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20 juni 2016

Brexit - the good, the bad, the ugly

Summary: a Brexit might finally trigger a re-set of global financial markets. Unfortunately massive stimulus will follow that will make everything even worse than today. And a lot of innocent people will lose their livelihood.

deflation inflation sprezza


The good thing with a Brexit is that it might catalyze a long overdue re-set, just like the Lehman Brothers bankruptcy (almost) did.

The avalanche is ready and more or less inevitable. We're just waiting for the right snowflake to set it off. And, the longer it takes the worse it's gonna get.

Lehman had the chance to do it with not too much damage, if the Fed just had backed off after its initial efforts, and let more banks and insurance companies fail. Then we wouldn't have piled debt upon debt, encouraged massive moral hazard and caused enormous malinvestments due to artificially low interest rates.

A Brexit might set off the avalanche. At least a man can hope for that. If it doesn't, it will happen later -which is worse (except for the authorities, that get one more day in the light, one more day to hoard assets). Just as with earthquakes and avalanches the instability is already there, the damage will happen, and the longer the build-up the worse the cataclysm will be.

What's bad with a Brexit is that the deranged (or possibly plain ignorant) twits in charge probably without a doubt would try their hands at the most ridiculous stimulus efforts ever witnessed by humankind. And that's even before the commencement of a true re-set in the wake of a Brexit. Then, I'm sure Yellen and Draghi would make Kuroda's attempts, at monetizing the entire Japanese government debt as well as its stock market, look timid.


The ugly? A lot of innocent and poorly prepared people will lose their jobs. It's just that even more people will be hurt the longer it takes before the re-set is allowed to happen.

The probable? The UK will remain in the EU and the slow and steady march toward doom can resume, with Draghi laughing madly all the way to the bank.

Wait, he's already there...


Taggar (blogg): 
12 mars 2016

Selling oil, waiting for abundance

Executive Summary

A quick (and simplified) overview of the oil price development, including Iran ramping its production, Saudi-Arabia refusing to cut production, overflowing storage and the risk of rogue contango.

What I'm doing about it, i.e., my personal investments - tactical and strategical.

And some ducks... (and doomsday scenarios). And DIKs

walks talks looks like a duck

Readability: Including the summary, and this, it's a fairly quick and easy read at 2011 words (10 minutes) and an F-K US school grade score of 10.


The table below shows my (simplified) view of the oil situation. I assume you are a grown up that understands it's not the complete picture. I also assume you understand I'm not recommending anything. It's all just entertainment. Disclaimer here.


To the left are variables supporting higher oil prices

To the right are variables that could cause significantly lower prices again; possibly new lows

Broken oil producer budgets Iran ramping production
Storage situation exaggerated Saudi-Arabia wants shale out
Price momentum Marginal storage left for futures arbitrage
Potential production cut Recession is coming, lower demand*
Capex cuts Dead cat short squeeze bounce ending
Strategic bombing = prod cuts (renewables - long term)
I'm selling oil :)  

*incl China

It's all Bernanke's fault, just as everything else

The story so far: low interest rates and QE drove higher oil prices as well as heavy (mal-)investments* in shale production. (*investments that only made sense in ZIRP La-La land).

Once enough new capacity was in place (it took a few years to complete the malinvestment projects), sub-par economic growth (and thus lower demand) contributed to storage all but overflowing and consequently a sharp drop in oil price.


They key is OPEC and shale budgets

Saudi-Arabia, Kuwait and UAE have exacerbated the situation by increasing production in an attempt to fix their broken budgets (they need to sell more at lower prices) while crushing the shale industry at the same time.


Oil prices have jumped on hopes alone

Very recently, the oil price has bounced by more than 40%, due to short covering and speculation amid hopes of an OPEC production cut. Several countries, including Russia and Nigeria happily fuel such speculation (to mitigate their budget deficits).


Productions cuts are highly unlikely

In the real world, however, Iran is looking to ramp its production back to "normal". Before that is accomplished, there is very little chance of any production cuts anywhere. This will take some time.

My guess is that oil speculators will be sorely disappointed when production cuts meetings are postponed or cancelled, while storage inches closer and closer to full capacity.


The storage crisis haven't even begun

Nota Bene that storage isn't full yet; that the storage crisis haven't even begun. Also note that Iran is just starting to ramp, they aren't actually producing more yet... It will probably take several more months to reach absolute full capacity in storage facilities, and several quarters or more for Iran to reach normal production levels.


Without arbitrage, exploding contango could obliterate ETFs

When there is no more room for front end/next month futures contract arbitrage, through temporary storage (when back yard containers of barrels are full, as well as tankers and ordinary storage), there could and should be a devastating price plunge in the front end contract. The resulting massive contango (Next month's price less this month's price; which could be repeated month after month) will erode any investment based on rolling oil futures forward, e.g., through an ETF like USO or Olja S.


Just knowing about it doesn't fix it - that takes time

This situation could go on for several quarters, maybe a year... or more, while Iran is increasing its production and OPEC is falling short of promises of production cuts again and again, perhaps most notably at the supposed meeting on March 20.


I'm selling

Due to the reasons stated above, I have sold my Brent ETF (Olja S) as well as the oil junior ShaMaran (which is still waiting for its "first oil" and has some cash flow problems, but trades at what might turn out to be just 1x P/E a few years hence).

I've also sold some but not all of my DNO shares. DNO could be a strong Buy for the coming 3 years, but there is a definite risk of a deep downturn before that, even if the company doesn't have the same financial problems as ShaMaran.

DNO is probably a much better bet already at current prices than any oil futures ETF or derivative.


Don't short what should eventually double

I won't go short though. And I'm actually not that confident in cancelling my longs either. The reason is that a sustainable oil price probably is somewhere between 60-100 USD per barrel for the coming few years (rather than the current $40), once the current storage crisis is sorted out. In between however, the front end contract could easily fall back to 30 and even below 20 USD/barrel. 

In any case, I'm expecting a quite prolonged storage crisis, up until Iran is content, shale is dead, and Saudi-Arabia, Kuwait and UAE can agree on the necessary cuts. I plan to buy more DNO, ShaMaran and USO long before that of course, but only when Iran has ramped significantly or we've hit new lows for oil, oil companies and the stock market in general. This might happen already this April,or as late as April 2017.

We'll see. I'm not sticking around for the downturn, except maybe with a marginal position in DNO.



If it walks like a duck, talks like a duck and looks like a duck, it probably is a duck. 

Oil prices pass the duck test of a recovery: unsustainably low prices, rising, breaking key levels, talks of production cuts...

On the other hand, so do storage problems (which pointy in the opposite direction): almost full, meaning the real problems haven't even started, Iran not backing off, neither is Russia or Saudi-Arabia. Shale still lingers as the walking dead.

Another walking, talking, living, sitting duck is the economy. Most pundits talk of low risk of recession. However, a select few, very mart people, point to a combination of factors: duck tail, duck beak, duck feet, duck feathers, duck calling sound etc., all clearly pointing toward there being a recession duck swimming around in plain sight.

I'm squarely in the "dead cat bounce" camp regarding the oil price and stock market, and in the "given these variables, including the stock market there is almost invariably a recession" group of people.

One caveat though: In 2009-2012 I used to say "this won't be too bad if we normalized rates to 4% and some other things". Now I'm leaning more and more toward "we are beyond thinking about investments, and more about defending civilized life as we know it". I'm sure many more make the same assessment, including policy makers.


There is no turning back from full retard central bank policies

That means the powers that be truly will do "whatever it takes" (as Draghi's Full Retard Threat went back in 2012) for as long as they can, thus making the final crash even worse.

As time passes and policy makers venture further and further into retarded measures, I'm becoming less and less certain of my forecast of a "pretty bad but not catastrophical outcome quite soon". Instead I see increasing risk of a blowout on the upside followed by something on the downside we haven't seen since the 1920's crisis in Germany and the Great Depression in the U.S. in the 1930's. 

The best long term outcome would be a normalization of stock markets, interest rates and debt burdens as soon as possible. There actually are some promising signs in that direction. But then again, there is Draghi (ECB), Ingves (Sweden) and Kuroda (Japan) trying to get into the history books with a particularly toxic variation to the Rio Spread Theme*. Maybe war is the only "solution" after all.

*The Rio Spread means taking a huge bet in the market and going to Rio for unlimited celebration. If it works out, it works out. If not, you stay there. The DIKs (to which Mark Carney of the BOE is very close to being added) will either miraculously save the economy, or (much more likely) ruin it completely. Either way, they will get their place in the history books.

I think the ECB reaction was quite expected (except the rebound afterward). The Fed is more important though. My guess is we'll get the exact same reaction after the FOMC meeting (except the rebound) as after ECB, i.e., reflexive buying followed by heavy selling.


How an economy grows

Saving enables investments which lead to better tools and infrastructure and thus increased productivity and falling production costs and selling prices.

Falling prices typically lead to increased consumption, but if it doesn't, it means more room for even higher savings and investments and higher growth. 

Somehow many economists have misunderstood this completely and think that lower prices (like spring sale, summer sale, Christmas sale etc.) mean less consumption. And even if it does, what's bad with that? Nothing! people will buy what they want and need, no matter the direction of prices. And if they were to limit their purchases somewhat that only means more saving and room for investments and even higher growth.

So, saving=>investment=>low prices and high growth=>both increased consumption and investment and thus even higher growth in a virtuous cycle.

Most economists want higher prices, which lead to less room for consumption and investments and thus both lower supply and demand => lower growth, less wealth, even less room for saving and investment, and so on and on in a death spiral.


Invest responsibly. Remember that investing is 80% psychology. The other half is patience.

Summary - selling oil, waiting for abundance

In short, I'm selling oil due to the storage situation, that will only get worse until Iran has reached full production and OPEC cuts can be seriously considered.

I don't dare shorting though. Quite the opposite; I'll look for (oil company) stock bargains in the expected carnage (blood in the streets).

I've gradually had to "refine" my general outlook from "bad" to "binary". I'm staying short the stock market but even that feels less and less palatable these days. Gold and silver are the only things that feel OK. I'm even leaning closer to getting some physical gold to complement my paper gold. So far, however, I haven't, and I just don't want to be that pessimistic.

I mean, the 2020's promise to be the best era ever (so far) for humanity, with widespread abundance provided by AI (did you see AlphaGo's victory?), nanotech, biotech, robotics etc. Billions of people coming online, sharing knowledge and using ever accelerating technological tools to create more and better solutions to everything than at any time in human history. And then we haven't even mentioned the 2030's!!

We just have to pass this little "bump" provided courtesy of Draghi, Ingves, Carney, Kuroda etc. (including Yellen of course, but she's no DI...)

What goes bump in the night?


Ingves negative interest rates are FUN



Janet Yellen


I want to put my wisdom in you

I may have gone overboard with that Will Ferrell-inspired book cover I tweeted the other day (the Tweet, viewer discretion is advised).

The message is the same though. I'm not blogging, podcasting and writing for financial gain, I just want more people to become aware:

Aware of themselves, aware of the world, aware of their career possibilities, of their investment opportunities, of the fantastically bright future that awaits.

So, please share this article, bookmark this site, subscribe to my newsletter and download and read my first e-book about the investment guidelines I picked up during a decade and a half as partner, managing director and portfolio manager at Futuris - The European Hedge Fund Of The Decade.

If you have already downloaded the book but never opened it, try just the first page summarizing my ten most important investment rules. Please.

Taggar (blogg): 
25 februari 2016

How to ace a hedge fund job interview

How to get through a hedge fund interview with flying colors

Reading time: 8-10 minutes (2120 words, including this)

Difficulty: super easy at F-K 70 and US school grade 7.5

Warning, this post is a bit unusual. It's a run-through of a job interview case I used at my hedge fund Futuris.

It takes about five to ten minutes to read, and will teach you a lot about what I was looking for when hiring analysts (PMs to be), and what you probably should keep in mind during an interview.

Executive summary

Don't crack under pressure was probably the most important part of the test - the ability to pick oneself up and continue, to try new ways and ideas, after failing one route. Functioning under pressure, keeping communication up, and being able to make decisions, ask questions and try, despite having made a few mistakes.


...and keeping neat notes, following a logical order, formulating a plan, communicating, demonstrating an ability to do quick sanity checks on the fly, to combine a bird's eye view with at least a quantum of sense for details and plausibility in the micro perspective.


How long is a string?

("piece of string" - I know, but I want it to sound a little retarded)

Well, a quantum string is around 10-35 meters long, so they're pretty well defined in terms of length, if that's what you're asking.



Unfortunately, you never know what kind of string the question is about, so the answer is usually completely arbitrary. What it means is simply "there is no (known) answer to your question".

I love using it as my turn-around to a lot of questions I get about valuation, timing, subjective judgement calls etc. 

-It works for most truly important questions regarding life, the universe and everything:

  • How far will the stock market bounce go? What multiple is warranted for this and that biometrics company?
  • Is micro or macro most important for valuing this stock?
  • Is it different this time or not?

The answer is typically "both" or some variation of that.


On required skills (measuring strings) for getting a job at a hedge fund

When I hired people at my* hedge fund, I wanted to know the person could manage switching perspectives back and forth, while being organized and keeping calm enough to keep track of the task at hand. Not least I wanted to see how they handled pressure and (rectifying) mistakes.

I asked them one simple question:

"Do all the physical legal currency (bills and coins) in Sweden fit in the Stockholm Globe arena?"

The question is similar to asking if all the physical money in New York would fit in the Madison Square Garden arena.

globen case

The math is quite easy, and the assumptions needed are hardly rocket science either. Without pressure, a person of average intelligence and math skills should manage to do it within 5-1o minutes using just a pen and paper.

  • First you need to calculate the size of the arena.
  • Then the amount of physical currency.
  • Third, how many bills and coins that amount is, and how much space that many bills and coins would occupy
  • Fourth and final, you have to remember to compare the volumes of one and four, and answer if the bills and coins fit.

You get a pen and a stack of papers and about an hour, during which you're allowed to ask questions, and supposed to explain what you're doing and thinking.

The Globe arena

(*my = I was one of three partners, as well portfolio manager and the managing director)


Size of the arena

Is it 10 meters, 100 meters or 1000 meters? If you don't know, just try to imagine a hockey rink or a soccer field.

Let's go with 100 meters. It's obviously larger than 10 meters across, and less than 1000 meters...

The globe arena building is (almost) spherical, but never mind that. Think of it as a cube instead. The volume thus can be estimated at around 100 x 100 x 100=1 million cubic meters.


A few guys tried using the formula for a sphere but got it wrong. Once they got the correct formula from me they couldn't handle the (very simple) calculations due to stress and inability to use rounding. Worst of all, they didn't verify the answer against the volume of a cube of the same size. Those mistakes are not what you want to see an analyst or portfolio manager make.

You can always go back and refine if needed. FYI: the real answer is 0.6m cubic meters. Close enough. At least it's not just 1 000 cubic meters or as much as 1 billion cubic meters...



Triangulate the amount of currency in SEK:

  1. a certain percentage (2%? 1%? 10%?) of GDP (4 000bn SEK) is physical money
  2. assume how much cash all physical people (1000 SEK each?), stores (twice as much as the people? Four times?) and banks (as much as the stores?) are holding
  3. make alternative calculations based on total national wages or something similar, followed by circulation and accumulation in stores before being shipped to banks daily or weekly.
  4. make an assumption of the proportion of bills vs. coins... how much do you typically carry of each?

Answer: There is 68bn SEK in bills (8bn USD) and 5bn SEK in coins in Sweden.

When I first did this, 10 years ago, there were 100bn SEK in bills and 5bn in coins. Let's go with the current number 68+5bn SEK.

By this time, many had already forgotten why they were trying to calculate the amount of money in Sweden, or estimating GDP etc.

Some were so confused they started comparing GDP in SEK to the cubic meter volume of the globe arena.

What?! Comparing GDP to a volume?! What were they thinking? What if an investment decision was made using a similar approach? 

They had to be nudged into calculating the physical amount of money needed to drive GDP, people's wallets, cash registers etc., i.e. how many coins and bills there were and their physical volume requirements.


How many bills and coins?

Well, assume an average value per bill or guess the amounts per each type of bill. The answer is the average value per bill is 200 SEK and consequently there are around 68bn/200 => 340 million bills (317m actually). Let's go with 300 million typical bills.

Do the same for coins. The average coin is worth 2-3 SEK and there are thus 5bn/2.50 => 2bn coins.

100 SEK

How much space does a bill or a coin occupy

So, how much space do these slippery little buggers occupy?

Could the amount of money in New York occupy Wall Street? Madison Square Garden?

How big is a bill?

How long is a piece of string, some applicants seemed to think and just froze. And, yet, they had a stack of papers in front of them - just like a stack of bills...

applicants freezing up

Anyway, a typical Swedish bill is around 70 mm x 140 mm x 0.1 mm.

At least it's not 200 x 100 mm.

Nor is it 1 mm thick (I seem to remember somebody going for 2 mm (1/10 inch) thick for a while. That guy did not know the length of a piece of string).

Sure, you're free to think out loud, but you should always do a quick "in and out" (of micro and macro perspective, to make a sanity check: What would a stack of 2 mm thick bills look like. Just ten of them would be an inch thick! Is that plausible? What if you folded it 5 times, making the equivalent of a stack of 32 bills?)

Bill x32

Anyway, a reasonable assumption, given the time and task was to say a bill had the dimensions 100 x 100 x 0.1 = 1000 mm3, or 1 cm3. However, any assumption within half or twice those dimensions in all directions would have been more than OK.

Some stopped right there.

Some just forgot about the coins (sloppy notes) and went on to do all kinds of crazy things.

Some tried comparing the volume of one single bill to the arena. Some compared the volume of a bill to the volume of a coin. Some tried stacking the bills on top of each other in one single stack 30 km high (300 kilometers in one case) and draw conclusions from that.

OK, a few just took the volume of the notes and compared it to the arena. Pretty good, albeit a bit sloppy. They were asked to repeat the original question (in order to remember the coins), which they should have written down neatly on top of the first page. I repeatedly throughout the case urged the applicants to keep neat and clear notes. None of them did.


OK, back to the coins:

A typical coin is about half that size (20mm diameter and 2mm thick), but assuming it occupies the same space as a bill is perfectly ok.

Those lucky enough to get this far, often went right ahead and made a stack of coins 4bn mms high = 4 000 kilometers, and then went through all sorts of trouble trying to fit it inside the arena in various ways (rarely succeeding)

Total volume then comes to: 300 million bills x 1000 mm3 each + 2 billion coins x 1000 mm3 each = 2.3tn mm3. Scaling it to cubic meters means dividing by 1bn (1000 x 1000 x 1000), or 2300 cubic meters.


Comparing volumes

Here and now, you should have a couple of neat notes saying

  1. "Arena volume=1 000 000 cubic meters" and
  2. "Money volume=2 300 cubic meters"

Some did (very few - actually not a single one of all applicants had such neat notes. However, four of them were at least able to eventually find the numbers, with some barely legible notes attached).

Most had to go back and redo a lot of their calculations, while trying to keep their notes in better order (often stressing and failing again, this time freezing up on simple calculations like 2+3 or 4/2)

And, yet, even those with the two appropriate numbers at the ready still found it somewhat difficult to answer if the money would fit. Mostly because they weren't entirely sure which number was the volume of the arena and which was the money volume, due to... sloppy notes... and inability to make a simple quick verification of the easiest volume to calculate (1003=1m).

Four finally did answer, trembling and sweaty (they claim to still get shivers down their spines, just hearing about the "Globen Case"), that yes, the money fits.



Then I asked them to draw the arena and the money in it (remember it would only would occupy some 0.2-0.4% of the volume), and invariably got way, way, way too big piles on the drawings. By then, however, we couldn't exclude more people or we would never be able to hire anybody.

I'm sure you are feeling smug by now, thinking the above case was super easy. 

Actually, you're right. It is. The case in itself is easy.

It's just that when sitting down at a job interview for a hedge fund, with me in your face, and not really knowing how long you have and not wanting to look stupid, can give anybody stage fright and freeze up.

And that was probably the most important part of the test - the ability to pick oneself up and continue, to try new ways and ideas, after failing one route. Functioning under pressure, keeping communication up, and being able to make decisions, ask questions and try, despite having made a few mistakes.


...and keeping neat notes, following a logical order, formulating a plan, communicating, demonstrating an ability to do quick sanity checks on the fly, to combine a bird's eye view with at least a quantum of sense for details and plausibility in the micro perspective.

Actually, the real lesson here probably is that hedge fund managers can be quirky.


Bonus: How to write a CV

If you want to help a friend prepare for a job interview, share this article with him or her. Even if it's not for a job in finance, they might find it useful anyway. If, nothing else, you could always talk them into subscribing to my newsletter and reading my book about investing.

Read more about applying for a job in finance here (how to write a CV), and why you shouldn't here (please don't waste your life in finance), and what you should do instead (robotics).

Taggar (blogg): 
25 januari 2016

Creating an explicit framework for managing your money

You know nothing* Jon Snow

I have friends and acquaintances opening new funds all the time, it seems. This post is an open letter to them. This is my advice to you, P/S, who are thinking about going live managing money right now.

To be perfectly clear though, everybody who recently started investing or is thinking about it should read this article carefully. Not only because of the negative start to the year for most, but because the bigger picture is so much...bigger than a January loss.

*about managing money

cv interview job finance application
Well, ehm, first we bought GoPro...

If you haven't managed money before, you really know nothing about the craft (luckily, both of you actually have)

That's okay, it's not that hard, really, it's "just" multifaceted and complex (and actually inherently non-understandable... -or was it just me?). On the other hand, most things worth pursuing are.


A watch is complicated,

the three body problem is complex



Quite understandably though, I constantly have to field questions about investing. The main problem is that I typically don't adhere to the same underlying basic strategy, thus rendering most detailed tactical inquiries moot.

So, grab a container of your favorite hot beverage and make yourself comfortable. Turn off all notifications, e-mail etc. and get ready to concentrate for a good 25 minutes (shamelessly plugging my podcast in Swedish: "25 minuter")

This article is in a way part of a series of articles about managing your own money (or possibly client money). Check out my archives for all my articles on finance in one place.


Hence, you should refer back to the linked material, whenever you feel anything is unclear.


This particular post outlines a few general points you need to consider before commencing managing your or clients' money. I don't provide any answers per se, only suggestions and a smorgasbord of choices.

Beware. After all, this is treacherous ground. Managing money is both difficult, complex and dangerous, albeit not very complicated (i.e. not too many moving parts, but as Newton knew, three is plenty).

That said, it isn't for everybody, maybe not for you. How would you feel, e.g., about losing 50%?


Suggested reading

Among the relevant articles in this context, my post about books and other reading material for budding investors stands out.

At the very least you should be familiar with the free pdf outlining 30 big ideas from Seth Klarman's book "Margin Of Safety".

I also think you should browse through at least one weekly comment from John Hussman. Just one single weekly, free, comment from Dr Hussman contains more market wisdom than most people acquire in a lifetime.

If you have the time (which you should), try reading a "memo from the chairman" (Howard Marks) or a quarterly letter from Jeremy Grantham at GMO.

There are many more useful (and timeless) links in this post from July 2015.

Last, I'd like to refer to my own eBook, The Retarded Hedge Fund ManagerSubscribe, download the book and at least take a look at the summary (10 bullet points) on pages 3 and 4:

Retarded advice summary

How to manage a fund

It's pretty straight forward. Anybody could do it.

Just open an account and start buying things (stocks, bonds, commodities, derivatives, whatever you fancy). Once your cash runs out, you simply sell something whenever you want to buy something else, or borrow and use leverage.


You're managing

ape face

(probably poorly though)

However, if you want some (professional) structure to it, listed below are the basic building blocks. Most of all they help you avoid common mistakes, as well as keep losses to a minimum (given your chosen strategy).


Avoiding mistakes is much more important than hitting homeruns when it comes to serious long-term professional investing


Decide on a strategy

This is probably the most common mistake of all. Investing is like air to us or water to fish. Most take it for granted and never take a closer look at what it really entails. Thus...,

Decide explicitly what your overall investment strategy will be:

  • International or domestic (hint: international)
  • Which asset classes (stocks, bonds, commodities, currencies, derivatives, precious metals, etc. - yup, investing is not about stocks only)
  • Long only (remember I thanked the "long-only herd" when receiving the 2008 Hedge Fund Of The Year award)
    • index independent
    • index hugging 
      • which index (Whaddya mean, which index; are there other than S&P500? It's never easy, is it?)
  • Market neutral (Good luck Chuck! Sounds good, but alpha is often elusive and you end up doing an involuntary epic split between two different trucks)
  • Market timer (if there ever were a losing strategy...)

The fund I managed, Futuris (Brummer) - the European Hedge Fund Of The Decade (Nota Bene), invested in stocks only and we were to some extent market timers, in as much as we deliberately controlled the overall net exposure of the fund. We invested internationally, albeit with a focus on northern Europe. We were completely index independent and non-biased in every way.


Tactical considerations

-How will you decide what individual positions to take?

  • Fundamental analysis (FA, valuation)
    • Key ratios (I don't like P/E:s, but this cash flow yield approach is a nice shortcut sometimes)
    • DCF analysis ("true" valuation, but rather impractical and deceptive sometimes. Numbers in a spreadsheet are no truer than lines in a chart)
    • Operations momentum (are fundamentals accelerating or surprising?)
    • Should you heed broker recommendations?
    • How do you plan to use analysts?
      • In-house
      • broker firms
        • For information only
        • Implement their alpha recommendations
  • Technical analysis (TA)
    • Momentum
      • Manual (intuitive, ocular)
      • Computer driven, data mining
      • Simple regressions (work until they don't)
      • Complex (e.g., Lorenz' strange attractor analysis for style gliding and trend change detection/prediction)
    • Patterns
      • General, commonly acknowledged, patterns (see "Reminiscences of a stock operator" for some background on the psychological underpinnings)
      • Stock specific patterns with statistical backtracking
  • Combination of FA and TA
  • Cross asset signals
    • What do commodities, bonds, precious metals, high-yield fixed income instruments etc. say about risk tolerance and growth, and consequently about the potential for stocks?
  • Macroeconomics
    • Investments, productivity, inventories, sales, employment, policy rates and economic growth, and their effects on profits and valuations

Futuris was mainly based on fundamental, bottom-up,  analysis, with a focus on unrecognized operations momentum and DCF analysis. Key ratios did play an important part as well.

FA often is based on triangulation of several valuation methods, which is exactly what we did. We did apply some experience-based intuitive hedging as well; whether that should be considered FA or TA isn't clear. On top of it all, we kept track of coross-asset signals as well as the macroeconomic trajectory and its potential impact on specific industries and stock markets.

Considering we won the "European Hedge Fund Of The Decade" award from HFR for the period 2000-2009, I'd say Futuris' overall approach worked, even if it could have been refined and optimized further. Sometimes hubris got the better of us.

futuris awards
Futuris' Awards, ominously quiet 2003-2007


What do you do when things go south?

-Plan B

You will lose money.

Yeah, yeah, I know...

No, you will lose money, more than you anticipate, and you need a plan for that (Hedgehogging by Barton Biggs, or my own eBook both tell you a lot about the particularities of finding oneself deep in the red):

  • Stop loss levels and procedures
    • How much and for how long are you (and your clients) ready to lose for something you believe in
  • Length of pause between a stop loss and restarting
  • Procedure for restarting
    • All at once, or gradually
    • Are the same (losing) positions acceptable alternatives? Under which circumstances?
  • Stop profit?
    • a somewhat unorthodox principle of investing, where "enough is enough" and you cut your cash cows when they've run far enough, or rather too far. That way you avoid sudden mean reversions.

Futuris had an informal, soft stop loss level of 5% losses at the portfolio level. Individual positions, however, were allowed much more leeway. There were instances of doubling up at a 50% loss, and at least one (albeit marginal) instance of going 10-fold on a -90% loser. We had no specified pause length before restarting, but we almost always eased back into the market gradually over a few weeks. I personally did apply a kind of stop-profit methodology, trimming winners on surges.



Alright, so you have your strategy and some tactics in place. What about where the rubber meets the road? How do you perform the actual deals?

  • How frequent trading?
    • minutes and seconds
    • days
    • months
    • years
  • Number of instruments
    • Some advocate a maximum of 5-10 positions - to make every investment matter and count, as well as increase the depth of knowledge
    • Some take hundreds of small market neutral "spreads", reducing single stock and market risk to a minimum
    • Perhaps, you plan to just buy and sell here and there and see how many you'll get to over time?
  • Overall exposure range (+/-10%, 50-80%, 97-100%, 70-130%, +/- 100%)
  • Liquidity management
    • Do you plan to have any cash at all?
    • If so, where will you keep it?
  • Level of aggressivity
    • Marginal opportunistic changes within a strategic position
    • Catching both up swings and down swings, no matter the trend direction (aggressive)
  • Commission and research expenses
    • How much are you prepared to pay per trade, or per year
    • Are you buying execution services (placing power) or will you rely mainly on DMA (Direct Market Access, self-help)?
    • Will you pay for research? How much? What is an acceptable ROI on that investment? How do you plan to measure the effectiveness of third party research? 

For a fund of 1-1.5bn USD, Futuris was unusually agile. Sometimes we bought or sold the entire portfolio (100% of assets under management, AUM) in a single day. Most days, however, we typically executed less than 5 minor trades (less than 1% of AUM each). The extreme measures outlined above were reserved for stop-losses or profit taking in extreme market situations, such as 9/11 (2001), Hedge Fund Hell (August 2007), the Kerviel debacle (2008) and the Fukushima disaster (2011 tsunami and nuclear meltdown).

Futuris usually held around 40 different instruments (38 stocks, one long or short future and perhaps an index sell option), albeit more (60) the last few years.

Our overall exposure range was approximately -50% to +100% of AUM. We managed our liquidity conservatively (cash at bank or in short dated treasury notes). We were minimally aggressive regarding trading - once we had decided an instrument was going up or down we held the basic position steady with only minor trading on the margin (10-25% of the position), rather than actively calling temporary counter trends. Going both ways we left to more free-thinking spirits.


So, how should you manage your money?

I can't tell you that, and I can't recommend you follow my example either. I only want to make sure you understand the universe you're about to enter.

Anyway, I think most investors should apply some sort of passive Buy and Hold stock strategy or a semi-passive Quattro Staggione strategy (stocks, gov bonds, gold, corp bonds). Going deeper is just a waste of time and a source of frustration for most.

I, however, am not most people (so I've heard).

I am currently heavily net short the stock market. Yes, that's right; I haven't just reduced my quattro stock slice from 25% to 20% or 15% or 0% for that matter. I'm way down at -100%!

It's served me well recently, and even if I'm still basically 100% short, it's less short than just a week ago. Hence, I'm actually ready for a temporary market bounce right now.

I know it sounds strange to some, but I have decided on a negative stock market exposure for the mid term, and will thus only trade around that position marginally - for fun and to stay tuned to the market.

I will not go tactically long on a gut feeling and risk being caught in an air pocket. It's a bear market and they famously make everybody look stupid before they're over.

Apart from (negative) stocks, I own quite a bit of gold (GLD) and gold mines (GDX), and I keep buying oil (Brent, and the oil exploration stocks DNO and Shamaran, which are both highly speculative punts on the KRG actually paying for the oil. That in turn probably means the oil price must rise above a certain threshold within a certain time lest they all go bankrupt, including the Kurdistan Regional Government).

portfolio Syding Current 22 jan 2016
This is not responsible. Do not follow my lead.

NB that I don't really manage my money in the true sense of the word. I'm betting on a downturn, after which I will start managing again. I'm doing it in part for fun, in part because I think I'm right.

Usually, and for most, it's not a good idea to try to time the market. It only brings unnecessary frustration and consumes a lot of time.

Once it's time to get professional again, I need to buy a much more diverse set of international companies. Depending on how far down the market goes, I just might go 100% long stocks, or more, for some time, while possibly using leverage in order to hold some gold as well. My oil investments are not for the long run, but how can you resist the world's most important commodity when it's down by 80%?

Yes, I know all about the Saudis needing the money, Iran coming online again, the promise of Shale, not to mention the expansion of solar power, carbon taxes etc. Please note that most oil people knew all about that already 2 years ago, with oil 300% higher than today (i.e. at 4x today's price). This is not the place to discuss peak oil or its inversion, today the topic is overarching principles for managing a fund.



OK... so what's in it for me, you think. I don't get it, should I invest or not? What stocks should I buy? Or should I sell the ones I own?

No, no, no!

What you should do is just think through the following before starting to manage a fund or your own money:

  • Should you at all manage your own money? Check out the pitfalls here. Is it worth it? Read the pitfall article and then decide whether active investing is something for you. It really isn't for everybody.
    • Is there some other alternative you could pursue, that would be more predictable, worthwhile (and fulfilling)
  • What asset classes and regions?
    • Doing everything and everybody is seldom a good strategy unless you have plenty of experience or a large staff ;)
    • Jumping haphazardly from one thing to another just means more time spent learning and losing. You could trade just one single stock or currency profitably for your entire life.
  • What overarching strategy in terms of net exposure (long only or market neutral, e.g.)
  • Fundamental or Technical - on what basis will you select, rotate and replace your investments? How will you know if your M.O. is sound and workable? Are you a trader or an investor?
  • How frequently should you trade? How much time (and money) are you going to spend on investing and monitoring?
  • Plan B?
  • Most of all, do you think it will make you a happier person, experiencing a fuller life, considering not least the loss of time, and the gain (sic.) in frustration?

Check out my eBook for more useful information on investing, not least my ten most important lessons for any investor, private or professional, including the most important one:


There is never any hurry to invest

Opportunities always cycle back


And if you are at all toying with the idea of going fundamental, first check out this article about the only two steps you need as a fundamental analyst or investor. Warning, it's actually 50...

Final note: This post doesn't tell you anything about how to choose your actual investments, the actual stocks or instruments. That's up to you. I'm 'just' telling you to be explicit about the framework within which to operate, and under which circumstances to abort.

Please share this article with your social network in order to help at least one person avoid financial ruin due to some simple error of omission.

The headline? Sorry about that... Pure clickbait

Taggar (blogg): 
21 oktober 2015

Calculate the sustainable free cash flow yield, to get an intuitive valuation feel

Executive summary: Single stock valuation

Cash Flow / Stock price = yield

That's actually the entire message of this post. Yes, true, you can move on to your next task of the day now.


Forget valuation multiples, DCF analysis, EVA etc. Just calculate the 'yield' of your holdings: "Profit"/market capitalization

5.4% yield? Good or bad? Worth the risk, the wait? You decide.

Is the yield high enough for you to hold on to the security forever, or do you require some price increase as well to be satisfied, to cover your costs, to reach your risk adjusted required rate of return?

Best guess is that if the yield is high you'll get a price increase as well, because more investors will flock to the high yielder, whereas a low yield will come with a (at least an interim) price fall.

That's it. That's all you need. Well,... and love. Actually, love is all you need. The yield is just icing on the cake.

Gigi hugs
Gigi hugs from Flickr

Or frosting. Think about that.


Read this first

Before moving on, please note that this is purely a hard core finance article. There is no humor, no personal development ideas, no tips and tricks, no memes and no great mindsets to contemplate. It's just numbers.

math brain retarded hedge fund manager novelty plasticity

There is not even a tangible specific stock example... or a picture... or stock chart. But you can always go back to the Amazon example from a few weeks back for that.


"Is this stock worth buying?"

Let's say you are more or less happy with the general investment environment (see last post about index outlook). Now, you just wonder if a particular stock is worth your time and money...

Here is one way of getting a feel for it.

What's the latest annual profit? After taxes? After necessary investments in various operating resources? What's this year's free cash flow available for dividends , hoarding and re-investment?


That last question is key: Free cash flow, FCF


The cash flow is a much better measure of real economic profit than the operating profit or net income, since it's for real. It's really there in the bank account after everything is said and done, after all the accounting gimmicks, staff stock options etc.

Divide the FCF number with the company's total market capitalization, FCF/MCap, and you get the cash flow yield. That's your annual return on your original investment, if the price stays the same. Compare it to your bank account, a private loan to a friend, a government or corporate bond, e.g.

  1. FCF/MCAP = yield

How high a yield do you demand, require, on average, to buy the shares, given there is a risk associated with equity investments? 6%, 10%, 15%, 25%? That's not for me to say, but the riskier the company, the more you probably want to demand in return.

The stock market in general has produced around 6% annual real performance, including dividends, over a century. That's around 8% nominal return per year. If some kind of general Required Rate Of Return [RRR] was 6% / 8% during the same period, the stock market has on average been priced just right.

It makes sense as a starting point, that the market on average over a century was neither a bargain, nor a rip off. Hence the RRR was about the same as the annual return.

What's your RRR for your stocks? What's your "base" RRR and how much do you adjust for specific stocks. That's entirely up to you and depends of thousands of subjective variables.

However, if you just want to fit in with everybody else, stay around 5-10% for most large caps (big, well-known firms), maybe as low as 2-4% for very stable business models, and up to 15-30% for newly IPO:d stocks with limited information or unproven or high-risk business models.

So, what are your RRRs?


Ask more of your shares

Statistically, a single stock is riskier than a group of stocks. Thus, you should typically require a higher rate of return from your single stocks than a broad index of companies, but I'm not judging anyone. 

Given your RRR and the actual yield, the upside/downside on the stock (for you) is thus pretty simple:

2. Stock potential = yield/RRR-1

3. Stock value = FCF/RRR

As an example, your company has a FCF of 50, a market cap of 400, and your RRR (return demand) is 7%. Then there is an (50/400)/7%-1 = 79% upside to the stock for you. The actual price of the stock could rise to FCF/RRR=50/0.07=714, before its yield was as low as your RRR.

Of course, the stock might never appreciate that way, since other investors have different RRRs and valuation models, but to you it is worth 79% more, so just keep buying as long as you have money to spare and the stock potential is positive.

NB: An asset returning 4% when you demand 8% is worth just half the price to you, since 4/0.5=8

Again: Let's say you find a stock that costs 100 and has a cash flow of 4. If you can buy the stock at just 50 you would get a 4/50=8% yield.


Complicating things just a tad

There is just one problem; This year's cash flow probably isn't representative of the entire future of the company.

What to do? Easy! Make it representative. That's easier said than done, but you can at least try. This is how:

The most important variables to normalize, make sustainable and believable, are profit margins, net working capital requirements, investment needs and tax rates. Simply adjust current year's profits and cash flows according to long term sustainable margins, NWC, investments and taxes.

Unfortunately, even a professional investor or analyst that has spent 10 000 hours on that company alone still can't do that with any precision. On the other hand, that leaves room for you to give it a stab too.

Think and guess. Is a 10% operating margin likely? Why? Why not? Competition? Tax rates in the future? Cash flow conversion (credit conditions, invoice routines, DSO...)?

If nothing else, you can piggyback on the analyst community, and assume that 3-5 years out, all variables have been normalized to the best of everybody's ability. Be careful in the smaller caps though. Analysts and investors tend to be overoptimistic there.


Take the margins and other variables from, e.g., t+4 years and use them on the latest available 12 months sales numbers, or this year's expected full year sales. Then use the resulting free cash flow as your basis for a yield and share potential calculation.

4. Sales at t=0 multiplied with margins etc. at t+4 => normalized cash flow at t=0, and normalized yield

Just as before, keep buying as long as the normalized yield is higher than your RRR. You'll get at least your RRR on your investment, as long as you don't have to sell the stock at lower prices, or your assumptions on future cash flow returns turn out to be wrong.


Calculate normalized cash flow yields and compare them to your required rate of return, and invest accordingly. Period.


The master class

Oh, I almost forgot. Then there is the question about growth after the normalization period.

If the company keeps some of its FCF, its equity will rise. If the company's business is growing too, next year's FCF will be higher as well. Depending on growth rates, the valuation of its equity, and your RRR, the relation between your RRR and the company's yield will change.

E.g., if the growth in FCF is higher than your RRR, even by just the most minuscule amount, the value of the company should theoretically be infinite to you. Weird, and hardly practical.

Price = Cash Flow / (RRR-g)

It's complicated. I'll leave it at that. This was never meant to be a full course for stock valuation, just yet another Quick And Dirty piece of the valuation puzzle. By the way, as soon as you start complicating things or involve too much math and formulas, you risk losing your intuitive feel for the investment. Leave that to professional number crunchers. They are wrong often enough.

Does it seem hard? Difficult? You have no idea where to begin...?

Alrighty then, let's do all the things that you wanna do! Here is a summary



  • Find the most recent annual profit, or a reliable estimate for the current year
  • Adjust it to get to free cash flow
  • Change margins etc. to long term sustainable levels
  • Divide the sustainable cash flow by the stock price
  • That's your yield
  • Is that yield higher or lower than what you want out of an investment with that risk profile?
  • Is the yield higher or lower than what you estimate the market in general requires of that kind of stock?

Remember that the yield is "real", i.e. if the company grows, the yield rises. That gives you an inherent margin of safety

On the other hand, the yield isn't safe, neither is the stock price. You have to be prepared to hold the stock through thick and thin and never be a forced seller. The yield valuation method doesn't say what other investors think, but what do you care if the stock moves up or down if you are going to hold it forever? You can always buy more on dips.


Did you hate this post? I feel you. I hated myself for writing it. Now, share it with somebody whose evening you want to ruin.

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Taggar (blogg): 
20 oktober 2015

Estimating expected returns; a 68% market crash

Reading time: 3 minutes - forever*

Executive summary: Just plug in market sales growth, future (trough) sales multiple, yield and the time for valuation adjustment; and get your 2-year 68% market crash

*Depending on your background, this article, about assessing total stock market returns during bull markets and crashes, might take between 3 minutes and forever to read.


Total stock market returns

The math is never hard in equity analysis. It's all about the assumptions.

Either you think you have an edge in calling the future, or you don't. If you don't, a decent assumption is that history repeats or at least rhymes.

When assessing the potential of the entire market, the following is a simple, albeit quite powerful, tool (my thanks to Hussman for the inspiration):

(1+g)*([MC/GDP]average / [MC/GDP]now)^(1/Time Period) - 1 + Dividend yield = annual total return over the Time Period

g=annual sales growth, MC/GDPaverage=historical average for Market Capitalization/GDP, MC/GDPnow=current MC/GDP, Time Period=time in years for adjusting valuation multiples to their historical average

The formula calculates the total stock market returns during the coming T years, given valuations during that time span return to their historical averages, i.e., history repeats itself when it comes to profit margins and valuations.

If we assume (you know what they say* about that, don't you?) 6% average revenue growth going forward, and plug in the average MC/GDP number of e.g. 0.63 (Hussman has a 0.55 here) as well as the current MC/GDP number of 1.35 (or whatever it might be when you are reading this), take it to the inverse power of the number of years, minus 1, and finally adds the average dividend yield over the period, this is what we get.

The current situation, give or take

(1.060)(0.63/1.35)^(1/10) - 1.0 + .018 = 0% total annual returns over ten years


Quick adjustment scenario

If you want to assume the MC/GDP ratio reverts back to its historical mean in just 24 months, this is what you get:

(1.060)(0.63/1.35)^(1/2) - 1.0 + .018 = -26% total annual returns over two years; or a total return of -45% for the two years. After such a re-set the market would be ready for 7.8% annual returns for the foreseeable future (6% growth, stable valuation multiples and 1.8% dividend yield).

See below for more examples


The following table show yearly returns during a three-year adjustment period

Yes, you read it right, the top left cell estimates three consecutive years of -30% market returns


If you are retarded you could focus on the bottom right cell, which says 7% annual returns the coming three years, i.e., if you estimate both the current and future sales multiples at 1.0


Is a -68% stock market crash something you could be interested in?

There are both worse and more optimistic scenarios than the one above.

On the downside, you probably should expect an undershooting, an "inversion" of the current valuation overshoot. Plugging in a (not that unusual) 0.37 trough MC/GDP in the formula, simultaneously with just 4% annual nominal GDP growth, renders a 10 year return of -7% per year for a decade, or a 68% crash in two years.

The upside is that after such a crash, the market is like a loaded spring, ready to perform 14% per year on average for a decade - which would be more or less a typical bull market. If history is rhyming, and considering all the extremes in debt and valuations etc., it would be about time we had a real crash followed by a strong bull market.

What are your best guesses for the input variables?

  • Market Cap/GDP is irrelevant (e.g., due to permanently changing profit or cash flow margins, tax rates, proportion of economy listed etc.); use another valuation gauge
    • However, in this article Dr Hussman shows that MC/GDP (actually nonfinancial market capitalization/corporate Gross Value Added) has a 91% correlation with subsequent market returns
  • 6% annual (nominal GDP) growth is too high/low (remember to adjust the growth rate according to your choice of multiple)
  • The future MC/GDP multiple will be higher/lower than the historical average
  • The current MC/GDP multiple isn't 1.35
  • The average dividend ratio will be much different from 2%
  • The valuation adjustment will be quicker/slower than 2-10 years

* To assume is to make an ass of u and me

Just remember, stock markets do not crash due to high valuations. They crash when investors are spent mentally and shy away from risk instead of chasing it blindly.


Single stocks

Hang on.

There is more.

You shouldn't use the above formula for single stocks (for many reasons), but there is a kind of equivalent method I like to use as a sanity check when researching stocks.

More about that later this week. Sign up for my free newsletter to make sure you don't miss it. You'll get the link to my free eBook The Retarded Hedge Fund Manager as well.

If you're already a returning visitor, please share this article with a friend.

Taggar (blogg): 
28 september 2015

Amazon redux - this time twice as expensive

March 2000 was a good year for drunks...

Warning, this is a hard-core finance article. It's mostly about the valuation of Amazon.

amazon meme

I'll show with a few simple assumptions and calculations why I think Amazon's shares are 10-20 times as expensive as I would find attractive.

I'm not advocating going short the stock though. You have to realize when you don't "get it". At this point I'm not quite sure what would change my mind about this. It's just so far off from what I consider reasonable that the situation simply is out of control. Hence, better not risk any money.

All I really do in this article is extrapolate growth and margin trends, and then state what kind of return I demand from an investment to consider it worthwhile.

You are free to have different preferences or assume others (i.e. the market) have.

Read on if you are interested in a step by step pedagogical approach to back of the envelope investing


Beer or IT stocks?

beer darth vader

At the height of the stock market bubble in March 2000, you would have been as well off financially if you bought beer and recycled the cans (in certain states), than if you "invested" the money in many IT shares.

As it were, the entire Nasdaq index (not only tech stocks) declined by 80 percent, and many stocks declined by much more. Just cash would of course have been so much better than beer, not to mention bonds or gold.

The difference between an 80% drop and a a 90% drop is an additional fall by 50% in value.

And yet another 50% loss takes the total loss to 95%. A third sequential 50% loss, after the initial hypothetical 80% plunge, renders a total loss of 97.5%, which aptly describes the trajectory of many IT and new media stocks during the years 2000-2003.


Stars do fall; Nasdaq composite index 2002-2015

nasdaq 25 sept 2015

I should know, since I was chiefly (ir)responsible for buying shares in an internet consultancy called March 1st (named after its starting date March 1, 2000, at the very peak of the bubble). Luckily, we made back the initial losses on that position (and sold it before the bankruptcy in early 2001). We then went on to earn so much more shorting similar stocks in Europe, using the US stock market as a template.

Make informed investments, with whatever you have left after Mr Market taught you a lesson - always be investing


The IT crash was no surprise

To many thoughtful and experienced investors the crash of 2000-2003 didn't come as a surprise. I have a list of 50 prominent investors and other pundits, that intelligently and timely forecast an epic bursting of the insane IT bubble. Many of those went on to correctly predict a housing crash and a financial crisis after 2006.

Neither of the last two crashes came as a surprise to anybody with the slightest knowledge of the art of valuation and the history of markets and bubbles. The timing, however, was often off by a year or two - or more. 


Crash number 3 is in the cards

I think it's about time again for a correction of frothy share prices. And by correction I mean on the order of -50%.

There are dozens, if not hundreds, of fingers pointing to that conclusion, but this is one of my favorites:

Dr John P Hussman's chart over "Price/GDP" vs. stock market returns

Observe, e.g, where the blue line bottomed in 2000, correctly forecasting ten years of negative annual returns 2000-2010. Or peaked in 2009, forecasting 12% annual returns 2009-2019 (with the market so far well on its way to fulfill that prophecy).

hussman 14 sept 2015

Chart from here at hussmanfunds.com

  1. Notice the tight correlation
  2. Notice that when correlation falters for a while, it comes back with a vengeance. Actually this "error" in itself makes a better job predicting market returns than the revered "Fed model"
  3. Right now, market valuation points to negative annual total returns, including dividends, over the coming 10 years
  4. Usually the market corrects to levels where you can look forward to 10-20% annual returns over the coming 10 years. To get to that point the market needs to fall by 50-75% or stay level for 10-15 years. Which do you think is more likely?
  5. A vertical move upward by the blue line is tantamount to a stock market crash, thus changing the valuation from promising, e.g., 0% return to promising 10% annual returns the following decade.   


Amazon - buy the merchandise not the shares

I  have bought 2 Kindles from Amazon and hundreds of books. It's a great company - for its clients.

However, let's take a closer look at Amazon's shares as opposed to their services. A quick visit to Market Watch tells you the stock price is 528 USD/share, with a total market cap of 251 bn USD.

There is no useful information on valuation, though, (since Amazon operates at a loss and doesn't distribute dividends).

So, what do you do? Ask your friendly neighborhood hedgehog?

-No, you do the math yourself. If you consider yourself a real investor, that is. But first, let's find out if you're cut out for this. What kind of money person are you?


Amazon's share price 2002-2015

Amazon 2002-2015

N.B. Amazon's stock price has already fallen by >50% twice, and by >30% several times


Astute Investor or Ignorant Speculator

  1. Active or Passive. A passive investor buys and holds single stocks or index instruments -and never sells. An active investor buys and sells at various intervals, depending on a multitude of factors (we'll get to that later)
  2. Single stocks or index investing. If you chose index-only investing, forget about Amazon (duh!)
  3. Fundamental or Technical. Are you willing to make an effort to understand what you invest in, do the math so to speak, or are you more inclined to speculate on tips, momentum, stock charts etc?
  4. Hope or Safety. Will you trade on hype and hope, on blue sky scenarios, or do you have the discipline and patience to wait for opportunities that offer a margin of safety

If you are an active investor and single stocks focused you can proceed. If you are passive, just buy the stock or an index already and go back to sleep.


See. Pretty picture

If you just can't be bothered with math, spread sheets, forecasts and economics, do what so many others do: draw pretty pictures in stock charts and invest according to the patterns you think you can discern.

Or just follow whatever momentum or trend you want to see or you are told (tipped) about by a "friend" or broker. Just don't blame me when you go broke.


lines in a chart are not real


Your broker is your adversary

Stock brokers don't want you to make good investments. They don't want to be your friend.

They want you to pay a commission.

When you buy, somebody else sells. One of you is often making a mistake. And the broker couldn't care less.

Charlatans (stock brokers and company representatives) use extremely simple and misleading measures of valuation such as some future year's Price/Earnings ratio (given made-up profit margins), perhaps complementing it with an arbitrary, historical growth number.

"Amazon has increased its number of employees by 38 per cent in the last 4 quarters and at 'normalized' operating margins of 10% it's trading at an EV/EBIT ratio of just 21.5 x (12 months forward op. earnings), i.e., only half its (employee) Growth rate! PEG=0.57 which is below 1, hence BUY!"

Assumptions: TTM sales of 95.8bn in June 2015 will grow at the same 17% rate the coming four quarters to 112.1bn. The operating profit at a 10% margin will be 11.2bn. The current EV is 251bn-10bn cash pile=241bn. The EV/EBIT thus comes to 241/11.2=21.5. The growth rate used in the PEG calculation is the last known employee growth rate.


Stock pitch break down

The above may sound convincing. But if you look more closely you'll see the cracks in the facade:

  • Okay, so the number of employees grew by 38%. Even if it could be representative of future growth in some cases, it's also a cost now. Sales, however, only grew by 17% the last four quarters (despite a 36% growth inemployees in the preceding period), and slowing. Thus, a better forecast of sales growth going forward would be 15%, given current trends.
  • In addition, the relevant growth rate, for applying a valuation multiple, is the growth rate going forward after the year of the multiple (which probably is even less, given the deceleration the last few years). Actually, unless profitability accelerates soon, Amazon needs to taper its hiring pace, which should hurt sales growth even more. Nevertheless, let's give them the benefit of the doubt for now and assume 15% sales growth. We can refine the model later.
  • "Normalized" profit margins at 10%? Whats "normal" with 10%, when actual margins have been between 0-1%? Are there any plausible reasons to forecast higher margins than what Amazon has produced the last 5 years?
  • Actually, there might be. If Amazon reaches 'scale', when growth diminishes, margins could increase. This is the trickiest forecast of them all, since Amazon hasn't reached "steady state" with sustainable growth and margins, so what to do?
  • Look to similar companies for guidance on potential margins. Also make a sanity check on what ROE those margins imply for Amazon (Return On Equity). Few companies stray outside 5-20% ROE for long. A higher ROE draws in competitors, and a lower ROE is a waste of capital. Assuming Amazon can increase its net margin to 1.5% (operating mgn approx 2%), Amazon will make a decent 14% ROE (1.5%*112bn/11.768=14.3%). Hoping for more is just that; hoping and believing the hype.
  • EV/EBIT-ratio of 21.5. Why is that supposed to be cheap in an absolute way? How can you tell? To start with it should be compared to profit or cash flow growth, which (at steady margins) can be approximated by sales growth - in our example at most 15% (probably less after 2016). Suddenly the PEG is 21.5/15=>1.43 instead of 0.56. That still doesn't say anything about whether it's a good buy or not, even if it can be compared to other listed companies' PEG ratios. Anyhow, it's apparently a lot more expensive than what the broker first said.
  • And, I almost forgot, that was based on a 10% op. profit margin. Assuming 1.5% instead, renders an EV/EBIT of 143 and a PEG of 10. That is 19x expensive-er than the broker was saying.
    • In addition, whatever happens in 2016 is less worth than if it were today, so profits should be discounted by your required rate of return. An EV/EBIT of 143 a year from now is some 5-10% more expensive than the same multiple today, or >150. That however still doesn't answer the question whether Amazon's stock is expensive. Do, however, compare the 150x on trailing EBIT to the more typical 10-20x multiple seen in the S&P 500 index. Enticed?
  • Continuing to use the extreme simplifications above, you can calculate an earnings yield to see what your actual return would be in a single year. If you dare extrapolate that year indefinitely, you can even rely on it as the stock yield. In Amazon's case, given 1.5% operating profit margin and a 30% tax rate the net profit is 112*0.015*0.8=1.18 bn and its earnings yield is (profit/market cap) 1.18/251 = 0.47%.
  • If you are lucky all this profit generation is converted to cash and distributed to you in some way. Also, if you are lucky, the coming four quarters are representative of the coming eternity for Amazon's business (in practice only about 50 years count).

There you have it. Given a set of simplifications, you can expect around 0.5% yield on an investment in Amazon. It doesn't really say anything about what price you'll be able to sell the stock for in the future, but if you just hold on to it forever, you'll get an 0.5% annual return on your investment, unless Amazon's business changes radically.


The quick and the dirty

Happy? I'm not. And that's not because of the low return, or that the stock might (should) fall dramatically in the meantime (to a price where you could expect at least a 7% annual return). It's because of all the simplifications.

Just because you put a lot of numbers down on paper doesn't mean they are correct or you are any wiser


Also note that, if in the future, when you want or need to sell the stock to get your capital back, another valuation paradigm dominates, perhaps demanding the historical 6% or 10%, 15% or even 20% return on equity investments, the Amazon stock price will be proportionally lower.

At a 9% required return, Amazon's stock price would be just a twentieth (27.50 USD/share) of what it is at 0.45% required return.

That was the quick and dirty way of analyzing and valuing single stocks. You should at least do as much for any stock you contemplate buying.

  1. Estimate (extrapolate) sales growth and margin trajectory in an informed manner
  2. Calculate future profits and cash flow that take into account total available market, innovation and competition
  3. What yield in relation to the company's market cap does that cash flow produce?
    1. If you're happy with that yield and don't care if the stock falls in price, you're good to go
    2. If the yield is below your required return (9% for example) or the historical market return (7%) and you do care about price fluctuations, tread carefully. 
  4. Is that enough? Are there better alternatives? Is it enough for others (i.e., the market)?


Get out of here!

If you felt that was already too much, you are not an active or fundamental investor. A sell side analyst does a lot more. It's not necessarily better or more effective but it's impressive work.


The long winding road of doing sell side level research and stock analysis

Make company forecasts like a 'pro'

  • Make reasonably detailed Profit & Loss, Balance Sheet and Cash Flow forecasts. These are hundreds or thousands of Excel rows long, several hundred columns wide and dozens of sheets thick 
  • To do that you need to forecast sales, costs, wages, investments, loans, interests, taxes, dividends, buybacks etc
    • Any one of those components can be forecast using a dozen other inputs
  • To do that you need a view on demand, competition, currency (FX) trends/fluctuations, technological development etc.
  • You also need the company's history to have an inkling of how its products have been received by the market and how management has been able to juggle all variables historically.
In addition to this fundamental single stock valuation, you should add a handful of supportive layers:
  • Total market valuation (if the stock market in general is "cheap" you stand a better chance the entire market will rise and help your shares appreciate. The latter, however, only really matters to a hedge fund and not for a long only index fund)
  • Momentum in the stock or the market (positive market trends can lift all boats)
  • Risk tolerance, i.e., your willingness to gamble (and willingness to lose)

Stock prices move in cycles. Sometimes a certain industry or company is in vogue and sometimes it's not. You can try to speculate blindly with this momentum or you can choose to invest whenever the price (valuation) is below a certain maximum threshold and sell when it is too high for a comfortable plausible return. Dare to make your own judgement of value and buy when others don't.

It's better to look the fool before, than after an event


Analysts make meteorologists look good

There is no secret to forecasting. No one can do it anyway and stock market pundits and economist are among the worst forecasters of all.

I think my complete immersion in finance for a quarter century is why I have always marveled at the accuracy of weather forecasting (no irony, I am amazed of what they can do).

The following can serve as a rough guide to informed forecasting of financial data. But remember that your forecasts don't become the truth just because you put them down on paper.

Collecting historical data

  • Get at least five to ten years of history for a simple set of parameters for the P&L: sales, cost of goods, cost of personnel, cost of loans, taxes
  • Make a rudimentary balance sheet: real Long-Term assets, goodwill and intangibles, Short-Term assets, cash,  net working capital, equity
  • Cash flows: operating profit after tax, investments, changes in Net Working Capital
  • Double check for funnies: too low wages vs history or vs. competitors, high personnel option compensation, share count development; profit, cash flow and equity not adding up over the years etc. Make charts of every series and subseries you can think of an look for kinks, trends, holes, bumps and so on. Then investigate those by reading old Q-reports, ex ante guidance commentary and ex post explanations.
  • Check the latest quarterly trends more carefully: DSOs, e.g., (Days Sales Outstanding=accounts receivable/sales) = how easy is it to get paid, is the company overselling or even sending unsolicited invoices?
Making forecasts like a baws
  • Find leading data series in daily, weekly, monthly or quarterly data: from competitors' sales, costs etc, weather data, monthly national data, PMI surveys, national industrial output statistics, retail sales, FX, etc
  • Start forecasting: Basically extrapolate trends in historical company numbers and leading data series. Allow for cyclicalities and reversions to the mean. E.g., profit margins and Return On Capital Employed numbers tend to gravitate to a mean for the industry or the economy. Do not expect super profitability or super growth for eternity. Check how long the very best companies of all time sustained their growth, margins or returns. Check what the average company did, including those that failed and are no longer here. Easiest is to check nation wide numbers for margin and growth trends.
  • Analyze really long cycles (over several decades or longer) and trends to make sure you don't get myopic, narrow sighted, seeing only one half of a cycle and thinking that is a long term trend to be extrapolated without risk

Knowing what you don't know

All of this is particularly difficult for new companies and even more difficult if they operate in new industries. There is no history, no precedent. That doesn't mean you get off more easily. Quite the opposite. The risk is higher and your work is harder.

Sell side analysts take advantage of the lack of data, and of the general optimism, to forecast blue sky scenarios, luring in buyers. Rising share prices then act as (false) evidence the forecasts are correct.

Typically, new companies are valued using new (i.e. unproven) key indicators; like clicks or eye balls or users, no matter if the latter are paying customers or not. Some even use costs as a key indicator, when there are no sales. The more costs, the more losses, the higher the value... Biotech analysts have been trail blazers within 'cost valuation'. The more biotechs spend and lose, the more they're worth -until they're not.
Let's not forget about the smoke and mirrors of three-letter abbreviations.
There are only so many three-letter combos to go around. Consequently the same three letter combos mean diferent things in different industries and at different times.
That's not a flaw, it's by construction. It's supposed to create confusion and make the client or outsiders feel inferior, afraid to look stupid. The companies first make some analysts feel stupid who then turn around and fool their clients. Oh, it's a WAP company! Buy. They have a BTC mechanism and make a ton on OEM...
Don't fall for the simple three letter abbreviation trick
Ask and ask again until everything's clear. Then make reasonable forecasts not based on 100% market share forever, constantly rising margins, and world domination of this industry and ten more nearby.
Take a minute to remember all those formerly glorious companies that perished and disappeared in the 2001-2003 downturn, despite all the thre-letter combos in the world in their Power Point presentations.

Don't forget geographical trends, product trends... to see if, e.g., the first markets, the home markets are losing steam, or perhaps if new markets are small but growing quickly - which might not be visible in overall numbers otherwise. Slice and dice numbers in all directions and look for S-curves, tapering, bumps and exceptions.

Typically it takes at least a few years to get reasonably good at doing fundamental research, and at least a week to build a basic valuation model for a single company. It's hard work and it's complicated but it's worth it if you have a nest egg worth a handful of years' income to invest.

Professional analysts have spent years on their models, but that's going overboard in my opinion and only meant to impress clients.
Equity research is at its foundation very simple; don't let anybody tell you it's best left to professionals. Just make sure you know what you know, and be honest to yourself about what you don't know and what risk that entails
Less is often more
Most important of all, don't make your model larger than what you'll actually keep updated.
equity research
Don't fill it with more data than you'll actually use.
Erase whatever is unnecessary. Ask yourself, does this particular data series affect the final valuation in any way. If not, get rid of it.
And, again, it's not true just because you wrote it down, or based it on an extrapolation of series of numbers. The future is inherently unknowable. It can't be foretold. Less things happen than could have happened and we never know fully beforehand which one's it'll be. We don't even know ex post what caused a certain future to come into being.
Don't supersize that model, please
Stopped clock markets - or analysts

Stock prices and stock markets very seldom reflect the true long term value. Just as a stopped clock shows the right time twice a day (in Europe, actually only once), the stock market is valued more or less correctly about every six years or so.

That's a good thing. It's something you can profit from; if you have the guts to take a contrarian view when everybody else is screaming sell or buy. Or the guts to run with the lemmings for a while longer, even after the fat lady has finished her aria.

Markets are not weighing machines, they are beauty contests (in the short to medium run). They don't find the correct value of a stock and stay there. On the contrary, markets forces of fear and greed create trends where the (perceived) prettiest stock is bought and the ugliest sold, until something, anything, changes and the trend reverses.

This makes stock prices and markets oscillate (in cycles of decades) around the true value. In the short term prices oscillate around some perceived popularity value.
The long term cyclicality creates twin opportunities for you as an investor: 1) follow the momentum, and 2) buy low, sell high. I think you should try to do it all:
  • Buy whenever a stock or an index is reasonably valued, or cheap, even if the trend is negative. Keep buying small increments.
  • Ride the momentum until it seems to stop (market dispersion crosses a threshold) or valuations venture too far out in the 5% tails
  • Sell if it is extremely expensive, no matter the trend, but don't go short until market dispersion tells you risk aversion is high enough.
A precise depiction of professional investors in action

Hype and Hope is not a strategy

Don't rely on blue sky scenarios. Very few companies hit it big. Why would yours? Perhaps just because you are looking at it (quantum mechanical interpretation).

Inoculate yourself against rosy forecasts by checking old stock market tables and company histories. Where just a handful succeeded, hundreds fell into oblivion or exhibited mediocre numbers.
Remember that you are only looking at the winners when looking at the current stock market
In fact, even the very best, the hundred top cash flow growers f all time, the Warren Buffets of listed companies, didn't grow faster than 20% per annum for more than 20 years. OK, that fact needs to be checked, and many do manage to grow 100%+ per year for a few years, making compound numbers very impressive.
However, once growth falls to 20-40% per year there are rarely many years of >20% growth left. But, don't take my word for it, look for yourself in the industry your current pet stock is operating in.
Status: It's complicated
In the end it all is unbelievably complicated, despite there being just two possibilities at any given time: Up or Down?
There are thousands of professional investors, if not millions, trying to make money on the market, using different strategies. There are scores of companies competing for the same client wallet share. Remember that company management often get their forecasts completely wrong at turning points, so how could you beat them at their own game?
Don't just flip a coin and hope for the best. Do the only thing very few investors do.
Pay attention to long term fundamentals, be patient and only buy when you have a decent safety margin, in terms of returns and think you can hold on forever and be pleased with that.
Don't run with the crowd, unless you know what you are doing.
  • Don't hope to sell the stock to a bigger fool
  • Don't hope for efficient markets having priced all shares correctly so you can just wander in and buy blindly
  • Don't hope that just any old stock will work as a hedge against inflation and money printing.
Equity research, explicit summary
  • Equity research is really easy and impossibly complicated at the same time. Just as life in general. Decide what type of effort you are willing to put in and what level of risk you accept. Just be explicit about it
  • Decide what kind of an investor you are. Active? Fundamental? Single stocks or index? Technical overlay? Gambler? Act accordingly
  • Do the math properly if you are going to do it at all. There is no big secret to forecasting; just do it, and be clear about your premises at all times. Make plausible and reasonable forecasts that are internally consistent. Double check your variables repeatedly. Believe the hype if you want; make a leap of faith in a product if you want, but make sure you understand that is what you are doing. Be explicit in your extreme assumptions.
  • Cheap or not? Compared to what? To your required return? To your marginal borrowing costs (your most expensive loan if you have any), to what you think the market's marginal required return is or will be in the future? Compared to other stocks? Here is an overview, a check list, for doing equity research.
  • Decide on timing: It may be cheap, but markets are trending sharply downward. Then don't buy until things calm down, or be prepared to ride a long downturn. Pace your purchases, buy a tenth at a time unless you have a specific game plan.
  • Wait. Be patient. Don't expect good opportunities just because you are looking right now. It may take years for real opportunities to arise, whether it is about stocks, finding a life partner or a dream job. It can take 20 years for fundamentals to manifest themselves (though 8 years usually is enough). If you bought on the right side of cheap, time will work for you. In the meanwhile you accumulate dividends and perhaps buy more shares.
Addendum: The blue sky scenario is Amazon trading down by 90%

My best guess is that Amazon's sales growth will fall slightly each year from 17% to 15%, from 15% to 10%, and sooner or later from 10% to 8 to 5% (assuming around 5% nominal growth rate for the economy in general).

Just spending a few hours with Amazon's numbers, I think it is 10-20x as expensive as it should be. The current growth rate is only 17% per year, despite expanding its staff by 38%, and the company is hardly making any profits.

A year ago, when I last looked, sales growth was 20% and employee growth 36%. Fundamentals are not getting any better.

Assuming a decent 15% ROE in the future implies 1.5-2% operating margins and not even a 0.5% earnings yield (net profit/market value).

I would require at least 10-20x that return, i.e. 5-10% annual return on my investment, to bet on Amazon succeeding in its endeavor to sell everything to everybody. Consequently, the stock price needs to fall by 90-95% to satisfy my return requirements.

In addition, I can't see any reason to assume growth or margins expand meaningfully in the future. Rather, I am worried growth will taper faster than most expect and that margins might fall to zero or below. I know the market believes and assumes Amazon can raise its margins to 5-10% as soon as it wants to, as soon as it concludes its hypergrowth phase (17%, remember?). It's just that you seldom see those margins in retail. Ask Wal-mart.

In my opinion the blue sky scenario is Amazon trading down by 90%. The base-line and worst case scenarios are that Amazon falls even more and becomes completely irrelevant and taken off the market.

So, what should you do? Well, not buy Amazon, that's for sure.

There are tens of thousands of other listed companies worldwide, many of which look more interesting than Amazon.
And if they are all too expensive, just wait. I'm sure you will get a good opportunity within the coming ten years, and in my opinion, most likely within two. If that seems too long to you, you just aren't fundamental enough. 
Go play with the chartists instead.
Final words; do this
1. Make the simplest possible models for your current investments. Spend about an hour (or less) on each company to begin with. What sales, margins, and valuations are required to make you happy? When? Is that plausible? If not, contemplate selling - not least given the extremely high general market valuation environment. But read my disclaimer first.
2. Sign up for my newsletter and free e-Book to stay up to date and learn more
3. Share this article with a friend that's gone deep into story stocks
Taggar (blogg): 
15 september 2015

Riding high on stocks? Aiming for high finance? Beware of the Dutch disease.

Long legged blondes

Dutch disease

White Sensation Parties

Dutch Disease White Sensation


moulin rouge

Picturesque landscapes


van gogh 1280px-Van_Gogh_-_Starry_Night_-_Google_Art_Project

-What's not to like about Holland?

Well, free drugs and (almost) free women are perhaps debatable, except to us ahimsas.

dutch disease stoned
After workout, September 15, 2015


What's not, is 'Dutch'. And, no, I'm not talking about the people or their guttural language, but about the Dutch disease.

This short (5-minute, tops) post is all about the risk of losing one's way and letting a windfall gain get the best of you.


The Dutch disease

"The Dutch disease" sounds better than it is. Trust me.

The old double-D is usually reserved for countries that get a windfall gain by striking oil, gold, diamonds or some other natural resource.

The discovery is supposed to be an unequivocal positive for the country, but most of the time, several dormant negatives are strengthened and actually make matters worse than before:

  • Politicians struggle for power over the the newfound wealth, breeding corruption and mismanagement.
  • The currency appreciates, strangling the export manufacturing sectors, while stimulating imports of (luxury) consumer goods.
  • The trickle down wealth erodes productivity and creates a nation of leisurely shoppers and welfare addicts.

Once the process has run its course, the country suffers from inflation, high cost level, unemployment, low productivity, low adaptability, corruption, poor governance etc. And its right then that the cause of the Dutch disease, the natural resource discovery, is exhausted, leaving the country much more worse off on all accounts than before.

You know, when you've been double-D:d


The ZIRP version of the Dutch disease

Zero interest rates work much the same way, just worse, in particular when the entire world plays the same ZIRP (zero interest rate policy) game simultaneously. After the interest rate cycle has run its course, what's left is a world of dysfunctional and disconnected speculators with zero useful skills, instead of educated, creative and productive people in a functional society.

The Greenspans, Bernankes, Yellens, Kurodas, Draghis and Carneys of the world, not to mention the Swedish "let's go negative" full retard interest rate champion, Ingves, "discovered" the natural resource of ZIRP and made sure the entire world contracted the Dutch disease.

In effect, they went to the streets and gave every junkie, every person with gambling debts, every irresponsible wacko they could shake a stick at, a wad of dough and said "There, I hope you've learned your lesson. And if you haven't, there's more where that came from"


Your own strain of the 2D

At an individual level, a bull market combined with zero interest rates might even have made you specifically contract the Dutch disease.

Check if you tick any of these boxes:

  • You think a quarter point interest rate rise would hurt your finances
  • You're not even considering rising interest rates; "Why would they raise if it's bad?"
  • Your mortgage is more than five times your annual disposable income
  • You've run up a sizable student loan or car loan without really gaining any useful skills
  • You actually don't have a reliable income, since you left your job to "invest on the stock market"
  • You aren't worried your real job skills are fading, since trading is going so well
  • Your only holdings are story stocks (no profits or no revenues, world domination plans, advertising dependent, story company clients only)

If just one or two of the statements above resonated with you, you should get checked for Dutch disease.

The risk is clear and present that you are financially fragile and couldn't cope with a normalization of the economy (including 6% policy rates, 50% lower stock prices, and a decimation of finance related jobs and the professional support services that go with them), let alone an undershoot with even higher interest rates, costs (inflation) and lower stock prices and reduced dividends.

Oh, and then there is the creeping issue of automation that will kill off office workers, taxi and truck drivers and many other blue and white collar employees, outside the world of finance.

Feeling worried yet? Butterflies in your stomach?



Here's a tip for you:

Check out the Freakonomics podcast from October 16, 2014. It's called "How Can Tiny Norway Afford To Buy So Many Teslas".

It tells you how Norway finally cured itself from the Dutch disease, on the third time round of windfall oil gains. Now the Tesla is the most sold car model in Norway, and with only 5 million inhabitants, Norway is Tesla's largest market outside the U.S.

Before that, they fucked up twice when oil prices increased (Norway found oil in 1969, and temporarily prospered during periods of rising oil prices before sinking back with a case of DD).


Don't be that guy with the Dutch disease (Summary and conclusions) 

I'm sure you've heard several stories about people winning the lottery, only to be broke a few years later, with high debts, no job, no skills and no friends.

Don't be that guy.

Low interest rates, surging stocks, increasing house prices etc. are like winning the lottery, like so many sirens of the sea luring you into stagnation and apathy.

Not even I am safe, despite my wealth, perhaps because of it... Remember, it's not paranoia if they're really after you.

Instead, make yourself change resistant and future proof:

  • Keep your skills updated, study online, use the abundance of free resources, such as Stanford, MIT, Khan, Codecademy, etc. Here is a list of 144 sites for that!
  • Keep your contacts up to date. Meet IRL, have fun, discuss what you would do if your income dried up, keep networking on LinkedIn
  • Keep your investments diversified
  • Check your spending while you can, instead of waiting until you have to (the latter will be much worse). Is that car really that fun or are you just trying to impress somebody?
  • If you're still in school, think about which industries might be most resilient to automation and de-financation
    • Hint: It wont be stock brokering, stock research, portfolio management or algorithmic and HFT trading
    • It won't be car or truck manufacturing either.
    • As discussed before, however, it might be psychology, design, marketing, programming, and as always, various forms of healthcare (unless your government has already ruined that market).
so you want to work in finance retarded hedge fund manager
Tell me more how you plan to buy happiness with your stock winnings

Yes, that's right, even when things are going your way, interest rates are low, jobs, dividends and profits come easy, you'd better Always Be Investing. Most of all, make sure life's journey is enjoyable and not dependent on becoming or staying 'rich'.

If this article resonated with you. If you liked it, if you want more... Why not leave your e-mail address with me, i.e., subscribe, and I'll send you my free eBook on finance, and weekly updates in my newsletters?

And, please, feel free to share this article or my site with anyone.

24 augusti 2015

Story Stocks For Fools Will Wither Worse Than Market

Damn you, Mr. Market!

This post is just a 2-minute comment on the minuscule stock market correction experienced the last few trading days. It's hardly visible on a 15 year chart, but nevertheless... people are talking about it.

Here I had a nice new post on story stocks lined up, that I had hoped writing and publishing before the market turned down. All short ideas of course.

But now I guess I'll just have to idly sit by and see all the "10 times Sales or more" and "no profits, please, we are American" stocks predictably crash to the ground during the coming 24 months.

You know which stocks I'm talking about: Tesla, Twitter, Amazon etc.

And then there is Apple (currently 107 USD/share). It's not actually expensive, not obviously at any rate. Even I got the "right" price to 107 USD in the fall of 2014 (see post here), but I think it will hit a 50 handle before this is over anyway. Today's dip into the low 90's was not a one-off, but a signal about underlying weakness and times to come.


The peak is behind us

Yes, I think we have seen the peak of the general market for this time. The risk spirit is gone, the irrational exuberance and the unwavering belief in central bank omnipotence have vanished like so much #¤%&¤ from the "news" anchors at CNBC.

Sure, we might sea an intensive bounce and a marginal new high at some point (though I seriously doubt it). There probably is a bit juice left in the narrowest of narrow slices of the market, meaning a select few stocks will continue to show new highs for a while. That could fool some people, for some time, into believing it's still a bull market. It's not.

Usually there are dozens of 10-20% bounces at the index level during the 60% ride down (that I think is in the cards). I expect this time to be just as lively. So strap in tightly and try to avoid buying too much too early.


Lots of fun ahead of us

In any case it will be a fun ride, with plenty of historically stupidities said and done by the usual culprits: The Federal Reserve, CNBC, Krugman etc. And then, when it's all over, the interviews and compilations with Peter Schiff, Jim Chanos, Raoul Pal, Marc Faber... will be nothing short of epic.


Strap in, start researching

So, what should you do?

Start researching your favorite stocks and industries right away to be ready.

Look for sustainable models, sticky products and services, strong balance sheets, good cash flows etc. and decide at what prices they definitely will be good investments.

Then get ready to carefully accumulate shares in those stocks, when they dip below your wish list price (probably 12-24 months from now). Buy slowly on dips during a year or two while 'your' stocks bottom out, and then buy some more when they start rising in earnest.

Oh, and then it's almost 2020 and we can look forward to a fantastic decade of productivity, robotics, genetics, journeys to Mars, and the first general Artificial Intelligence that at all resembles a human mind (very late in the 2020's).

Please note, that I'm not recommending anything here, nothing at all connected to the real stock market. This is all a fairy tale. See Disclaimer page here.


And, yes, I bought some Brent today. Slowly accumulating. I know you'd ask anyway.

Taggar (blogg): 
17 augusti 2015

Change or die - learn to appreciate the cheaper things in life

Aiming for a career in finance? Read this first

This (be warned: quite self-centric) post contrasts the life as an analyst or portfolio manager against that of an early retiree. It deals with the alleged dangers of retiring, and postulates a solution (always be investing).

For the budding investment professional, or potential quitter, my two "days in the life of" should be of some worth.

In addition, during your 30 minutes here, you'll get my two cents on happiness and purpose (experiencing, understanding, creating and sharing), as well as scientifically based advice on how to make tough decisions such as quitting your high status job, or ditching Med School for a trip to Thailand with your boyfriend since just around a year (my little sister just announced that little gem yesterday).

learn to appreciate the cheaper things in life

Warning: if you are still 'raw' since 9/11, be prepared for insensitive opinions from my former self.


Life topology, please

I quit my position as a hedge fund manager some 18 months ago. That's a pretty big step for a 41-year old - still in the first half of a normal working span for a Western world citizen. My environment was flabbergasted, but for me it was the only sane thing to do; end homeostasis and establish a huge 'milestone' to pivot the experience and memories of living around.

I often talk about the disproportionately benign effects on humans of convexity. With that, I mean making sure life is a roller coaster that includes many and frequent 'moderate extremes'.

Living life laterally (focusing on new things periodically) ensures accumulating a unique set of experiences and skills, which strengthens the monopoly of you and enhances your value as a partner or employee. Apart from the external worth, it simply makes you better and happier as well.

Exposing the body to moderate extremes, such as cold, heat (sauna), hunger, dehydration, strength training overreaching, varied foods, capsaicin (chili), broccoli (actually slightly poisonous) etc. makes it stronger. And feels kind of good in a Samantha Fox-y way "I couldn't decide between pleasure and pain".

Challenging the brain with unusual tasks increases brain plasticity; the very ability to learn: meet new people (much younger and much older), read books and watch documentaries recommended to you, even if you never would have otherwise.

Move on, if too boring though. The last few weeks I've read Half Of A Yellow Sun and New Delhi Borås, watched the movie "The Man From Earth", and the documentary "Of Hearts And Minds" based on spontaneous recommendations. They were all completely off topic for me, but one was excellent and the other not bad. All were useful.

All of the above is often fun too, in the now, and makes life seem longer and fuller in the retrospect, due to more milestones (Brain Science research).


Change is good

In short, variation is healthy and fun. Actually, not changing is downright dangerous; homeostasis means slowly decaying and dying. Both the brain and body will "rot" if left in the comfy zone for too long, and before you know it Alzheimer's or muscle atrophy will get you.

An additional piece of evidence comes from the podcast Freakonomics, that shows that if you have a hard decision to make, always take the active route, for increased happiness. That goes for everything from quitting your job to ending your marriage or selling the car - or cleaning out your not so recently deceased grandmother's old apartment and sub-letting it.

I didn't know all this explicitly when I quit, I did feel, however, that I was slowly shrinking as a person, that I was losing my versatility of mind. But, perhaps most important of all, wealth, contacts, power and experience had finally taught me to appreciate the cheaper things in life*. In addition, I had had time for introspection and realizing status just wasn't interesting. I wanted to live for me, not others.

*growing up in the lower middle class, I just had to show off my new money with sports cars and watches. It took me some ten years to get over that phase and value curiosity, intelligence and experiences much more highly than conspicuous consumption, envy and empty admiration.


This is what changed

A day in the life of me (now)

Last Friday (August 14, 2015), I got up at 8 a.m., after 8 solid hours of sleep. That's typical.

I work out every second day and on those days I have exactly one cup of coffee after walking the dog for an hour, but before gym - and no more caffeine for that day. This was such a day. Consequently I had a cup of coffee and went to the gym.

After my pretty long workout (they have stretched out to 2 hours of weight lifting rather than 1, since I retired), I had one quart of milk (1 liter) in the dressing room. I want to provide muscle fuel as soon as possible, not least since after my gym sessions, I've typically gone 16 hours without any nutrition. I do 16:8 fasting every day (since January 2013).

Back home, I had a quick shower and a protein shake (olive oil, milk, raspberries, blueberries, 1 banana, 50g protein powder), and then took a brisk 20 minute walk to lunch (fish buffet) with my first boss, and Ludvig at SGM before sitting down for a lecture on Omega 3 and other fatty acids. I (re-) learned a lot - and this time I wrote it all down (!)

Right after the lecture stopped at 2:40 p.m. I had to walk just as briskly back to my apartment, fetch the dog for her second outdoors this day, and then walk even faster for 30 minutes to another meeting.

During my few minutes at home, I did make time to buy some Brent oil (at what happened to be the low of the day, and the lowest price in many years - but I'm sure it won't be the low of the cycle, though).

My old friend from secondary school and I met in a park to discuss his world changing business idea, before I walked back home with Ronja (my dog) again. By then it was about a quarter past 6 in the evening, and I hardly had enough energy to make dinner after all the walking, discussing, thinking, taking notes, working out etc. Hence, I just heated something from the sub zero and served with pan fried french fries and a hot Asian sauce.

The rest of the day, between 7 pm and midnight approximately, I just relaxed with an old sci-fi movie that a blogger friend recommended, walked Ronja a third and final time, and then finished the day with the season finale of True Detective season 2.

I certainly do know how to kick back and relax; it's what I do best - paleolithic campfire time. Actually, my original plan for retirement was to just read books, take walks and in general do nothing. I literally wanted to be a DNB (as per R Rousey).

I knew retirement research shows you shouldn't be passive when retiring, nor watch a lot of TV, but I am used to proving people wrong and looked forward to doing so again.

However, somehow, a dog, a blog, several book plans, new contacts, new energy, science podcasts and curiosity came between me and the hammock. It probably was inevitable all along. Some people have a certain energy that won't die; it's just that most of those stay in institutionalized work if successful there.

Not I; I had done my years, and then some, in whore village, and now it was time for the artist presently known as SpreZZaturian to emerge. And that's an artist that just can't help always investing...

By the way, I have always applauded artists switching genre, whereas most people I know enjoy seeing movie stars fail as rock artists or the other way around. Who else has the opportunity to really go for it? Who cares if it sells, that's second hander thinking (Ayn Rand).


A day in the life of me (before)

Scene: September 2001. My hedge fund (Futuris) had had a pretty good year so far, doing guerrilla warfare against tech stocks - in after dead cat bounces and out after wash-outs, sometimes around earnings, sometimes between, depending on market sentiment and indications from tech industry peers. We didn't know it then, but we were laying the foundation for a Morningstar Gold award (as well as the HFR Decade award much further ahead).

I got up, sleep-deprived, at 6:52, but dressed within a minute (I've always had a psychological problem with rising before 7; it's just not for humans, not this one at least). Despite better hours since quitting sell-side, there still was a sense of face time, and of having to be on top of all new information before the start of the market.

I occasionally tried getting up as late as at 7, or even later, but then my mornings became too hectic, and I always succumbed and gradually moved my alarm clock back to the time that was optimal for me; 6:52 am. By setting the alarm at the optimal time, I know when the alarm rings that I have to get up right away and thus never, ever snooze, not even for a minute.

I arrived at work at 7:30 a.m. (a year earlier I still was on a 7am-7pm office hours regime [and then more work from home], which was much more humane than during my first years on the sell-side, but still didn't leave much room for living). After finishing reading Financial Times and other news, I was off to a tech conference held by a nearby bank.

I also typically used mornings for quickly browsing up on names, events, suppliers/brokers, abbreviations etc. that just wouldn't stick in my asocial mind. I knew that if I didn't, I would look like a fool several times a day.

I've always had a mild firm of face blindness as well as difficulty remembering details I think are less important, like who works where and with what. That can unfortunately make me seem arrogant, or just plain stupid. During my last three years in the business I stopped pretending, and predictably got the obvious "Alzheimer's?" comments.

During the tech meetings that day, September 11, 2001, I as usual tried to ask 'smart' questions to pry some forward looking information out of management. In reality it was often the same questions as before, and several times over:

  • Why?
  • But why?
  • Okay, but why?
  • Does it really work that way?
  • How?
  • But in detail?
  • Why?
  • You want fries with those lies?

The above questions work better with some added knowledge:

"You said in the last quarterly report that you aimed for X but got Y; How come (why)?"

Then be ready for the answer with a prepared follow up question that sets a trap, that reveals either A or B:

Okay, I see, but then why did Z happen, doesn't that mean that either A or B, which proves that Y was in the books to start with, rather than X?! Or does this one go to 'eleven'? (Hah, got  you!)

The year 2001 was a time when tech valuations were coming down wholesale, in particular around earnings seasons, since the companies had no way to live up to the ridiculous expectations set a couple of years earlier. I didn't know definitely that 2001-2002 would turn out to be 'the big one', the IT crash, but my spidey sense was definitely tingling.

Please note that this was after 18 years of bull market, and before the crashes of 2001-2002 and 2007-2008, so there really were no recent precedents - and we nevertheless worked with the idea that a big crash was in the works.


Trust no one

It wasn't until this time (very late to the game compared to my peers), around 2001 that I eventually understood that you can't and shouldn't trust company management.

They are nothing but hired marketers, and they are not there to guide you to the truth.

Founders are even worse. They believe their own hype, and are blind to the negatives.

Michael Hasselquist (former chairman of Nyckeln and CEO of Beijer Capital, among dozens (!) other assignments), who was senior partner at Futuris 2001-2002, used to pose two key questions:

"Which E; whose E? Which S?", regarding Price to Earnings and Price to Sales ratios as a basis for stock valuations (implying the E or S could change, was forecast by somebody with too little information or with an agenda),


"Would we, you and I, buy the entire company if we had enough billions privately?" (thus making sure the valuation level was sound and sustainable and the risk level appropriate).

These days (August 2015), those questions sound obsolete and irrelevant, and I've been made fun of for trying to spread some truths about normalization of growth, margins, valuation and debt, but I suspect the time will come again for Michael's piercing questions. Soon.


Coffee machine

During meetings like those on that day, September 11, 2001, I typically had a small cup of coffee or two, and stuffed my mouth full of candy, during every presentation and Q&A session. I tried to limit myself somewhat, but during 5-10 meetings over a whole day, I could easily eat half a pound of candy and drink 6-8 (small) cups of coffee.

That's quite a contrast to 15 years later, when I stop at one cup every second day (to keep my caffeine sensitivity high, and to ensure good sleeping habits).


Trading with the enemy

I went back and forth between my office and the conference venue, and during one of my breaks at the office, suddenly CNBC started showing smoke billowing from one of the World Trade Center towers in lower Manhattan.

I tried to make sense of the size of the hole and soon realized that it was really, really big - something you only know if you've actually been close to the absolutely huge and wide towers in real life. Fifteen minutes later I happened to see the second plane smash into the other tower in real time.

I then had to leave more or less immediately for more meetings, as if nothing had happened. I did not realize what a pivotal event I was witnessing.

Back at the conference during a Q&A session which was suspiciously empty, I happened to casually tell the CEO (he and I were alone together and he wondered why there were so few attendants) of that particular company that two jumbo jets had crashed into the WTC towers. His face turned pale immediately. He understood the world had changed. So did a friend of mine, who that very day was about to launch his new long haul private airline service...

When I got back to the office, I made a few joking remarks, thinking that the gains we made on our short positions should have people in a festive mood - even if it meant financially being on the same side as Al Quaeda and Bin Laden (though they were not yet associated with the event at the time).

Nope. Not so much. At all. No giggles for me.

"One tower has fallen and is completely gone, and the other might fall too. This is way past any kind of jokes" is what I got back and a dead serious look.

I hated it. We made gains. The towers were already gone, that was in the past, not our fault, and not anything that could be changed. We didn't know anybody in the towers (although I couldn't know that for sure).

My not so empathetic brain could only see that we made a lot of money and should be happy for that. Everything else was out of our control anyway. Besides, I thought you were always allowed to joke about everything, unless somebody directly affected was within earshot.

I hated being taken down from exhilaration; pride even (for being short at the right time). I felt constrained, controlled, not living up to my full potential. I didn't feel like that very often in 2000-2005, but after 2010 I did. It felt like being reprimanded and controlled by "the adults" for no logical reason other than political correctness. I did feel that way on September 11, 2001.

As an aside, other things I started hating during my final years were  snappy market sound bytes: when in doubt stay out, long and wrong, trend is your friend, don't fight the Fed, Trade when you can, not when you have to, etc.

They sound good and they are based on a kernel of truth, but not as much as implied or assumed. I am guilty too though; increasingly so with time. I mean, they do sound good, you sound professional and cool.

It's the curse of vicariousness again; living for others, through them or for them, instead of doing what's real and what works.

After the WTC towers fell, the US markets were closed for a week, then opened -7% on the first day, and lost another 7-8% during the rest of the first week.

We covered our shorts a bit too early - and not really based on economics or fundamentals but on political correctness ("we can't be seen profiting too much from this carnage"). I couldn't believe that last reason; I hated the notion, but I kind of agreed with the actual decision to buy anyway. Also, I really didn't have much real say in the matter back in 2001. It was the two senior PMs that called the shots back then, while I was just an in-house analyst.


It got old, or was it just me?

That day was so much like many other days at the hedge fund - jam packed with both mundane tasks, such as routine company meetings and information gathering and management, and acute fire fighting. And it was all wrapped up in the not so cozy feeling of "what if that was the wrong decision", "what if we will look like fools..., or bandits", not to mention the occasional wet blanket of "I don't agree".

All in all, I of course loved working at Futuris 2000-2015 (my last day was on January 1, 2015), and most of my days, weeks, months and years there were LateralityTopologyConvexity and (not so) Moderate Extremes in a nutshell. Those years more or less made who I am today, through all the ups, downs, hard work, celebrations and frustration.

However, toward the end, the ondulations seemed smaller and confined, the fluctuations one-dimensional and my financial motivation for staying gone.

So, I quit; I just up and left a day in January 2014. Or, so I thought I did, but was convinced to stay as the managing director for a year, to smooth things over during the transition. Surprisingly, the fund was wound up just 9 months later for other reasons. During my 9 more or less idle months at the firm, I had time to rediscover the (my) true joys of life.


Keep investing

My reason for quitting was a drive for more change, for investing in myself, for growth, not the opposite. I think that's why I haven't experienced the kind of emptiness and lack of purpose many retirees and retirement researchers talk and warn about.


Value of life: Experiencing, understanding, creating and sharing

Hanging out with power and money was interesting for a while, not least considering my background (read the book), but soon enough I understood that the basis for happiness lay elsewhere. Finding out exactly what is a work in progress, a task that I guess, and hope, will take the rest of my life.

Right now, however, a few of the ingredients that I think are key are

  • experiencing (very broadly; and paying close, mindful, attention to the experiences); using the body and the brain to their fullest
  • creating something meaningful, something to be proud of, either the effort or the end result - this typically means not working for somebody else

My life mission can be expressed as "Experiencing, understanding, creating and sharing; for getting and lending perspective"


"I'm sigma"

N.B. that if you were hoping for fast cars, fast women, impressive yachts, money and "Versace, Versace, Versace!", you'll be disappointed.

But, but, but,... what about approval, and women? Well, if they aren't intelligent and curious enough to appreciate the cheaper things in life, I'm not interested in playing their game. I'm not alpha or beta, I'm sigma. 


The little things

Last week I got the 'innocent' question of when I am happy.

The word "happiness" doesn't quite describe the ultimate state of mind, but let's use it as shorthand for the the state I or you want to reach.

On the one hand there is the overarching oceanic big happiness that carries me over the years and decades. It's built on freedom, knowing and accepting myself etc. On the other hand there are moments of more intense everyday happiness. For me the latter take many shapes:

  • Smells: tar, sea, gas/petrol, cinnamon buns, wet dog fur, newly washed hair
  • Insights: aha moments, connecting the dots, reading and understanding new concepts, learning something new
  • Coming home to my dog, Ronja (German Shepherd - Doberman)
  • Connecting with new and old friends
  • Mind altering: fall asleep, wake up, drink, sober up, leave, arrive, coming home
  • Food and rest after working out
  • Projects; planning, progress, fulfillment, growth for me and the project
  • Positive surprises, being scared, laughing
  • Completing projects, constructions, articles
  • Touch

mind altering meeting new friends Life livet

The common denominator is progress, phase transition, change or growth (including completion and closure), including varying sensory experiences.


Summary: Make the change already!

Take the leap. Change. At least if you are in doubt of whether to stay or go, you should definitely goI say it, Freakonomics says it, brain research supports it, Ludvig at SGM is at war against homeostasis... What more do you need?

Be prepared for finding something else than you might expect, though.

Learn to appreciate the cheaper things in life ;) Anybody can buy expensive wine, but searching for a good cava or prosecco is much more rewarding. In addition, that's the kind of smart and interesting people I like hanging out with.

Investor wanna-be? Learn to ask the right questions, then ask them again and again. There are no points awarded for originality. And, do not trust company management. Always read between the lines and expect what can be hidden to be kept in the shadows. Never take words for facts, demand numbers, make the calculation and assessment yourself whether "growth is good" or not.

Trust no one. And, remember: "What E? Whose E?". But, perhaps most important of all, question whether you really want a job in finance, and why.

Identify your own true joys and pursue them. Learn, accept and embrace your personal traits (but be smart about it, you don't always have to be you - just know who you are and accept it but don't flaunt it unnecessarily - definitely not on job interviews, first dates, client meetings etc. I've done that enough for both of us)


Now, make that change you've been pondering, and stop hating: Stop hating people who change. Stop hating your situation, your environment or yourself for not changing. Just do it. Always Be Investing.

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