Showing posts sorted by relevance for query point of no return. Sort by date Show all posts
Showing posts sorted by relevance for query point of no return. Sort by date Show all posts

Saturday, April 4, 2020

Some Secrets to Investing Success

To be a "successful" investor, you've got to start by defining success. It is different for just about everyone. Two investors with nearly identical demographics including age, lifestyle, and net worth can have significantly different financial goals. And financial goals are almost never determined along one dimension. Thinking they are is a formula for a typical 80s movie, and most were bad depictions of how investing works even though they have classic status.

Here are five hot tips to get you a leg up on the competition:

1. Get a head start. As a Sooner I can tell you there is no substitute.
Imagine you, a very conservative person, begin investing at age 25 by putting $100 per month into a very safe bond index fund (perhaps BND). You do this for 20 years (240 months straight). Let's suppose this bond investment grows at an average rate of 3.5% per year. Although you put in $24,000 of your own money, that money is growing on average as it is invested. So after the 240th month you would expect to have about $34,576 of which about $10,576 is the growth of the investment. At that point when you are 45 years old you stop saving additional money and just let the bond investment grow for the next 20 years or until you are 65 years old (40 total years of investing). 
Now imagine me, a rather aggressive person the same age as you, waits until you are done putting money in to begin my own investing. At that point, 20 years after you started, I start investing $100 per month and I don't stop adding $100 per month until age 65 (20 years of adding to my investment just like you) and I invest in a stock fund with more risk and return potential (perhaps VT). Let's suppose this stock investment grows at an average rate of 8% per year--more than double your investment return per year. After 240 months I've added just as much as you, $24,000 of my own money. I've also enjoyed a higher rate of return on those investments. But do I have as much in total? In this case, no.
At age 65 you have over $68,798 while I have only $57,266. And if you would have chosen the stock fund instead of the bond fund keeping the other assumptions the same, you would have over $266,914--being early is an amazing difference!
See the chart below and notice how starting early allowed you to be invested more conservatively.

Here is a short video showing the same principles at work.
2. Protect against the downside first and foremost.
It is mathematically impossible to save enough and earn enough on that savings to cover spending more than you have. Try it and see. If you save $20 million and earn a return of $40 million on it (a 200% rate of return!), you still cannot spend $61 million. Even if you borrow against the $60 million to try and get an additional $1 million, you have to come up with that $1 million to pay back the loan. Spending prudence should seem self evident. So too should investing prudence because you mathematically cannot spend investment earnings you do not achieve. 
If I put all my investment (eggs) into one stock or bond (basket so to speak) and that stock or bond goes broke, my investment is gone. If I put all my investment into two stocks or bonds and one of those goes broke while the other is fine, I have only lost half of my investment. Repeat this logic for more and more individual investments, and you will eventually get to a point of diversification where the impact of picking a complete lemon (stock or bond that goes to zero) is immaterial to you. That should be a goal for most investors.
The entire stock or bond market basically cannot go to zero. If it does, you got bigger problems than your IRA balance like the colossal asteroid that must have struck the Earth. In fact, the history of economic growth has been a reliable (eventual) pattern of higher highs and higher lows. Diversification is your first best risk reducer against the threat of ruin.
3. Grab the right rate of return.
It is all about beta not alpha. Beta is the fancy way of saying give me the market's performance. Alpha is the fancy way of saying give me something different (hopefully better) than the market's performance. Beta is passive investing, boring, dull, easy, anybody can do it. Alpha is the sexy stuff. Alpha is the smart money, the guys zigging when the panicked sheep are zagging. At least, that is the story so many like to tell.
The fact is overwhelmingly most professional money managers do not beat their benchmark. Let that sink in--the guys paid millions of dollars to add value for investors by being better than their benchmark are most of the time subtracting value. Investors are paying a fee to get a lower rate of return than they could otherwise.
The key decision for most investors is not "can I beat the market?" but rather "can I be the market, and what market do I want to be?" Remember, every investor is different--different risk tolerances, different various goals, different unique circumstances and biases, etc. Getting the right mixture of various investments (AKA, asset allocation) is the first best method of achieving your financial goals--notice how this works hand in glove with diversification. The asset allocation decision will almost exclusively determine the risk/return path your investments travel making other decisions small contributors to performance.
4. Look for the rewards of liquidity and transparency.
Listen to Jason Zweig among so many others. Don’t trust hedge funds. Understand that private equity = public equity minus liquidity minus transparency plus fees plus leverage. As Cliff Asness points out, let others accept a discount for illiquidity (when a premium would be the theoretical demand of investors). You want access to your money while invested in assets and processes you can understand, fully benchmark against, and truly see the value of
5. Resist temptation and envy--the key drivers of FOMO.
This one has many short sub components (here are a few):
  • Don't time the market -- This is an impossible task and anyone who tells you different is a liar or a fool.
  • Therefore, stay invested and on your long-term plan -- Uncle Freddy very likely doesn't know something you should be emulating. This time (any time) is very probably NOT a time to go to (some different asset allocation as compared to your long-term plan).
  • You will never be significantly invested in the best performing single investment because of rules 2 & 3 above -- You don't want the risk that has only luck as its investment thesis.
The bottom line of this is successful investing generally is simpler, cheaper, and duller than advertised.

Thursday, August 28, 2014

Point of No Return

As Burton Malkiel points out in this article, popular sentiment is growing that the stock market is reaching or has passed fair value. As he also points out, beware your attempts to "time" the market--selling out to buy back in after the "inevitable" dip.

The stock market will go up and down and up and up and down and up and down and down and up and . . . Of course, history shows that those downs don't fully counter the ups. The composition of ups and downs in both frequency and magnitude matter. Historically it has been the case that the rides up are slower and longer while the trips down are sharper and shorter. I've discussed this before. While that pattern isn't always followed, the strong historical trend has been an upward bias in returns--the long-term trend in the stock market is positive.

Add to that the fact that the market is very efficient, and you are left with virtually no reason to try to time the market. Yet, many are not convinced. They still feel compelled to sell out with the belief (hope) the market will decline allowing them to buy back in cheaper. My advice then comes in the form of a question: What if you're wrong? What is your contingency plan for that?

It better be to find a point to throw in the towel and get back into the market. Of course, you'd like to know how to recognize you were in fact wrong. After all, just because the market has risen from where you exited doesn't mean it won't come down still.

Here is perhaps a little guideline. Looking at the monthly total returns for the S&P 500 since January 1970 through June 2014 (44.5 years or 534 months), I isolated all of the drawdowns for the index. I then ranked them and calculated the implied percentage gain for each. This last figure would be the amount the index would need to increase in order to overcome the drawdown. For example, if the market declines 25%, it would then need to increase 33% to get back to even. A 50% decline requires a 100% increase from that new low point. Here are all 36 drawdowns for the period charted:

Your reentry point might be once the market has gained some threshold amount above the point in which you sold out. Because the general trend is for the market to grow, you would want to buy back in once that threshold of growth has been achieved no matter how difficult it feels to do so. And it will feel difficult--you sold out at a lower point for a reason. Your complaint might be that just when you thought you were out, the market pulls you back in.

To give you some comfort, though, notice how rare very large drawdowns are. Couple that with the fact that over this time period (January 1970 to June 2014) the S&P 500 increased over 8,300%. Like I said, are you sure you want to time the stock market? If you do, consider that once the S&P 500 has increased about 20% from your exit point only five times in the past 44 years has it dropped so much that it would return to your exit point. And that drop needs to happen ASAP. The index's average growth over this period was about 10.4% per year or about .83% per month. You risk being left behind for good.

When it comes to beating the market, market timing as a strategy isn't even on the map. The implication is discipline beats (mythical) exceptional skill--most value added by professional financial advisers (perhaps as much as 90%) comes from simply finding appropriate asset allocations, fulfilling it with appropriate (not sensational) investments (styles and classes are more important than particular names and issues), and KEEPING with it in good times and bad.

Tuesday, October 23, 2012

Thinking like an economist at the Sooner Club Tailgate

As part of the benefit package associated with being a large enough donor to The University of Oklahoma Athletic Department, our group gets two complimentary passes to the Sooner Club Tailgate before each home football game. The event is described as:

Before each home football game, more than 5,000 Sooner Club members are treated to a variety of complimentary food and beverages provided by more than 40 local restaurants and vendors. Special entertainment is provided by the Sooner spirit squads, the Pride of Oklahoma marching band, and our own emcee and DJ.

It is held inside the Mosier indoor practice facility originally used by the football team (before the Sooners discovered the forward pass circa the 1990s—the roof is too low) and currently used by track & field teams. It is almost as large as a football field inside. The overwhelming majority of the floor space from the middle out is occupied by tables and chairs while the surrounding sidelines on both sides host the various vendors of food and beverage.

While I don't actually over analyze this opportunity as described below, I thought it would be a good thought experiment to explore.

Here are some relevant facts to consider as I try to think like an economist:

  • The event opens 2.5 hours before kickoff; I like to be in my seat at least 45 minutes before kickoff.
  • I generally will be on campus 2.5 hours prior to kickoff--I am already in the area naturally but on the other side of campus. I enjoy eating something before the game and I always have done so.
  • The line to get into the tailgate begins forming outside the doors about 30 minutes before it opens. Getting to the front of the line would mean leaving 30 minutes earlier from my house.
  • The event is very crowded for the space and lines are present at nearly every vendor booth constantly.
  • Vendors often run out of some items. Occasionally, one will run out of all items.
  • The event is about a half-mile walk out of my way, which would mean, of course, a half-mile extra in return.
  • There is a good variety of food offered considering only tailgate-likely foods. The food is very similar to what is offered elsewhere inside and outside the stadium. More on this in the strategy below.
  • Generally, I attend the tailgate with my 8-year-old daughter.
  • Just to be clear this is an all-you-can-eat event including all-you-can-drink with soft drinks, bottled water, and beer offered. The beer offered includes real beer like Shiner Bock and that from the local microbrewery Coach’s Brewhouse along with nonsense like Budweiser, Bud Light, and other forms of badly flavored water.
  • The two complimentary Sooner Club Tailgate tickets are part of the package for the stadium tickets my group purchases including the season donation. Receiving the tickets cannot be avoided and does not factor into our decision to purchase our stadium tickets. Regardless, once I’m at the game, it would be a sunk cost even if we had explicitly purchased the tickets for the purpose of attending the tailgate in the future. More on this in the strategy.
  • You basically can’t take food or drink out of the event, but only beer is really monitored. A bottled water or some of the packaged goods like Hostess donuts pass inspection. The layout of the facility and its surroundings preclude the risk that someone would make a repeated run in and out distributing food to outsiders.
  • A normal plate at one of the vendors inside the tailgate would probably be priced outside the tailgate on game day at between $8 and $12.

Here are some irrelevant facts to disregard:
  • The Sooner Club sells tickets at the door priced at $30 for adults and $15 for children 12 and under. Since it is just me and my daughter and we have tailgate tickets already, these price points are not important. This is the first lesson. To determine the value of the event to me, I must consider my opportunity cost in obtaining it--the value of the next best alternative foregone. The price of the tickets at the door is not relevant.
  • A normal plate at one of the vendors would probably be sold at the vendor's primary place of business on a normal day at between $5 and $8. Also not relevant and in this same vein, a hot dog in 1940 cost $.30.

Here is my thinking and strategy:

Do I attend?
  • If the weather is bad (rain or snow or high, very cold winds), the decision not to attend the tailgate is easy. The walk over is unprotected from the elements. I’d rather stay warm and dry in the Student Union and pay for the same meal. The price of my food thus at most equals the amount at which my daughter and I value being warm and dry. Remember, the tickets, even if explicitly purchased before the season, would be a sunk cost at this point.
  • Otherwise, I will generally attend unless there are some special circumstances like meeting friends from out of town before the game. Again, the price of food purchased as an alternative would be equal to or less than the value I place on meeting the friends. So far this year I am 3 for 3 in attendance. I must need better friends :).

Do I get there early to get to the head of the queue before it opens?

  • No. The food is good, but that isn't really important. It must already be good enough because I am attending. What matters is the range of opportunities within the tailgate (the best food relative to the worst food), and all this leads us to the expected food. Remember that I said vendors do run out. Presumably the highest demanded food has the greatest chance of running out. Also, there are varying lines of people within the tailgate waiting to get each vendor’s food. The best food will have the longest and quickest forming lines. So, I was wrong before? Here is where thinking like an economist helps and leads me to the answer not to get there early.
  • It is unlikely that there is much difference between the vendors for the typical consumer. If you have very atypical tastes, this might be a reason to get there early. More likely it would be a reason not to attend as the cost would be too high. Snobby foodies can’t afford to attend “free” tailgates.
  • If there were much of a difference, the line to get in would form that much earlier and the fight inside would be that much more intense. It is hard to beat the crowd when price is not a rationing tool.
  • I like to watch as much football as possible on Saturdays. My daughter can't walk as fast as me. Leaving early or rushing across campus to get to the front of the line is costly. And we can safely assume it isn't worth it. The food isn't likely to be that much better than the competition outside, isn't likely to be greatly different once inside, and isn't likely to all run out—not if the Sooner Club really intends this as an enticement to be a big donor. 

Am I picky about what I get to eat?

  • No. While not snobby, I do consider myself a foodie. The food here is good, and some is better than others. Do I scout out my options on the website before the game knowing some vendors drop in and out? Do I do an initial recon mission once first in the facility to plan my attack? No and no. Remember, there is a limit to how good and how bad the food can be, and the internal lines will smooth out the differences for the typical consumer. I do consider myself fairly typical in this case.
  • An example: Bubba’s BBQ is very good. Burger King is an average burger. Bubba’s BBQ is at the back, and the line moves slowly. Burger King is at the front and is quick. There are a lot of trade offs here, but they most are negligible except for my time. The marginal benefit of the BBQ over the burger is greatly outweighed by the marginal cost of 10 minutes longer spent waiting. My goal is to get in, get something decent to eat, get over to the game.
  • You just can’t go that wrong or that right in this situation. There is no grand arbitrage to be played here. Grab some food. Attempting to find the optimal solution is costly to the point of ridiculous. The margin of error on food choice is much, much lower than the risk of wasting your time. In short, you're fearing regretting the wrong thing (food choice instead of time spent).
  • The one area where I will exert a little choosiness is beverage. My preference is beer, but my first choice, Coach's Brewhouse, is usually out of reach because the line is too long. Moving down the preference chain until time spent is worth the taste usually lands me at Blue Moon or Shiner Bock. Again, the best choice is made at the marginal trade off.

How much do I eat?
  • It is not that good; hence, it is not worth getting stuffed. In fact, I think the risk of overeating is high; so I am careful to be moderate--unlike I was in expounding upon this post.

Tuesday, January 25, 2022

Crony Capitalism (Vacation Rental Edition)

My wife and daughter just returned from a delightful long weekend in Santa Fe, NM. The entire family will return soon to Saint Francis's fine city where, as Hermann Banks reminds usstrangers are kind and beauty is overflowing and the local government is captured by crony capitalists. In fairness to Banks he never has said as much about local government, but I would imagine he wouldn't dispute it. 

Case in point:

A friend of mine has a vacation home there that he purchased a few years ago for both personal use and as an investment. Part of the investment is renting it out as a short-term vacation rental.

About six months ago I booked his place for my family's trip this coming April. In October I received an urgent text message from the rental property service directing me to check my email. Doing so I saw a short message stating that my reservation was no longer available, they were searching for a substitute property, and would be back in touch soon. I somewhat shrugged it off as being a mistake since I knew the actual owner well. But before I had a chance to contact my friend I received another email regretfully informing me that my reservation was cancelled with no substitute.

I reached out to my friend still thinking this was just a clerical error in their system. While a clerical error had occurred, it had a deeper problem behind it. My friend was somewhat upset but a lot calmer about it than I would have been. In fact I was livid for him and ready to go to the barricades. Not because of my vacation plans being disrupted but because of why this was happening and the implications it had for him.

The short version is this: The property management company had failed to make sure that my friend was current in his short-term rental permit with the city of Santa Fe (and yes, this is enough to get me to the barricades--the fact that a city government makes property owners get permission to use their property . . . but wait, there's more). The failure here was pretty significant in that it had expired the prior December 31st. Shame on the management company for sure. 

Should be no problem, though. Just refile as this should be a formality at this point. My friend does so starting a few days before my cancellation email by calling the proper city office. Keep in mind that my friend lives in Tulsa, OK; so all of this is out of direct control for what it's worth. I'm not sure if being able to go down to city hall would have made things better for him. They probably wouldn't have been better for me if I were in his shoes due to the whole ready-to-storm-the-castle attitude I have in these matters. Nevertheless . . . the city official looks it up and says, "Uh-oh, I don't think we'll be able to do this." 

[I swear this is the short version] It seems there exists another, current, valid in-the-eyes-of-the-Duke-of-Santa-Fe short-term rental permit for a property located within 50 feet of my friend's. You see kids, in America Big Hotel has decided that short-term rentals are a threat to their business. They've convinced well-meaning homeowners that people renting out their property could be scary. Soooo, rather than compete they've helped create rules to stop the madness. 

But this no-longer-short story doesn't end with just a Bootleggers and Baptists tale of the hotel lobby working hard to stifle competition along with the help of residents who think they should be able to dictate what happens on other people’s property. We get some government failure and unintended consequences to boot. 

My friend was taken aback at the news he couldn't get a permit because one nearby already existed (a new rule) but was immediately relieved relaying to the official, "Who has a rental? I know all my neighbors, and none of them rent." Upon further inspection, the city official realized that there are two roads with the same name in Santa Fe. The other permit is for a property miles away from my friend's. He could get it after all. Just need to have the local inspector swing by the next day to validate it all. Phew, that was close . . . but wait, there's more . . . as you probably suspect knowing what came next for me. 

The inspector comes out to my friend's house. Presumably begins checking boxes. Sees that there is another property located within 50 feet holding a short-term rental permit by looking it up just like the prior city official did. So he promptly denies the permit and goes about his day. 

This triggers a very fast and unforgiving process in the several rental property agencies my friend uses for his listing. Because I'm sure so as to not fall afoul of city governments everywhere and their crony capitalist controllers, they act swiftly to cancel all of my friend's future rentals. Remember this is October right before a busy Thanksgiving and Christmas season and he depends on repeat business as well as referrals. Along with all of these would-be customers, it is now that I receive a cancellation via email. 

At this point my friend was already on top of getting this reversed--I would not say satisfactorily resolved. He cleared it up with the city and over a LONG weekend was square to lease his property. Then came damage control. Many apologetic messages later with many discounts offered and still a large number of permanent cancellations foregone, he had done all he could to salvage some of his 9+ months of bookings.

It is hard seeing the system work the way it is actually, ultimately intended. It is harder still being a victim of it.

Summer Rental

Tuesday, April 16, 2013

The Midas Touch

What a difference a few days make. I planned on making this post last Thursday after a client meeting where the discussion included the pros and cons of an investment allocation to gold. My basic premise is no truer today than it was before gold's plunge in price Monday, but it would have given me a few bonus points to state my thesis on gold before the dramatic sell off.

The case for gold in a portfolio like the case for any precious metal is difficult to make. The theoretical support would be that it is a good inflation hedge, an historical store of value across societies and time, and uncorrelated with most other investments. But that is where the difficulty begins because those beliefs are not as ironclad as goldbugs would have you believe. In fact the most important theoretical support for gold, inflation hedging, seems to be the weakest case of the three. We'll get to that in a second, but first let's consider what gold lacks.

Gold lacks industrial use. It is not a capital good. It is a consumer good. So is bread, Travertine tile, and 55"-LED LCD TVs. Unlike bread, it won't go bad, but also unlike bread, it won't do you a bit of good if you eat it. It is durable like Travertine tile, but a lot more expensive--so much so that someone might try to steal it, which makes it expensive just to protect. One ounce of gold will buy you a pretty good TV. At the margin, I'd rather have the TV. Already there is something funny about using this soft, yellow metal as an investment asset.

Here are two of the top seven Warren Buffett quotes on gold as told by Minyanville:
3. "Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn't produce anything."
4. "I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE:XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils." [Note: The price of gold has changed since this quote was made. The gold would buy much less today.]
The first quote alludes to a chief problem many including myself have with gold as an investment--it has no cash flow. Aside from a potential positive roll yield when the futures market is in backwardation, a gold allocation generates no gains but does have substantial costs to maintain (transactions, storage, and carrying).  And realize that not having a cash flow of any kind (direct to the investor like a dividend or interest payment or indirect to the firm like a profit stream) means we can only value it based on the amorphous idea that someone does and will want it at a future date at a price attractive for us to sell.

Let's now turn to the historical record. To be a good inflation hedge, an asset should have a high correlation to inflation along with relative outperformance of inflation--when inflation is high, the asset is high or higher and when inflation is low, the asset is low or not as low. The first part is crucial. We want our inflation hedge to come through in the clutch. The U.S. left the gold standard in April of 1968 allowing gold to freely float when priced in dollars. It is at this point that it became investable as a theoretical hedge against dollar inflation.

Well, for the period April 1968 through April 2013 gold has only about a 13% correlation to CPI, which is to say they have basically been uncorrelated over this time span. The correlation doesn't improve much in the high inflation days of the late 70s and early 80s. The S&P 500 was even more uncorrelated with CPI at about -10%. But for what it gave up in correlation, it more than overcame in return. [UPDATE: the correlation between gold and CPI for the 1973 - 1985 period is only about 14%.]

Looking at the total return from owning gold to owning the S&P 500 with dividends reinvested over this time span, the comparison is not close. The S&P 500 returned over 6,850% while gold returned over 3,560% (see chart below). [Note: The source for these calculations is the St. Louis Fed's FRED. When using Bloomberg, I get somewhat different results for gold, about 4,400%. I will try to get clarification on this calculation to verify why there is a discrepancy. UPDATE: Looking further into the Bloomberg data it seems that the historical gold price is a composite and that the TR calculation is much closer to the FRED data, about 3,843%.]

This return difference is impressive. While gold was in the lead for two decades, the S&P 500 made a strong comeback to take over. Only the recent run up in gold has helped the yellow metal gain some but not all ground. And notice the long lulls for gold. This is another knock against it. For someone retiring in 1984, it would not have been a very good store of retirement value.

Over the full span the S&P 500 is over 50% higher in value. To understand how big that is think about everything you own and then imagine not having half of it.

Gold beckons you to enter, but there is no disguising what I fear.
To love the gold investment, the golden words poured into my ear,
there must be another whose heart is cold
He loves only gold.

Saturday, April 11, 2020

Who You Gonna Call? An Economist

If you had questions about the conditions of the local restaurant market, you wouldn't ask a chef or a restaurant manager.
If you had questions about the OPEC oil cartel or how it's actions affect the U.S. fracking industry, you wouldn't ask a petroleum engineer.
If you had questions about the affect charter schools have on education outcomes, you wouldn't ask a teacher.
If you had questions about the pricing and payment of medical services, you wouldn't ask a doctor.
If you had questions about fractional reserve banking, you wouldn't ask a banker.

Well, you might ask these people, and they might have brilliant, insightful answers. But if they did, it would be because they were using the tools and skills of economics. You might be better off just asking an economist--especially one with expertise in the specific area of interest.

Drs. Fauci and Birx are very important experts in immunology. Their understanding of infectious disease and their roles in the current crisis are keys to us conquering SARS-COV-2. But asking them when we should open society back up and revive the economy from the self-induced coma is likely asking them to speak outside their depth. I am not saying they are incapable of performing the necessary trade-off analysis, but if they are, it is because they will be employing economics not epidemiology.

Just as we did not prepare properly for a pandemic, just as we did not heed the warning signs as this one approached, just as we did not do the relevant cost-benefit analysis as decisions were hastily made and virally accelerated, I fear we are not willing to reasonably and scientifically consider, plan, and execute the return to normal life.

Reversing the lockdowns and shelter-in-place commandments should require us to consider the following at a deep level:

Benefit of reduced infection going forward minus Cost of change in way of life

What would we like to know includes:
  1. R0 - the rate of infection now and going forward (both the average and the distribution of typical people and super-spreaders); Robin Hanson's analysis shows the need for an even deeper level of thought. 
  2. How did R0 changed over time both as a result of human action and public policy as well as naturally?
  3. How many people were infected and when?
  4. How did the various policies impact viral transmission, viral impact (did putting asymptomatic infected people, mostly kids, in intense contact with at-risk people, mostly elderly, cause dangerously strong infections--dose makes the poison?), other health results, etc.?
  5. How did the various policies impact our way of life? Just how damaging were the policies and how damaging was the virus?
  6. What would we do different? How many lives on net did the actions taken save? How much was overall well being benefited by the actions taken? 
  7. How would we do it differently in the future?
At this point we don't really know enough to depict the overall tradeoffs and how the equation above would plot in the graph below.

The x-axis runs from maximum virus eradication (all resources thrown at fighting the virus, which is well beyond even the extreme measures we have taken so far) to not changing our lives one bit other than perhaps dealing with infections as they arise including hospitalizations and death. The y-axis is overall societal well being. In the middle is the point of well being that is equal to a world where there was no SARS-COV-2.

Is the trade-off function like one of the solid-line parabolas? Don't get too hung up on the lines I've drawn other than to notice that one is at times above the other. And of course choices we make could allow us to jump from one trade-off frontier to another. But notice the other two stylized functions. Perhaps the virus is so dominant that any effort short of total effort to counter it was a net loser for societal well being (as depicted in the red-dashed line). This is possible but highly unlikely. Yet this in the extreme is the position implied by many in the populace as well as some in power. Alternatively, the virus could be an unfortunate circumstance but not one that at any level deserves us changing our way of life (as depicted in the green-dashed line). This is also possible but highly unlikely. Yet this in the extreme is the position implied by those who might be labeled virus deniers.

We would expect, however, that some type of parabolic function if not one with multiple peaks would properly depict the real world tradeoffs. The devil is in the details, and which function and how we might transform the function to improve our lot is the many-trillion-dollar question. I would like to see it asked more strongly and widely, and I would especially like to see it asked of economists. 

Sunday, June 23, 2013

The Cape Crusaders

I've just returned from a family vacation in Cape Cod and Maine. We spent four lovely days in Cape Cod followed by two in lower-coastal Maine with Portsmouth as our base of operations. Here are some thoughts:
  • There is plenty to do on the Cape as well as plenty of ways to do nothing but relax. It is a highly recommended retreat. 
  • It is hard for an outsider to appreciate how out in the country Cape Cod can be. As we learned navigating our way back from Scituate (see "Boston detour" below), you travel from rural to rural. And New England is not the flat, open, grid-patterned world a midwesterner is used to.
  • To uncharitably generalize, Cape Cod is the Upper East Side gated by Branson . . . if the Upper East Side were in the country and the cast of Hair Spray ran Branson. This is quite unfair, but it gives a sense of how diverse some of it is. 
  • There are different traffic norms up there. I noticed stopping to let people in including stopping on a busy two-lane road to let someone make a left turn. As a result, many drivers proceed with the expectation that you will allow for this. Hence, many times cars pulled in front of us or stopped to wait for us with the drivers giving irritated looks when I didn't notice what they were expecting from me.
  • In many places there was a tolerance and incorporation of weeds (I'm saying in the small green spaces of nice businesses) that would not be acceptable in this part of the country (particularly Texas and Oklahoma).
  • But there is seemingly less tolerance for "neglect" of a property or perhaps more respect for what "neglect" a neighbor will see. Upkeep is impressive in almost all corners. In that same vein you see a bit of the delicate balance between historic devotion and modern adaptation. Political signs about proposition XYZ being "wrong" for [insert a Cape Cod town] allude to this. Of course one problem is  what if the Cape Cod style of house falls out of fashion. What if population/ownership turnover leaves these many properties significantly less desirable? 
  • On the road the exit numbers do not match the mile markers. They simply count up from the road's origin. This seems so wrong that we can call it stupid. Am I missing something? Isn't the system in the west superior in every sense? And do we really need a full mile marker sign every tenth of a mile? Is this a kickback to Big Sign? 
  • The Boston Detour aka, the Undependable Train, a lesson in good business practices, character, and adaptation. To my three-year-old son, Max, there are two things in this world: trains and not trains. On Tuesday we were to do a bit of the former by riding the Cape Cod train from Hyannis to Provincetown. This is a narrated scenic ride with one departing at 11:30 and one departing at 2:30. Since we were 30 minutes away in Chatham, the 2:30 was the better option leaving us time before to take in Sandwich (a place but we did coincidentally eat a sandwich there). Upon navigating the mess that is Hyannis, we arrived at the train depot about 1:45. The whiteboard sign out front read "TUESDAY: no trains today [frowny face]". Ever the optimist, I went inside to confirm our fear. Two people sat chatting, and it took them a minute to process that I might need some assistance. Once awoken from their unresponsiveness, they were friendly, but the answers I was given were unsatisfactory on several levels. I was told mechanical issues halted today's trains. But then I was told that I really should make reservations rather than just walk up. You see sometimes they don't have enough customers to run the trains. But then I was told there is no way to know, which I would like to being that I was coming from some distance away, because often they have a lot of walk-up traffic at the last minute. Contradictions aside, the fact remained that I had to go out to the car to tell a little boy he was not going to ride a train today. The letdown was as predictable as it was sad. We scrambled for ideas. There are lots of commuter trains in the area running to Boston. If we could connect with one, that might save the day. Thankfully smartphone technology enabled that brainstorm hope to become a reality. We headed toward Plymouth, but after further research we opted to go farther to Scituate for the best chance to make a train with time to spare. Thirty minutes later we were waiting at the station enjoying donuts with plenty of time before the 3:40 arrived. Into Boston we went. We emerged from South Station as rush hour was projecting people into it. We cleared the crowds and made our way to Quincy Market. Lobster rolls, clam chowder, and pizza recharged us. Outside we saw a familiar performance: a street performer we had seen a little over a year before in Denver. Her act, style, and looks were unmistakably the same. Time was ticking and we wanted to do a little more. We went to the North End both for me to see the fruits of the Big Expense Dig remarking how "close" the North End is to downtown now (it is amazing the effect) and to enjoy some treats from Mike's Pastry. The charm of the streets and excitement of the restaurants made me long for more time. But we didn't have it. After a moment enjoying gelato, the kids didn't want pastry, we began our trek back to South Station. Only now the overcast had turned to sprinkles which turned to drops. We had one umbrella between the four of us walking with the youngest curled under the stroller's awning. While at first we thought we could make it, the heavier rainfall was changing our minds. We ducked into a doorway for cover. By luck it was a CVS. Inside we fled for two essential items. Our unexpected detours had us in need of both an additional umbrella as well as a phone charger. Remember, outside of Boston travel is rural to rural. The combination of navigation and train planning had drained our phones. The pictures of Boston finished them off. Getting back from the train station to the main highway in the rain-filled dark was not an attractive idea sans Google Maps. At this point I was excited for the character building exercise I was about to put my kids through. We had about .7 miles to walk, much of it uphill, in significant rain, with temperatures dropping, and pushing a stroller. But they didn't even flinch. In fact they enjoyed it. My daughter protested loudly when we considered a subway ride escape. We made it to South Station. The imaginative story we concocted on the train-ride back will be the inspiration for a future post. This could have been a low-point or breaking point in the trip. Instead it was just another highlight.
  • The apparent housing irrationality: I thought I had stumbled onto an obvious business mistake. On the scenic highway 6A leading into Provincetown, there are quite a few condos for rent. In the pictures below is the group that first caught my eye. They start at $200,000 a piece. Presumably the ones with ocean access are even pricier. Zillow has them at $325M. They appear to be the size of Monopoly pieces. My conclusion of an apparent business mistake came when I spotted similar real estate about a half-mile down and farther from town that was for sale--price undisclosed. The second set of properties was in shambles. Something seemed amiss. Was this a great arbitrage opportunity? Was it simply irrationality on the part of the sellers of the highly priced condo properties, et al? Land restrictions perhaps were to blame, but that didn't quite jibe unless coupled with building/renovation restraints. Materials and labor would be perhaps $50 per square foot. These were priced at approximately $2,000 per square foot. If that is the going rate, the dilapidated property and many others are free hundred dollar bills laying in the street. How could a freely functioning market let such a disequilibrium exist? My first conclusion was a poor one--that uninformed/disengaged sellers were suffering housing crisis amnesia. My second conclusion wasn't much better--that government restrictions must be preventing supply at a drastic affect. Upon more thoughtful reflection, I think I have the missing consideration: risk. While all of the prior explanations probably were at play somewhat, we should never underestimate the effect of uncertainty. This was no disequilibrium per se. Once I had properly channeled von Mises, it became clear. Markets are only in equilibrium in textbook models. In the real world markets are constantly moving toward equilibriums taking in new information and realizing new knowledge. Pricing down the quaint, efficiency condos carried a big risk of lost profit. Investing heavily in renovating the run down properties or converting raw land was far from a sure bet as well. The next sale at $325M might be the last for a long while or it might be the start of a boom. These huge unknowns implied huge bid/ask spreads--just what we found travelling highway 6A.
  • I couldn't help but notice how recycling has gone cultish in New England. No sooner had I done so I saw this excellent Cato Unbound issue on environmentalism. More on that to come . . .
  • Portsmouth is an awesome town worth a weekend excursion for those in the area. 
  • Travelling up the shoreline in Maine was excellent. I needed a lot more time for Maine. 
  • The people of New England seem to have an appreciation for summer that is more taken for granted in the south. Their summers are beautiful. And the experience of them is a truer glimpse of nostalgic (perhaps stereotypical) Americana to me that what we see in the hot Southwest. I like it.
  • Two gripes related to the rental car. First, we rented a Chevy Traverse. The short review on it is it sucks. The longer review is that it seems to be a car built by a factory in 1985 who happened to know about some technological and style features demanded by people in 2013. Remember how Soviet warplanes always had a "strange" resemblance to their better designed American counterparts? In Soviet Russia, Chevy Traverses you. Second, do we really need severe tire damage gating around rental cars? This is the best way to prevent theft? How many times is a driver in a confusing situation (like the Manchester Airport's rental car return garage) backing into these compared to how often a thief is deterred by them? 
  • Speaking of the airport, the Stasi have a new method of winning compliance. The TSA agent who checks IDs gave my kids TSA sticker badges. I was hoping they would refuse when offered, and they did hesitate like it was a trick--smart kids. I had to bite my tongue. I found this little propaganda infuriating. Don't make my kids an advertisement for your unwarranted policies and ridiculous behavior. 
  • Let's not end on a sour note. This was a great vacation. Here are some pictures:

These are $200,000+ condos.

Sunday, May 5, 2013

Escape from New York

I've returned from a jam-packed trip to NYC that was part business and part pleasure. I always find it hard to leave New York without feeling that leaving is a mistake. It is such an amazing place. Very few places on Earth can boast the same wide-range of risk/return opportunity sets. Here are some thoughts:

  • To my impression, by a wide margin no other American city is as much an international city. This is an underappreciated quality.
  • It is a shame people tend to be too uncreative to appreciate experiences that are not "tourist traps". 
  • The success of the city, largely a reflection and exacerbation of the success of American free enterprise, disguises and minimizes the drag of being in the People's Democratic Republic of Bloomberg [insert any prominent former or future mayor as well]. It is hard to see the forest of unintended consequences when dealing so directly with the trees of real-world problems. Viewed in this lens, it becomes easier to excuse the frequent acquiescence to bureaucratic and technocratic power.
  • If your only impression of life in NYC was from television sitcoms, you would be missing 75% of it. If it were only from movies, I'd say you are still missing 50%, and most of that corresponds to the prior missing 75%. 
  • Goldman Sachs, the business portion of my adventure, is a first-class organization. I am often a critic of the revolving door between government regulators of GS and executive positions at GS along with other regulatory capture issues. Being in the heart of the dragon, one sees clearly how that cozy relationship maintains harmony. Literally, the janitors at GS exude more confidence and professionalism than I've seen among bank presidents. Uniformly both in informal conversations and formal presentations, every representative of GS was quite impressive--not cocky or arrogant, but definitely assured of themselves and their organization and certainly serious. They can and do laugh (when appropriate), but I am certain they physically lack the ability to giggle. 
  • I appreciate Goldman for having me as a guest at what was a very good conference filled with good information and entertainment. I now have more respect for them as a money manager, and it is with more confidence that I consider investments with them for my clients. 
  • Here is a random thought I had during the conference: Does corporate paternalism and generosity breed acceptance for governmental paternalism? This is similar to the forest/trees thought referenced above. People in these companies are very well taken care of with all ancillary needs provided or sourced, they are used to showing ID cards and having limited access within their firm and even on their floor or in their business group, they work in "safe" environments insulated from the "chaotic" world outside, etc. 
  • Depending on your perceptive sensitivity to any given behavior, you can get the feeling that "everyone" in NYC matches that given behavior. For example, everybody jogs. Of course, everyone doesn't. But it is easy to be misled being that there are countless examples of any behavior, activity, etc. to be found. That is one thing >60,000 people per square mile will get you. This goes a long way to explain misconceptions visitors come away with.
  • Being in the beautiful jungle of so many choices, a thought I have had previously occurred to me again. A key to happiness is being easy to please. If you can see the good in things (be optimistic) and if you can refrain from pickiness (see things as highly substitutable), you can greatly expand your happiness. In economic terms, the flatter your indifference curves and the looser your budget constraint, the greater your utility potential. 
  • Nearby our hotel was a Whole Foods grocery. We have a Whole Foods store in Oklahoma City, but the store in NYC, as a microcosm of so much else, is quite different from the store in OKC. The selection was larger in scope and scale, and the services included delivery for a flat $10 fee. No such delivery option is available in OKC. Discussing this with my wife dovetailed with other grocery economics discussions we have had. We've thought before about the intrinsic differences among stores like Whole Foods and Central Market versus Safeway and the local Crest Market versus Sam's Club and Costco. Not to get too far off on tangents, but this thought problem brings up the difficulty of finding a comparable basket of goods for inflation as well as other comparisons. Back to the central idea, what are people getting out of food shopping? The joy of bargain hunting (optimizing $/calorie) versus the joy of elegant shopping (optimizing the experience per se) could be generalized extremes along what seems a reasonable dimension of quality/quantity tradeoffs (optimizing selection and discovery). At what point is the only physical grocery shopping we do that done as an entertainment (elegant shopping) with the remainder done online including preprogrammed? 
  • Enough random thoughts. Here are some pictures from a great trip. Enjoy!