Monday, June 13, 2022

Moving to Substack . . .

The times, they are a changin'. Going forward, I will primarily be blogging on Substack:

Bryan Caplan, who else, convinced me to let go the sunk costs and brave the change

For a while at least I may continue cross-posting here as I may want to maintain my tags and options otherwise, but I fully expect the transition to be permanent. In which case I will eventually redirect traffic from Blogger to Substack for the domain.

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Sunday, June 12, 2022

NYC & Cape Cod Travel Observations

I have just returned from a family vacation in Cape Cod which began with a brief, 3-day stay in New York City. We flew into NYC and then rented a car for the drive to the cape. Below I note a few observations from the trip. These are just trivia compared to the wonderful time we had in both locations. Chatham, our regular destination in Cape Cod, again proved to be a splendid escape. 

  • My Lyft driver said as we were crossing the Queensboro Bridge, “the greatest city in the world without a doubt.” He is much better travelled/lived than me—born in Nigeria; lived in Dubai, Shanghai, LA, somewhere in Europe as well as several other worldly locales I don’t recall specifically. Who am I to argue? NYC is indeed world class. It’s ability to overcome so much poor and excessive governance is a tribute to its greatness.
  • NYC is vibrantly crowded—in a very good way. This was refreshing to see as I feared the city might have lost this by an order of magnitude. 
  • Outdoor dining is generally well placed and seemingly here to stay. The outdoor market near Times Square on Saturday was new to me and a treat to walk through.
  • New condo high rises are incredible. These so-called "pencil towers" don't inspire me the way other skyscrapers do, but maybe I'm too caught up in how structurally unsound they appear, which is intended as a feature rather than a bug. Just to me they look like how a child might sketch a cityscape lazily drawing as many tall buildings as possible.
  • Residence Inn Central Park (54th & Broadway) is recommended. Laundry options and convenient location along with great room and views—pics below.
  • Office space use looks still near empty by my anecdotal evidence. These pictures were taken from my room. Of the many elaborate office floors pictured in the neighboring building, only one ever had any occupants other than cleaning crews--cleaning floors that didn't ever have office workers messing them up. The floor with the basketball games and other fun stuff was vacant during the day. Note that the machines were all on 24/7--this should probably count against this firm's ESG rating, LOL

  • Where are the homeless? Michael Shellenberger has a point. Considerably less panhandling total than I encounter in the OKC area with 1/14th the population.
  • Crime and safety never seemed an issue on this trip. While I was in relatively high-income places, the popular narrative from the right still seemed false. We walked about 8 miles per day in various areas: 
    • Times Square (at night!)
    • Greater Midtown area
    • Central Park to the Upper West Side
    • High Line/Chelsea Market to Little Italy/Chinatown
    • I left my family shopping at Rockefeller Center to go pick up the rental car planning on them walking the half mile back by themselves without a second thought. I would have hesitated to do this in downtown OKC. Their journey was uneventful.
  • Memories come serendipitously. On our first night we were caught in a downpour in Times Square. While some of us had rain jackets, we were ill prepared. We stopped into a CVS to buy a couple umbrellas. Still our shoes and socks were quite soaked. This was very much like Boston years ago. No one would plan to get caught in the rain like this, and it would undoubtedly be one of those wouldn't-do-that-again moments. Yet, how can we reconcile that with it also being a wouldn't-trade-that-away moment? We don't get to choose our moments, but we do get to choose how we feel about them and how we take them on. (NB: I still plan on making good on this from the prior post: "The imaginative story we concocted on the train-ride back will be the inspiration for a future post.")
  • Masking is relatively high. ~20-25% of people still mask and those that do do it constantly—inside, outside, between bites. These are the people suffering long COVID. One young man walking down a busy, curvy street in Central Park choose to avoid passing our group in a tunnel under a bridge by walking down the middle of the street. He crossed between speeding cars, walked down the double-yellow line in the shadows of the tunnel holding his Macbook up high as cars whizzed by, and crossed back behind our trail. He seemed to stride with some pride in this moment of horribly bad risk analysis.
  • Book stores are the last holdout on required masks (aside from public transportation where it actually isn’t enforced). Stores in both Greenwich Village, NY and Chatham, Cape Cod strictly adhered to the antiquated ritual.
  • Cape Cod is resilient as well. Hard to tell a difference from my last trip in 2019.
  • Mask use is lower here than NYC. Maybe 15% tops. Very few outside.
  • Police are used for traffic directing around construction. This is something I noticed in Boston a few months back. In Cape Cod four or more police can be found just standing around pointing for cars to drive or wait as construction workers actually work. Definitely a union giveaway—great to see all the crimes have been solved in Massachusetts.
  • People were quite friendly almost everywhere in both places. The northeastern USA's reputation of unfriendliness is again proven quite unwarranted. Distant and reserved, yes. Hostile or gruff, not so much.
  • Rideshare the business model as experienced via Lyft seems strong and competitive. Uber was just a tad more expensive on each prospective trip but highly available as well.
  • Prices are high but a competitive market helps. Cocktails were basically the same price at comparable bars to what I see back home. Food was more expensive but an order of magnitude better when considering availability times quality. As for prices, it is hard to know how much is inflation versus big market, if only I had a restaurant journal… oh wait, I do. 
    • Let's begin by comparing Nom Wah Tea Parlor between my visit in June 2018 and current prices in June 2022. Recreating the order from the prior trip (beer, tea, 3x buns, 2x dumplings, roll, rice, and noodles) yields a total bill of about $69 pre tax & tip. My total bill with tax & tip in 2018 was $68.72. Assuming the tax rate is the same and I tipped the same rate, the total bill difference goes from $68.72 to about $89--about a 30% increase. In comparison NYC-area restaurant prices in general as measured by CPI over this time span are up about 18%. A similar order made at my local option, Mr. Hui, comes to about $93--more expensive and lower quality (sorry, Mr. Hui). My bet is Nom Wah got discovered between then and now, and its prices are reflecting as much. Hence, the 30% increase is a combination of general food inflation and something specific to that restaurant.*
    • One more comparison: The Chatham Squire, which I always hit multiple times per trip. In June 2019 I was there with extended family. Our total bill was $202.05 for which we enjoyed (well, let's just say quite a few drinks) and cioppino, mussels and hummus. Recreating the order in June 2022 makes the total about $253--about a 25% increase.* 
  • Pervasively merchants are directly passing along credit card fees in Cape Cod and to a lesser extent NYC. This has got to be an intermediate solution to a standard menu-price inflation problem. Seems slightly bullish for crypto while obviously creating a distortionary arbitrage for the cash-based consumers. 

  • Employee scarcity didn't seem as bad in Cape Cod as NYC or back home, but the effects were still in evidence. Restricted hours of operation seemed the most obvious sign. Restaurants were otherwise packed. 
The trip was delightful as I could have easily enjoyed double the time in each location. Cape Cod is very relaxing especially the way we do it. If you feel rushed there, you're doing it wrong. Enjoy a few pictures.

*Take these comparisons with a grain of salt since you really cannot tease out anything from an N=1 sample. 

Monday, May 30, 2022

Stock Picking: The Game Within The Game

It is important to understand the game you’re actually playing in all endeavors. In stock picking among other areas of active investment many times the game that is being played is not the one that is at first perceived. It is also not always the one commonly believed or advertised to be being played. 

Goldman Sachs is on the other side of grandma's trade. Grandma and her investment club might have been putting in some pretty good research, but they’re very unlikely to outperform the models and information advantage a firm like Goldman Sachs will have. 

As general investors selecting exposure to the market when we evaluate Goldman Sachs, we evaluate them against the market. That is the correct benchmark for a potential or current investor as that is the central question: Am I better off investing with this particular active stock picker or is there another that can do a better job including using a passive index fund? Perhaps more appropriately and completely the question really is: Is the performance Goldman Sachs delivered appropriate for the risk taken, and could I have achieved as good or better results with as much or even less risk? 

That is the game we are playing when we choose investment in a fund manager, but that is not the game that Goldman Sachs, a fund manager, is playing. Goldman Sachs is not trying to beat the market per se. Goldman Sachs and more precisely specific fund managers within the large organization that is Goldman Sachs are trying to beat grandma and her investment club along with all the other relatively novice investors in the market. 

Personally as a wealth manager I am trying to help clients reach financial goals by investing so that their risk-adjusted return is appropriate for them. That is the game I am trying to play--rather than trying to beat the market, I am trying to match their risk/return exposure to their goals. That might mean using a Goldman Sachs fund if I think it is the best option in that specific area. 

Yet clients often don't want to play that game. In wealth management one of the more frustrating things to deal with is competing against mythical portfolios that clients think exist. An example of which might be when a client is told stories at the country club or down at the barbershop about how great someone else’s portfolio is performing. 

It is very difficult to compete against a phantom. Floyd in the barbershop is probably not doing as well as he claims. In fact it is very likely Floyd is under performing the competition because the competition for Floyd is Goldman Sachs among others. 

For Floyd to feel good with his investments, he only has to compare himself to those decisions he happens to remember along with hypothetical investments he did or did not choose to make. Floyd’s benchmark is cash and imagination. 

For Goldman Sachs to succeed they specifically have to beat most of the Floyds out there and only loosely do they need to keep up with the market. In the long run they probably don’t stand a chance against the market but in the long run that’s not who they really are competing against. 

For those of us who want to be investors with Goldman Sachs, the proper benchmark to compare them to is the market. But the bottom line for Goldman Sachs is a benchmark against Floyd, and Floyd never stood a chance. 

Sunday, May 29, 2022

Desperately Seeking Alpha

Great investing is generally about taking on the right risks and being compensated properly for risks taken. It is primarily NOT about out trading other investors.  
This is a sister post to Does Active Investing Work in Theory? exploring the two types of active management: alpha seeking and risk-adjusted return matching. The former is the sexy one; for almost all of us the latter is the realistic one. 

Let's make sure when we say "alpha" we all agree on what we are talking about. The term alpha generally means some version of outperformance. Imagine two runners in a 400m race where one finishes half a second ahead of the other. The faster finisher could be said to have .5 seconds of alpha over the opponent. But that is a bit too simplistic. In investing we usually want to know if any apparent outperformance is actually truly outperformance once we consider any inherent differences between competitors including adjusting for risk taken. 

In a fair race there shouldn't be inherent differences in the playing field so to speak. The runners are on the same track travelling at the same time. For investors we don't get such clean, simple comparisons. Even for our runners on an elliptical track the runner on the inside ring will have to start a bit behind the other runner so as to compensate for the less distance of the inner track lane and so the finish line can be a straight line across the track. 

What about risk taken? Pushing the analogy consider if one of the runners was using performance-enhancing drugs. This could be in one of two varieties. In one case they could be banned substances that if caught he would be disqualified. An outside gambler betting on him was taking a greater risk than perhaps he intended. In the other case they could be allowed substances but that have dangerous potential side effects. His risk now is that he runs the race (maybe winning and maybe not) and then suffers a bad health outcome. 

Back to investing, we ideally want to compare the performance of two investors isolating just the set of factors inherent in their investment "skill". I put skill in quotes because we never can be quite sure we are seeing skill or luck or that we have forgotten about an important difference we would have intended to adjust away. 

Most of the time in investing it is risk in its many forms that we want to adjust for. As an example, if I tell you I am a great investor because I have substantially outperformed my S&P 500 benchmark for the past 5 years, you might not be so impressed if I then reveal that it is because my only investment has been the single stock Apple, Inc. Sure, I outperformed in total return, but I took WAY more risk to do so. If that risk adjustment isn't made, we can't say much about this so-called outperformance.

There are other adjustments to consider like if an investor has been using inside information to facilitate his outperformance. The fact that this unethical practice might not be repeatable should make us doubt that this outperformance is replicable. At some point we would have to consider if the inside information advantage was just a different version of luck. 

Alpha seeking in active management is an attempt to outperform the competition, be it other investors or a benchmark index, adjusted for risk. How is this such a daunting task? Don't we hear about great investors all the time doing exactly this? Actually we do not. We hear about some investors' performances when they happen to be outperforming and often that is not true outperformance because they are not risk adjusted. But there is more to say about how difficult this is.

The capital markets (stocks, bonds, etc.) are very efficient markets primarily because they are very thick markets (i.e., there are lots of people participating in them). This is helped by the fact that they are very lucrative to those who perform well in them. The idea that some investors will outperform is a near certainty. The idea that that investor is you or someone you pick to follow is highly unlikely. 

Public capital markets are a ruthless machine viciously and constantly seeking to eliminate any advantage an investor may possess. The more brilliant your new method of discovering and unlocking outperformance, the more quickly and decisively the market will absorb it away from you. And in those cases where apparent persistence in outperformance exists, the more likely a hidden risk difference has yet to be understood.

For active management the sooner one gives up on alpha the happier and more financially successful one will likely be. Instead of trying to outperform adjusted for risk, try to just keep up by taking the right risks. 

A human investor's benchmark isn't a stock index or a bond index or some combination of the two. It is the realistic financial goals they are trying to achieve. These are some combination of consuming well today and being able to consume well tomorrow and for the rest of one's life. For most of us this includes more than ourselves--primarily our family and somewhat our friends and our charitable desires.

Our investment portfolios must be constructed initially and revised regularly to be appropriate for achieving these goals successfully. This is intentionally vague since it isn't something we easily know even for ourselves much less specifically for others. What we can say is that broadly diversified, low-fee investment into marketable securities should help our cause in most cases. 

Hence, the active management of financial assets that I believe desirable for most all investors is simply risk-adjusted return matching. Try to get the market's return adjusted for the risk you want and need to take. Notice two important nuances in that last sentence: the market is more than the stock market and I am framing risk not as something to avoid but rather as something to embrace appropriately. Risk negation isn't a thing. Risk tradeoff is. You are taking and will take risk. PERIOD. 

What risks to take more of and what risks to take less of is the essence of good investing. Being well diversified into low-fee index funds takes care of some of the typical risk factors like concentration risk, market risk, and credit risk, but others persist beyond that first step. In most cases one needs to also consider liquidity risk (being able to use one's financial assets when one needs to), inflation risk (maintaining purchasing power), wipe-out risk (losing so much one is permanently set back to a lower standard of living or truly financially wiped out), bad-discipline risk (letting emotion drive decisions that thwart the long-term plan; this could be the more obvious bailing out at the worst possible moment but also the less obvious overexposure due to complacency or exuberance), and mismatch risk (having an investment portfolio poorly constructed to fit with an investor's specific investment horizon and objectives). These risks push in different directions at different times and with different magnitudes. Active management is a fluid process of balancing and rebalancing risk tradeoffs.

Successful active management is difficult enough before attempting to then add alpha to the objective set. Notice also that attempts at alpha generation might certainly interfere both intentionally and unintentionally with risk management since taking on different risk profiles is both a means and an effect of reaching for alpha.

Leave it up to the professionals to try to generate alpha. You are too smart to lose money they way they do. 

Saturday, May 28, 2022

The Party's Over

The Republican Party is facing an existential crisis. It is at a point where it must decide as an organization if it is going to continue to be a personality cult devoid of ideas and completely unable and unwilling to provide potential solutions to problems. 

The Democratic Party is facing an existential crisis of its own. It must decide as an organization if it is going to continue to be an elitist cabal that refuses to engage in anything but gesture politics. Interestingly the Democratic Party just emerged from or narrowly avoided becoming its own personality cult during the years of Obama. But the next iteration of the party was a substantial backward step rather than a major mistake averted. 

The Republicans basically do not have ideas. The Democrats basically have only bad ideas. I’m not sure which is worse, and I am equally unsure about which one can right its listing ship both of which are at risk of completely capsizing.

If there is any salience to my Five Tribes of Politics theory, then perhaps that can shine some light on where things go next. 

To recall, I think there are five key factions that in order to be electorally successful the major parties must appeal to. They are:
  • Crony Capitalists
  • Labor
  • Patriots
  • Evangelicals
  • Woke Champions
Balance is important as too much appeal to any one group can alienate the others making a strong coalition of resistance. 

The Republicans are about to get what they supposedly were asking for with abortion pleasing evangelicals. While this enrages woke champions, that is not a group the Republicans have any interest in appealing to. However, like the dog that caught the car, evangelicals might be done with the strategy of "using Trump to get the courts". At the same time the extent of strictness of some state's abortion laws might turn away others who find the developments a bridge too far.

More problematic for the personality cult would be the shifting ground on geopolitical tensions. Praise for Putin doesn't look so hot to patriots these days, and both labor and crony capitalists have reasons to see a strong, engaged American military as a benefit. 

But for Democrats the footing isn't any better. So many parts of the woke agenda eventually conflict with the real-world aims of labor and crony capitalists. Patriots too tend to lean toward an America-first policy world. At some point you cannot keep convincing these factions that what you "really, really mean to say is [thing that benefits them most truly]". 

A very big part of what the parties are grappling with is the same phenomenon that is reshaping so much of society and institutions--namely, disintermediation in all its gory and wonderful forms. America's two-party system has been remarkably enduring. Perhaps this was a function of America spending over 100 years fighting obvious enemies with the parties arguing about whose ideas were best suited to bring a better world. 

These enemies included economic collapse just as the industrial revolution hit its stride (i.e., the Great Depression), tyrannical kingdoms hell bent on world domination (i.e., the axis powers of WWII followed by the USSR; the hottest of wars and the Cold War), domestic unrest as people no longer tolerated various inequalities (i.e., the civil rights and women's liberation movements; note these virtuous developments were "enemies" in that they threatened the order of things--they were enemies of the regime), and threats to American hegemony (i.e., economic globalization and terrorism). 

All of these were ironically existential threats to the United States. All of them called for solutions ranging from combat to embracement. Big parties were an efficient means of fighting these battles. That era may have ended. Economies of scale have limits and one of the virtues of specialization is that bespoke eventually outcompetes commodification. 

Wednesday, May 25, 2022

What I'm Worried About as a Crypto Investor

Much like throwing a pass in football, there are three general outcomes from crypto investing, and two of them are bad. Namely, aside from maintaining or increasing in value, crypto assets like Bitcoin and Ethereum could become nearly valueless to an investor in two distinct ways. They could go bust or they could fail to reward investors even though they prove valuable to society in general. 

I consider these two bad outcomes distinct since they are so different in every manner except for the ultimate experience for investors. In the one case we have the conjecture that cryptocurrencies are vaporware that are just riding a greater-fool wave that will ultimately come crashing down. Label this one the "worthless" scenario.

In the other case we have the concern that even though crypto and its inseparable blockchain technology are godsends, there is no way to actually profit from their benefits directly. Label this one the "unable-to-capture-worth" scenario. 

Which one you subscribe to or concern yourself with says a lot about your crypto demeanor. For me the second concern is what keeps me up at night. I am a modest investor and a big, enthusiastic supporter. I want it to win and for me to win with it. 

Others are rooting for it to lose because they don't believe or don't want to believe in it or maybe some of both. For these doubters there is often a FOMO element that partially drives the want for crypto's demise. But in many cases these are thoughtful people making intelligent arguments against.

While the case against crypto isn't completely empty, I believe the clock is running out on that perspective. As crypto assets continue to establish themselves now more than a decade into their existence, this view looks more and more like a trivial dismissal similar to thinking the Internet would not amount to much beyond a step up from a fax machine.

Much more likely is that if crypto investors are left holding the bag the value has melted away from investors flowing to the benefit of all of society in general. Tyler Cowen made this case recently in his Bloomberg column:
So you can be bullish on crypto’s future without being bullish on current crypto prices. For a simple analogy, Spotify and YouTube have greatly expanded music’s reach, but overall the price of recorded music has fallen, and many performers earn much less than did their peers in the LP era. Or consider the agriculture sector, defined broadly: It has done very well over the last few centuries, but food prices have fallen rather than risen, due to higher output and greater competition.
I consider the unable-to-capture-worth scenario the serious, thoughtful worry. There are many ways this almost certainly will be true if crypto pans out for the long haul. You can make a great living as a bathroom remodeler or a plumber, but you aren't coming anywhere close to capturing all the value to consumers of indoor plumbing. 

If crypto investing fails, I think it will fail despite succeeding as a technology rather than because of it failing to ever deliver.

P.S. I take it as a very positive sign for crypto assets that the serious ones (Bitcoin, Ethereum, etc.) are becoming more and more correlated with the performance of "real" financial assets like stocks and bonds. It is an unfortunate economic fact that assets tend to become more highly correlated together as they mature making investing more difficult as some of the benefits of diversification erode.

Monday, May 23, 2022

Partial List of Best Last Meals

Perhaps which one you choose says a lot about you. Perhaps what I list and the order I choose says a lot about me. 

I leave it up to the reader to consider why it is your last meal; be it choice (yours or someone else's) or unexpected circumstance.