Thursday, November 27, 2014

The Best Paragraph I Have Read All Week.

The Best Paragraph I Have Read All Week.

"Since other investors may be smart, well-informed and highly computerised, you must find an edge they don't have.  You must think of something they haven't thought of, see things they miss or bring insight they don't possess.  You have to react differently and behave differently.  In short, being right may be a necessary condition for investment success, but it won't be sufficient.  You must be more right than others ... which by definition means your thinking has to be different."

Howard Marks "The Most Important Thing: Illuminated."

Friday, November 21, 2014

Kamikaze Capitalism, Its Correlation to China, and US Self-Confidence.

1980’s Kamikaze Capitalism.

Speculative episodes and euphoria seem to occur during periods in the shift of the balance of economic power between nations. Two examples: the Tulip Mania appeared in Holland not long after the Dutch “economic miracle” and Amsterdam's rise to prominence as the centre of world trade.  And secondly, the New York stock market boom in the early twentieth century occurred as the USA overtook Britain as the worlds leading industrial powerhouse.

In the mid 1980's America was struggling with growing trade deficits, while Japan had trade surpluses.  The Reagan government also produced large budget deficits, "that were only sustained by the willingness of Japanese investors to sink their country's trade surplus into US Treasury Bonds" (Chancellor, Devil Take The Hindmost: A History Of Financial Speculation).

Not only was that trade surplus spent on US Treasuries, but also investors spent up on other assets luxury goods, fine art and property, often at above it's real value. “The rising value of (Japanese) land became the engine for creation of credit in the whole economy,” (Chancellor).

Non-bank, loosely regulated lending in Japan was occasionally offered at double the value of the property.  The price of a small apartment in Tokyo exceeded the lifetime earnings of an average graduate salaryman.  Multi-generational hundred year mortgages were undertaken to purchase property.  All this on the speculation of continued domestic property rises which at 1990 prices, equaled four times the real estate value of the entire US!

The Rockefeller Center was purchased by Japanese interests, as was the Exxon Building, Columbia Pictures and even Pebble Beach Golf Club.  A new anxiety that "Japan is buying up the United States" was written about in countless magazines and papers, and this deluge of Japanese capital revived some sense of WW2-type xenophobia in America.   These fears occurred simultaneously with a rise in Japanese self-confidence and nationalistic pride.

This Japanese capital expansion and financial speculation, in almost everything it seems, had not really had a precedent in Japan.  That economy and culture was strongly anti-individualist, community based, hierarchical, state controlled and supposedly more stable, according to Chancellor.

However, when speculation came to Japan in the 1980's, "it burrowed so deep in the Japanese system that when it departed, after a mere five years, the system was in ruins."  Many of the Japanese owned US properties were eventually repatriated to Americans at discounted prices, compared to their inflated sales prices. (Pebble Beach at a $300 Million Loss).

Ultimately, the social consequences of speculation became evident in Japan that were not intended by the government.  It was only then, that for reasons of social control rather than economic side effects, that a decision to prick the bubble was made, (Chancellor).

"History doesn't repeat itself, but it does rhyme." (Nucky Thompson, Boardwalk Empire, Season 5).

2000’s China and US Self-Confidence.

1. Surely we are, and have been witnessing an economic balance of power shift back the USA since the GFC troughs.
2. America has been struggling with a large deficit, while China has had trade surpluses.
3. Chinese surpluses have been sunk into US Treasury Bonds.
4. Chinese surpluses have been spent on US and world property, often at inflated prices.
5. The Waldorf Astoria building in New York has recently been purchased by Chinese Angban Insurance Group for the possibly inflated price of almost $2 Billion.  (

6. The “China is buying up all the property” fear, has been published repeatedly.
7. Chinese nationalistic pride and self-confidence has risen, and been shown on the world stage increasingly over this period, nowhere more so than South East Asia.
8. The Chinese economy and traditional culture is somewhat anti-individualistic, heirarchical, and state controlled.  Cronyism was rampant in both Japan and China.
9. The height of Japanese speculation occurred during the later half of its economic rise and then its market top, as has China’s - so far at least.

10.  Much of the speculation that has occurred, is on the back of rising property prices domestically, as evident in Hong Kong and China (plus the empty cities issue adding to this risk).
11. Much of the speculation has created ever-increasing disparities of wealth in China, as it did in Japan.  Social side effects have been occurring in China and Hong Kong in the form of protests and a greater awareness of the public of the ultra-rich disparity.

I would argue that Occupy Central in Hong Kong is not just about the universal suffrage and right to vote, but that it also encapsulates issues such as Mainland control and perceived unfairness in the city, and issues about housing prices and wealth.

History would argue that we should see speculation right to the pivot point, and then a decline in China’s economy, and that of the export countries it supports.

The probable current economic balance of power shift, should lead to a beginning of speculation in the USD on top of its recent new gains.  Ultimately a repatriation of many of the American-located sold properties back to their own citizens at discounted prices seems reasonable to expect.  Conversely, Australia and NZ as more reliant on China’s economic health, may not see that happen, as many Australians or Kiwi’s wouldn’t be in a position, or have the confidence to buy at that time.

And finally, a return of US self-confidence would only serve to bring more people back into the market.  All we need to see is that Templeton Optimism to start it off.  The many effects of a strengthening USD and consequently lower commodity/energy prices could be that catalyst.  People would be more optimistic as their purchasing power rises.

This view is essentially nothing new to anyone studying economic history, but I found reading about the historical parallels REALLY interesting today, sitting in the sun at HK Islands Delaney’s Bar, watching massive container ships full of cheap junk, sailing east into the Pacific Ocean.

Monday, November 17, 2014

Trading Stocks and Comedy.

John Cleese released his memoirs recently, and reflected on how the broader loss of general knowledge in society has limited a wider variety of jokes from working.

People once knew where places, and whom historical people were, to make relevant jokes for instance that might fail these days.  He even went on to say that Monty Python Fans were very smart fans, and he has pride in his fan base for that.  Could "Life of Bryan" have worked without a historical context known to viewers?

Part of the problem is "lack of curiosity about important information that does not directly apply to their lives," he said.

"What people don't get about wealth is that it's very boring." (At least in accumulating it, and what you need to do to make it).  He also feels, “people that are obsessed with themselves will not have the energy to deal with other things or people in the world that are important.”

The Gen Y's are currently very uninvested in the market, having come of age though the GFC, and are very distrustful of investing, wealthy investors and banks.

However, they will eventually come to the market to trade and invest, but how will they do it?

Surely social sentiment through Apps, and social networking will play a greater role than in the past, I would think.  Stocktwits, Twitter, FB or something new will be playing a greater role in investment choices.

But will that mean, that they are simply the biggest Trend Followers of all time? Will trading on hyper social sentiment, with no historical context, be the norm?  Will they have the patience to hold long term investments at all, that are mundane and not receiving any social focus?

Or perhaps, have younger, new investors never been any different?

"An Irishman, an American and John Cleese carrying a dead parrot, walk into a Bar...."

The problem is, the two mid-twenty year old guys I worked with today, didn't know who John Cleese was when I asked them, or showed them his picture in the paper.......

Joke Wasted!!!  Opportunity Lost.  Carry On.

Thursday, November 13, 2014

The First Ever Contrarian View of Markets?

“Is it possible that a young Man at present could pass his Time better, than in reading the History of Stocks, and knowing by what secret Springs they have sudden Ascents and Falls in the same Day?

Could he be better conducted on his Way to Wealth, which is the great Article of Life, than in a Treatise dated from Change-Alley by an able proficient there?

(SIR RICHARD STEELE, ~1695)  {My caps}

I think Graham and Buffet would agree with the capped statement. 

Steele was a proponent of the “Castles in the Air” theory – that stocks have no intrinsic value and are simply the product of investor psychology.

Steele also talked about the link to the height and extravagance of ladies’ headdresses, which peaked the year the 1695 London stock market collapsed, just as hemlines rose during the 1920’s stock market boom.

Basically, fashionable style, like a speculative movement, is subject to a popular consensus and follows a trend until it reached a point of extravagance, from which it can only retreat, (Chancellor, Devil Take the Hindmost).

I thought it interesting that some people were thinking about investor psychology, long before Psychology itself existed as a science, and that social and cultural behavior was influenced by stock market exuberance or decline – and vice versa!  Ladies Hemlines fell after the 1929 Crash too!

Monday, November 10, 2014

Anti Fragility, Robustness and Risk.

A great video of a conversation between Nassim Taleb & Daniel Kahneman discussing the concept of Anti-fragility. Interesting to see how two deep thinkers discuss the philosophical challenge of anti-fragility.

Taleb argues that Greenspan, in trying to smooth out the economy to create no more boom or busts, actually caused a big bust.

Likewise it seems obvious that the Fed in smoothing out the GFC downside with QE, have created the current stock market boom cycle and likely future inflationary boom.

Controlling stressors (smoothing), leads only to the increased Magnitude of events later, and blowouts in volatility.  This creates Fragility in the system, not robustness or anti-fragility.  In other words the system does not learn - the risks have not changed (only the direction).

Anti-Fragility he demonstrates in the Airline analogy, is that everytime there was a crash (certainly a volatile event), the airline industry and aircraft makers, made changes to their products to decrease the chance of another same-cause highly volatile event.  Airlines became safer through these changes and volatile events occurred less, and then usually for different reasons.  "You never let the mistake go to waste."

The finance industry eliminated small risks at the expense of large risks, the airline industry mostly eliminated large risks, though small risks do remain.  We can handle the small risks, and therefore survive the big risks - most likely.  More so, taking the small risks, benefits and advances our lives - travel, opportunity, wealth and the like, whilst less exposure to the big risks negates the downside.

I think that is Anti-Fragility.  (I need to read this book when I can get through the ten others I have bought).

There is a lot more in this video to get my head around.

Wednesday, November 5, 2014

The Power of Narrative. (I have ways of making you THINK!)

The Power of Narrative.  (I have ways of making you THINK!)

Simon Singh, a British Author has a neat trick.

He plays a snippet of “Stairway to Heaven” by Led Zeppelin, and then plays it BACKWARDS.

Time and again to new audiences, it sounded like Random sounds to most of the people in the audience.

The second time he plays it backwards, he provides lyrics on the screen, like Karaoke lines.

As people follow along “the audience unmistakably hears the words, where before they heard nothing.” (The Success Equation, Mauboussin, p33).

It demonstrates how our mind has a great ability, and NEED to explain the world around us.  It does this through creating stories of  unlinked events, patterns in the clouds out of random air movements, and impressionist paintings of dots into a complete image.  It is such a strong occurrence its often difficult to ignore!

Taken further, “our love of stories, and need to connect cause and effect,”  “leads us to believe the past was inevitable and to underestimate what else might have happened.”  (The Success Equation, Mauboussin, p34).  This leads to biases and inevitable errors in judgment.

We are provided with unending narratives daily via the media.  It’s quite hard to see through that, when an opinion has been provided and seemingly backed up with some facts, to find our own opinion independently afterwards.  More so to refute that opinion completely.

I found a video on YouTube that demonstrates this effect.  I don’t want to pre-empt the lyrics, but its an entertaining 6 minutes!  After seeing the lyrics presented, close your eyes and TRY NOT TO hear the words that have been planted.

Sunday, November 2, 2014

To IPO, or not to IPO: that is the question:

To IPO, or not to IPO: that is the question:

To be, or not to be: that is the question:
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them?  (Shakespeare, 1602).

Hamlet was talking about the pain of life verses the uncertainty of death and damnation of suicide, and not Trading IPO’s, however I think the metaphor works somewhat.

I have only ever subscribed to an IPO once, and probably won’t do so again.  Risk/Return does not seem right. 

My recent reading highlighted the IPO’s of the Railway boom in 1845:

“If the subscription was successful, the committeemen retained a large allocation of stock for themselves and their friends and released only a few shares in the market, thus creating a scarcity which threatened to snare speculators who had sold shares short in anticipation of buying them back at a lower price.  The new railway company was then hyped by friends in the railway press and its stock bid up by agents in the stock market.  Once the shares were trading at a premium, the promoters would offload their retained shares at a vast profit.  Some companies even employed special “share committees” to oversee the success of those operations.”  (Chancellor, Devil Take the Hindmost, p130).

It all sounds quite familiar to TWTR and FB, and Alibaba.  Of course the banks these days are the “committeemen,” and their “friends” the Venture Capitalists perhaps.

I see some value in companies that have IPO’d and corrected into a nice long base perhaps in the months after IPO.  But they need some time for price and volume to become valid post IPO.  Before that, its ALL sentiment, usually too high a sentiment for investing in anything other than day trades.

There can be nothing worse than buying something when you only do so because everyone else already wants it, and it has been marketed to create that.