I read Zero Hedge everyday. I find the writing witty, pithy and insightful. They are my news source of choice when I want comment and insight to either breaking news or other issues that warrant understanding.
It boggles my mind that they have been so unrelentingly wrong (at least from a helping people make money perspective). It just proves the adage that perma-bear arguments always sound more insightful and compelling than the conflict ridden cheerleading of Wall St.
Zero Hedge is going to be right one of these days. That is just how it works. As they say, even a broken clock is right twice a day. They will likely do numerous victory laps and tout their superiority from the rooftops. When they do, they will exhibit the same lack of integrity as the Wall St shrills they take shots at everyday.
Caveat emptor!
Friday, March 6, 2015
Wednesday, March 4, 2015
What Is Market Efficiency?
No one knows what intrinsic value really is. That is what makes a
market. Myriad investors with different amounts of money, different levels of
sophistication and different motives place their bets and the current market price
is where that supply and demand meet.
I believe there is such a thing as intrinsic value. However, intrinsic value is in the eye of the beholder (different investors use different discount rates, different growth and profitability assumptions, different multiples) and is better looked at as something within a band or range of values (as compared to a singular point estimate). At a micro level that band is narrower for individual companies than it is for the market as a whole. As you add companies to the investment universe, the number of factors, level of uncertainty and multitude of different individual value ranges expands the general market's intrinsic value range.
So, for example, a company's intrinsic value may range between $18-$22 given all currently available information. This might translate to a multiple of 14x-16x based on an historic average multiple of 15x. This does not mean a company's stock will be priced within its intrinsic value range. Conversely, the general market's intrinsic value may range between $16-$24 based on cumulative individual valuations with a multiple ranging from 12x-18x based on a historic average multiple of 15x.
When the market price (and a company's price) is within its intrinsic value range you should go with the trend (momentum). When the market price goes outside its intrinsic value range that is when you should adopt a contrarian or mean reversion position.
80% of the time, the market trades within its intrinsic value range. But there are times when "animal spirits" (whether fear or greed) commandeer the zeitgeist and lead to exploitable inefficiencies (playing defense when things are overcooked and offense when things are falling apart).
I believe there is such a thing as intrinsic value. However, intrinsic value is in the eye of the beholder (different investors use different discount rates, different growth and profitability assumptions, different multiples) and is better looked at as something within a band or range of values (as compared to a singular point estimate). At a micro level that band is narrower for individual companies than it is for the market as a whole. As you add companies to the investment universe, the number of factors, level of uncertainty and multitude of different individual value ranges expands the general market's intrinsic value range.
So, for example, a company's intrinsic value may range between $18-$22 given all currently available information. This might translate to a multiple of 14x-16x based on an historic average multiple of 15x. This does not mean a company's stock will be priced within its intrinsic value range. Conversely, the general market's intrinsic value may range between $16-$24 based on cumulative individual valuations with a multiple ranging from 12x-18x based on a historic average multiple of 15x.
When the market price (and a company's price) is within its intrinsic value range you should go with the trend (momentum). When the market price goes outside its intrinsic value range that is when you should adopt a contrarian or mean reversion position.
80% of the time, the market trades within its intrinsic value range. But there are times when "animal spirits" (whether fear or greed) commandeer the zeitgeist and lead to exploitable inefficiencies (playing defense when things are overcooked and offense when things are falling apart).
Tuesday, March 3, 2015
Helter Skelter
It amazes me the extent to which I am harassed and harried when going into queues or getting into lines with lots of people around.
Basically I'm neurotic and have little appreciation for how good I actually have it in the modern world.
Just saying.
Basically I'm neurotic and have little appreciation for how good I actually have it in the modern world.
Just saying.
Smart Investing Is Smart Business
It amazes me that people who have been phenomenally successful in creating and building valuable businesses - people we call "good businessman" - are often bad investors. And not just bad investors in the sense that they make lousy investment decisions (they do that also, but that is a post for another day). But bad investors in the sense of not knowing the price they pay for financial services and not knowing the pros & cons of the strategy(ies) they have hooked their 'barrow to. Quite simply, when it comes to managing their financial wealth, they leave their business brains at the door. When in their business would they not carry out the requisite due diligence to not pay more for something than they need and when in their business would they not want to understand the rules of the game. For whatever reason (usually social norm because they are friends and run in the same circles) they trust their advisor is doing the best thing for them. That is a false assumption that has cost a lot of people a lot of money over the years.
A little bit of education and a little bit of knowledge can go a long way to minimizing those kinds of mistakes.
A little bit of education and a little bit of knowledge can go a long way to minimizing those kinds of mistakes.
Secular Cycle vs Cyclical Forces
The secular cycle portends the positivism of growth, expansion and rising productivity. It also increasingly includes certain headwinds from changing demographics over the next 50 years.
Cyclical stimulus (monetary and fiscal) has managed to delay, defer and extend the full impact of the prior cycle's contraction. The question is whether such actions have got us over the hump or whether there will be a price to be paid? and if so, what the price will be?
The price is likely to be a rebalancing of labor/capital wealth distribution (probably through taxes) and lower growth. To some extent we have already seen some of those factors playing out: higher taxes and lower relative growth.
Cyclical stimulus (monetary and fiscal) has managed to delay, defer and extend the full impact of the prior cycle's contraction. The question is whether such actions have got us over the hump or whether there will be a price to be paid? and if so, what the price will be?
The price is likely to be a rebalancing of labor/capital wealth distribution (probably through taxes) and lower growth. To some extent we have already seen some of those factors playing out: higher taxes and lower relative growth.
Monday, March 2, 2015
Why Are Interest Rates So Low?
Quite frankly, I don't really know and I can't make heads or tails of it. The current environment is a classic case of my habit of missing regime/paradigm shifts. The scales usually drop way after the trend or the event has manifested itself.
There are numerous reasons posited:
I just can't understand why any investor would settle for a negative interest rate. This makes no sense to me at all. US rates look as attractive as ever relative to European rates. European rates are crazy. What are they telling us? Imminent collapse in the Euro? Maybe!
It should be noted, that you can't talk about why interest rates are so low in the US without taking account as to why they are so low (or even much lower) elsewhere.
There are numerous reasons posited:
- Savings glut (this one is a mystery to me when you look at savings rates relative to history and trends...the argument is the savings glut comes from China/Russia/Brazil).
- Supply deficit (can't quite work this argument out; I think it relates to QE and lack of collateral).
- QE (combination of reduced supply and scramble for collateral).
- Financial repression (combination of debt overhang and distorted price signals from QE).
- Low inflation (yes inflation is low and has been trending down...let's call it declining inflation, but it is still positive and real rates are low).
- Fears of deflation (I don't see deflation...commodities have taken it on the chin in the last year, but asset prices have gone through the roof and commodity prices are cyclical).
- Fears of market collapse/capital protection (maybe...but those Wally's have all missed the boat).
- Currency wars (fight to the bottom).
I just can't understand why any investor would settle for a negative interest rate. This makes no sense to me at all. US rates look as attractive as ever relative to European rates. European rates are crazy. What are they telling us? Imminent collapse in the Euro? Maybe!
It should be noted, that you can't talk about why interest rates are so low in the US without taking account as to why they are so low (or even much lower) elsewhere.
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