It is weird how there are times you are playing well on the golf course (or anywhere else for that matter) and you have a swing thought that is working for you. You feel it, it feels good and you believe it is making your game better.
I know that is the case with my golf game. There are times when I have a swing thought and it just works. The funny thing is if I took a video of my swing when I have the swing thought and I look at a video of my swing any other time, it would in all likelihood be no different.
Thursday, May 14, 2015
Tuesday, May 12, 2015
Why Won't This Market Go Down?
The fundamental reason why this market may not go down (when for all intents and purposes it probably should) is because there are still plenty of investors still sitting on the sidelines just waiting for it to fall to get back in.
I hate the idea that the market level is in fact set by supply and demand rather than fundamentals. But you would argue that supply and demand are a part of fundamentals. Yes and no. Yes in the sense that the market is simply a market with prices set by supply and demand. But no in the sense that the market does not always reflect the fundamental economic reality of an asset.
When supply and demand are more a function of sentiment than economics, then perverse outcomes tend to happen.
I hate the idea that the market level is in fact set by supply and demand rather than fundamentals. But you would argue that supply and demand are a part of fundamentals. Yes and no. Yes in the sense that the market is simply a market with prices set by supply and demand. But no in the sense that the market does not always reflect the fundamental economic reality of an asset.
When supply and demand are more a function of sentiment than economics, then perverse outcomes tend to happen.
Inherently Distrustful Of Macro Commentary
I am inherently distrustful of macro commentary, especially if it tries to come up with some pseudo-conspiratorial explanation for what happened attributable to countries, actors, or politicians.
There is usually some truth to what they point to, but the attributing of such calculable intent when none was recognized previously is a stretch.
There is usually some truth to what they point to, but the attributing of such calculable intent when none was recognized previously is a stretch.
Friday, May 8, 2015
Incentive Structures - Moral Hazard and Behavior
The problem with most institutional incentive structures, ie. those promulgated by major corporations, is they overemphasize increasing revenues and maximizing profit to the detriment of customer experience/service. The reason is, they already have the customers, they are now just milking them with sales and marketing gimmicks and internal employee incentives to achieve their goal of profit maximization.
At some point they will go too far. But because these organizations are so large, the cost (in fines) or damage to reputation are not sufficient for customers to move away (they already have them locked in and switching costs are high).
The other thing about the incentive plans is they are invariably unbelievably complicated. That is because, as with most things bureaucratic, they are heaping performance measures on performance measures (when new ones come along, they usually don't scrap the old ones), which will also ultimately be self-defeating due to their complexity. A structural issue which can effect employee morale is when incentives and bonuses are based on unrealistic goals, then either behavior becomes severely distorted (really leverage and exploit the client) or employees lose motivation. Both circumstances are bad and should be watched out for.
Fines are other penalties are just considered a cost of doing business.
If there are so many things wrong with these plans/structures, why don't companies reform them or change?
One reason is that they are the most effective way to exact more money out of clients. Another reason is that senior management is served by these and this effect with bigger bonuses.
One of the real problems is employees become demotivated and begin seeing the absurdity of the company and its business.
At some point they will go too far. But because these organizations are so large, the cost (in fines) or damage to reputation are not sufficient for customers to move away (they already have them locked in and switching costs are high).
The other thing about the incentive plans is they are invariably unbelievably complicated. That is because, as with most things bureaucratic, they are heaping performance measures on performance measures (when new ones come along, they usually don't scrap the old ones), which will also ultimately be self-defeating due to their complexity. A structural issue which can effect employee morale is when incentives and bonuses are based on unrealistic goals, then either behavior becomes severely distorted (really leverage and exploit the client) or employees lose motivation. Both circumstances are bad and should be watched out for.
Fines are other penalties are just considered a cost of doing business.
If there are so many things wrong with these plans/structures, why don't companies reform them or change?
One reason is that they are the most effective way to exact more money out of clients. Another reason is that senior management is served by these and this effect with bigger bonuses.
One of the real problems is employees become demotivated and begin seeing the absurdity of the company and its business.
Thursday, May 7, 2015
Future Taxes
No one knows what future tax rates are going to be in the future. Everyone, however, knows the tax codes needs to be reformed.
It is no scholar who thinks that future tax rates are likely to be lower while deductions will be less.
How then should you plan for saving in your retirement accounts. Obviously it depends upon your current marginal tax rate vs your future marginal tax rate. One known, one unknown. The thing to remember is that current marginal tax rates are artificially low compared to what they will be in the future. Now while they may drop tax rate levels, with fewer deductions, I suspect future marginal tax rates will be on average higher than today. All of which pitches for the Roth over the tax deferred vehicle.
It is no scholar who thinks that future tax rates are likely to be lower while deductions will be less.
How then should you plan for saving in your retirement accounts. Obviously it depends upon your current marginal tax rate vs your future marginal tax rate. One known, one unknown. The thing to remember is that current marginal tax rates are artificially low compared to what they will be in the future. Now while they may drop tax rate levels, with fewer deductions, I suspect future marginal tax rates will be on average higher than today. All of which pitches for the Roth over the tax deferred vehicle.
Wednesday, May 6, 2015
Everyone Is Shy Of Calling A Top
Everyone is gun shy about calling a top in equities or bonds.
Too often in the recent past anyone who has called a top has been steam-rolled. As a result it is only ideologues and dogmatists who have been calling a top for years who are left to carry the flag.
I don't think we are in a bubble, but I do think the market is way overextended. The contrarian in me wants to take the under.
Too often in the recent past anyone who has called a top has been steam-rolled. As a result it is only ideologues and dogmatists who have been calling a top for years who are left to carry the flag.
I don't think we are in a bubble, but I do think the market is way overextended. The contrarian in me wants to take the under.
Monday, May 4, 2015
Saturday, May 2, 2015
Synthetic Deferred Annuity
Given that I have never dealt with annuities and given that I have never liked them (because investment texts degrade them because of their high cost and complexity), it has been really interesting for me to discover that academics love annuities. There seems like almost universal support for annuities as the solution to retirement income spending needs (at least deferred income annuities).
The initial investment for a lifetime deferred fixed annuity paying $1000/mo in 20 years is $26,894.
The PV of a deferred fixed annuity based on 20 years of monthly $1000 fixed payments is $57,108 (assuming 5% discount rate).
Looks like the annuity is a much better deal than trying to construct it yourself.
The initial investment for a lifetime deferred fixed annuity paying $1000/mo in 20 years is $26,894.
The PV of a deferred fixed annuity based on 20 years of monthly $1000 fixed payments is $57,108 (assuming 5% discount rate).
Looks like the annuity is a much better deal than trying to construct it yourself.
Return Myopia
Return myopia is the fixation on return to the neglect of risk.
A myopic focus on yield is a classic case of focusing on return and neglecting the risk side of the equation.
A myopic focus on yield is a classic case of focusing on return and neglecting the risk side of the equation.
Yield Chasing: There Is No Free Lunch
There is no free lunch.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
Friday, May 1, 2015
Variant Perception and Edge: Value vs Growth
There are only two possible options for variant perception for both value and growth investors.
Both investor types are forecasting either higher growth rates or higher margins or a combination of those two factors compared to the market consensus and what is baked into the stock price today.
It is as simple as that. One other possible variant perception relates to the realm of undervalued/hidden/latent assets which occurs more on the value side of the divide (although effectively that is the implied assumption also on the growth side).
So for a growth investor when they come across a growth company trading at 30x forward earnings, implying 30%pa 5 yr growth and 20% operating margins, to have a variant perception they are either forecasting growth greater than 30% and/or operating margins greater than 20%. Implicitly they are also forecasting the future multiple to be 30x or greater. Lots of moving parts in that equation and lots of hope (the future) embedded in todays price. As long term holders the odds are usually not in their favor. Although if they hit the jackpot and get a genuine emerging leader that turns into a market leader then all their misses are likely to be made up by that one single hit.
For a value investor, looking at a company trading at 10x forward earnings with consensus growth of 0%pa for 5 years and operating margins of 5%, the variant perception hurdle does not appear all that great. The risk in this space is a company going the way of the dinosaur.
Both investor types are forecasting either higher growth rates or higher margins or a combination of those two factors compared to the market consensus and what is baked into the stock price today.
It is as simple as that. One other possible variant perception relates to the realm of undervalued/hidden/latent assets which occurs more on the value side of the divide (although effectively that is the implied assumption also on the growth side).
So for a growth investor when they come across a growth company trading at 30x forward earnings, implying 30%pa 5 yr growth and 20% operating margins, to have a variant perception they are either forecasting growth greater than 30% and/or operating margins greater than 20%. Implicitly they are also forecasting the future multiple to be 30x or greater. Lots of moving parts in that equation and lots of hope (the future) embedded in todays price. As long term holders the odds are usually not in their favor. Although if they hit the jackpot and get a genuine emerging leader that turns into a market leader then all their misses are likely to be made up by that one single hit.
For a value investor, looking at a company trading at 10x forward earnings with consensus growth of 0%pa for 5 years and operating margins of 5%, the variant perception hurdle does not appear all that great. The risk in this space is a company going the way of the dinosaur.
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