat, with the same seasonal timing. So I’ve been guessing that cryptocurrencies would peak in mid-January. Yes, that’s pretty weak evidence, but weak evidence is all I expect to get.

I’ve also tried to extract some evidence from price trends. That usually provides only a tiny benefit in normal markets, but I suspect I get some value in high-volume inefficient markets (mainly ones where it’s hard to short) by detecting how eager traders are to buy and sell.

I watched the markets nervously in December, thinking that a significant bubble was developing, but seeing signs that any peak was still at least weeks in the future. Then I got nervous enough on January 2 to donate some Ripple to CFAR, even though I still saw signs that the market hadn’t peaked.

By January 5, I stopped seeing signs that the trend was still up, but I waited several days before reacting, hoping for rebounds that ended up being weaker than I expected. I ended up selling at a lower average price than CFAR got for what I donated to them, because dissatisfaction with the lower-than-recent price made me hesitant to sell.

An important lesson to draw from this is to always try to sell financial assets before the peak. Endowment effect is hard to avoid.

P.S. – It’s unclear whether cryptocurrencies are important enough to influence other stores of value. My best guess is that gold would be 5 to 10% higher today if it weren’t for cryptocurrencies. And the recent rise in cryptocurrencies coincides with a rise in expected inflation, but that’s more likely to be a coincidence, than due to people abandoning dollars because they see cryptocurrencies as a better store of value.

Peak Fossil Fuel

Posted by Peter on September 22, 2017
Posted in: Investing, Politics. Tagged: .

This post is about the combined effects of cheap solar energy, batteries, and robocars.

Peak oil is coming soon, and will be at least as important as peak whale oil; probably more like peak horse.

First I noticed a good article on the future of fossil fuels by Colby Davis. Then I noticed a report on robocars by Rethinkx, which has some fairly strong arguments that Colby underestimates the speed of change. In particular, Colby describes “reasonable assumptions” as implying “Electric vehicles would make up a third of the market by 2035 and half by 2040”, whereas RethinkX convinced me to expect a 2035 market share of more like 99%.

tl;dr: electric robocars run by Uber-like companies will be cheap enough that you’ll have trouble giving away a car bought today. Uber’s prices will be less than your obsolete car’s costs of fuel, maintainance, and insurance.

As I was writing this post, a Chinese official talked about banning gas-based cars “in the near future” (timing not yet decided). If only I had bought shares in a lithium mining company before that news.

energy costs

Solar costs have dropped at a Moore’s law-like rate. See Swanson’s law.
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