Thursday, June 30, 2016

Second Guessing

To close the loop on my Brexit posts you would think I would be very happy.  I thought that the market overreacted.  To attempt to profit from that belief, I took a large long position in US equities after the initial drop.  The market did in fact bounce back and I covered at a tidy profit.  So I should be very happy, right?  Here once again is where the insidious psychology of investing arises.  In fact, I turned out to be "righter" than I gave myself credit for. As the chart below shows within six days the market had rebounded almost fully from the Brexit collapse.  But I profited from only part of the bounce back because I covered early.  My rational side says you made a good choice be happy and forget it.  But my emotional side continues to second guess.  This second guessing is the final aspect of what makes investment decision making so psychologically difficult.  Even when things go well, they could have gone better.  So don't feel bad if you second guess.  Most everyone does.  Just try to prevent it from guiding your investment decision making.


Wednesday, June 29, 2016

Position is Profitable: What Now?

Well the hardest investment question just got harder.  The large position I took in the S&P 500 on the Brexit drop on Friday, over which I was ringing my hands and discussing in this blog, is now marginally profitable.  (See chart below.)  So what do I do, take the profit?  This position was designed as a short-term trade and now it has worked to a degree.  Even though the market is not back to where it was before the Brexit decision, it is above the level to which it fell after the announcement.  Furthermore, I would not expect it to come all the way back.  After all, Brexit was bad news even if the market overreacted.  On net, it looks like time to unwind but the decision is not easy.  This is why most rational scholars recommend against trying to time the market!

Postscript.  As the profit rose further I decided to cover.  The chart has been updated to reflect the level at which the position was closed.





Monday, June 27, 2016

The Hardest Investment Question

On Friday, I wrote that I thought the reaction to Brexit was excessive and took an additional long position in US stocks.  Today (Monday) the market is down over 2%.  The decision I made was a short-run trading choice based on what I thought was an oversold market.  Well if the the market was oversold Friday, it is more oversold now.  So do I buy more?  On the other hand, if it thought the market would recover from Friday's drop and I was wrong does that mean I don't know what I am doing and should abandon the decision?  That to me is the hardest investment question.  When do you double down on your convictions and when do you conclude that you are wrong and cut back.  Unfortunately, I have no answer to the question.

Saturday, June 25, 2016

Brexit and the US Stock Market

        To evaluate the reaction of the US stock market to Brexit remember that stock prices reflect the discounted present value of expected future cash flows at the proper risk adjusted discount rate.  When the market drops sharply, it must be because the marginal investor has either reduced expectations for future cash flow or increased the discount rate.  While stories can be told about how the British action will depress American business, they seem farfetched.  In fact, it is even possible that turmoil in Europe could help American companies.  It is hard, therefore, for me to see how Brexit reduces expected cash flow for US companies.  The discount rate is a more likely culprit.  The fact that credit spreads widened indicates that investors were demanding greater expected return in light of what they thought was the enhanced risk of holding US equities.  That would explain the drop.  However, it is also hard for me to see how Brexit makes US equities riskier on a long-term basis and it is the long-term risk that ultimately determines the value of equity securities.   The bottom line is that Friday I did what I consistently recommend one should not do – try to time the market.  Because I see the drop as short-term, I piled into US equities with the hope of profiting in the next few weeks.  Bad decision?  Quite possibly.  Stay tuned.

Friday, June 24, 2016

Tesla Offers to Buy Solar City

In light of the number of times that Tesla has appeared in this blog, I would be remiss if I failed to weigh in on one of the most interesting and important developments at the company – its decision to make an offer for Solar City.  The offer has attracted a lot of interest in the financial press and most of it has been negative in the large part because of the drop in price of Tesla on the announcement.  But was it a bad decision of Musk’s part?  That is a subtle, deep and multifaceted question that I hope to explore in several future posts but first to the most basic question – is the offer price too high?  To answer that question the best place to start is with the market data, so that is the focus of this post.

The actual price that Musk offered was a range 0.122 to 0.131 shares of Tesla for each share of Solar City.  Such stock for stock transactions are more difficult to analyze because the effective cash price being offered depends on the value of the currency (Tesla stock) in which the sellers will be paid.  For instance, the drop in the price of Tesla stock on announcement of the proposed deal (bad for Tesla shareholders) resulted in a reduction in the effective price that would be paid (good for Tesla shareholders).  As a starting point, nonetheless, there is no better initial gauge than a comparison of the market values over time of what Tesla would be paying versus what the company would be getting.   The results plotted below offer support for Mr. Musk.  For most of the last year and half Solar City has traded well above the range he offered (the red band).  More recently, of course, it was less because by definition Mr. Musk would have to offer a premium to convince a majority of shareholders to sell into the deal.  Nonetheless, the premium was not large.  Thus, although the deal may have other issues, from a valuation perspective it is reasonable, if not attractive.


Thursday, June 23, 2016

Milton Friedman at the Airport

            While virtually everyone complains about air travels these days, I have always been at the forefront.  My wife, colleagues and friends became sufficiently exasperated with my constant complaining that they ordered me to get off my duff and apply for Global Entry or stop griping.  Global Entry is the process by which you can effectively apply for TSA pre-check on an international basis.  So, with trepidation based on my past experience with the DMV, the IRS and the Franchise Tax Board, among others, I decided to start the process rather than further aggravating my wife and friends.
            At first, I was pleasantly surprised.  The online form took no more than ½ hour to complete.  At the end, I was told that after the form was submitted, it would be reviewed and if the review was successful I would be contacted by email for an in-person interview lasting about 15 minutes.  Fortunately, my wife who had applied earlier, warned me about the email contact.  It would come from no-reply@cbp.dhs.gov which she suspected I would interpret to be a Russian hacker and delete the message without opening it.  Boy was she right about that.  Despite the warning, I still almost deleted it.
            When I opened the email it told me to log into my account to schedule my interview.  On doing so, I was informed there are two interview sites in the greater Los Angeles area where I live, the Long Beach cruise terminal and the Los Angeles airport, LAX.  This seemed a bit thin for a metropolitan area of 15 million, but I forged ahead.  Given all my bad experiences with LAX, I chose Long Beach, despite the fact that it is further from my home, and clicked for an appointment.  The computer responded that there were no available appointments in Long Beach.  I thought that meant today, or tomorrow, but further investigation revealed I was wrong.  The computer meant ever.  There were no appointments available in Long Beach period.
            The situation was a little better at LAX.  There was one (only one that day) three months hence at 10 am.  But I was going to be in trial then so that date would not work.  It turned out if I was willing to travel to San Diego, about 120 miles from my house, there were several appointments available starting six weeks from now.  I decided to take one on the grounds that maybe I would take a San Diego vacation and spend my 15 minutes with the Global Entry folks.  Of course, this assumes that even if I make the trip my appointment will be honored.  Given my experience with the DMV, I have grave doubts about that.  Currently, therefore, my future with air travel status remains fraught with uncertainty
            As I write this, I cannot help think of the inspiring speeches by Barack Obama calling for new government programs to deal with health care, education, and poverty.  Of course, as I write this I am sitting in an airport waiting for a delayed flight after witnessing a fight over line cutting in a security line that was about an hour long.  In comparison, I imagine what would happen if after clicking to buy a product from Amazon I was told that they could never deliver it to my house but if I drove 120 miles I could pick it up in six weeks.  But with Amazon, unlike Global Entry, I have a choice to go elsewhere.  Having a choice brings to mind Milton Friedman, so I get online and order a new copy of this old book, Free to Choose.  It will be delivered tomorrow.

Sunday, June 12, 2016

A Great Reader Comment on Apple

    In response to my recent Apple posts I got a very thoughtful email from a reader.  It was so good that I thought it was worth sharing.

I agree and would also add “improved cloud based products, icloud data/photo storage, Apple Music, etc” to the list.

However, I don’t think that these failures individually are the biggest issue Apple faces.

I believe Apple derived much of it’s strength (and ability to maintain profit margins) from having really good integration within an all Apple system. Personally speaking, I owned Apple products exclusively because they all worked very well together and they were great cutting edge products. I was reliant on and happy with Apple for everything. This was fine when they were aggressively innovating. The switching costs of moving outside an all Apple infrastructure for me was high, and a the few minor annoyances I had with certain products never warranted a change.

However by failing to innovate and keep up with competition, that has changed. I now use Spotify(vs Apple Music) for music, Amazon Echo for Home Auto/Voice commands, Google Drive (vs iCloud) for cloud services, Netgear (vs Apple) wireless routers, and would have gone with a non-Apple external display if I did not already have one.

Failing to innovate on these matters, really threatens the whole Apple “system” and business model. A couple years ago, I would have never even considered getting a non-Apple phone or tablet. Now since I use many non-Apple services and products, the added integration benefit of an iPhone is much less. I am much less inclined to pay a premium for Apple products, now that I no longer “tied” to an Apple system, and I don’t think I am alone.

Granted, it is extremely difficult to remain competitive and innovative in all these areas. However, by failing to do so they are not only losing out on individual services/products but more importantly their entire customer allegiance and relationship.

One more thing on Apple

      I know I am a broken record regarding Apple's policy of secret development followed by grand introductions  but I fear it has lead them to ignore small piecemeal upgrades.  I put the following in that category.

Failure to routinely upgrade Apple TV
Letting the MacPro die by not improving the data ports and not introducing a 5k external display
Ditto on the data ports for the iMac
Delaying 13 and 15 MacBook upgrades for too long
Going years without introducing new wireless routers
Letting Siri fall behind competing products

      I'll bet if you think for a while you can come up with other examples.  I can live with Apple working on secret products like a car for "grand introductions" if they feel they must.  But as a recurrent shareholder I cannot accept the slow process of basic innovation.  The company has too much talent to dwaddle like this.

Wednesday, June 1, 2016

The Apple Investment Thesis: Some Doubts

           Recently, this blog has focused on two aspects of the investment Apple story.  One is that by any reasonable standard the stock is extraordinarily cheap.  The other is that the Apple policy of tight secrecy followed by grand announcements is harming the company.  Going forward the two may become more closely related than I appreciated heretofore.
           In the days when the most rapid innovation in consumer electronics involved fundamentally new hardware, the Apple secrecy policy made more sense.  Develop a new hardware product in secret (iPod, iPhone and iPad) and then announce it to great fanfare.  While I still suspect that Apple may have succeeded in spite of this policy, not because of it, those days are over.  Looking ahead, it is hard not to believe that future innovation will in software more than hardware.  The fundamental issue is this.  Computers keep getting faster and smarter, but humans remain humans.  We keep bumbling along the way we always have except now we are asking computers to help us with our bumbling.  Future value creators will be firms the can harness artificial intelligence (AI) to help us bumble more effectively.  But the process of developing such AI is almost sure to be an interactive one.  Companies come up with initial products.  Customers interact with the products and complain.  Companies upgrade the product in response to which customers develop new complaints and so on ad infinitum.  The point is that to be successful AI developers will need constant feedback from their customers who become, in effect, part of the development team.  Keeping customers in the dark until some secret project makes a grand entrance is not going to work in this space.
           From an investment perspective, I fear that Apple has not embraced this new landscape as completely as competitors including Google, Amazon, Facebook and even Microsoft.  If so, there may be a good reason why Apple’s stock is so cheap.  If future AI turns out to be the driver of future devices sales, Apple better get on board quickly and invite its customers onto the ship as well.  As I have said in the past, Apple’s integrated combination of hardware and software gives it a leg up in solving future problems for its customers, but it will have to innovate aggressively in the AI space to take advantage of that.  The key investment question is whether Apple will do so.