Stock Investing - Quant and Traditional

[JohnRoberts]

I've found analyst recommendations to be mostly useless. And agree things look overvalued.  Basically every historical metric is near an all time high,  or close to it.

I don't generally look at analyst recommendations other than to see how many are bullish/bearish/whatever. I was optimistic that a future price target was more than a buy/sell recommendation. Changing from $40 to over $200 suggests one or both are faulty.

Over the decades I have studied lots of corporate reports. In simpler, more orderly markets you could learn a lot about companies by looking at gross sales history and projections, profit margin, and dividend history. For about the last decade the market has become less predictable, not that it ever was linear. 

There was a rather interesting new study though,  essentially that $1 in net money flow creates a $5 change in market valuation. Given the insanity that is the fed, stocks could potentially be pushed much higher.

I am wary of a new class of (young) investors who have only seen stocks go up. At some point they will be disappointed. Of course the liquidity faucets are still wide open, and bonds still stink. Interesting times.

JR

PS: Value and Momentum stocks seem to rotate in and out of favor almost daily.

 

[JohnRoberts]

I hate high speed trading, and consider it a tax on regular traders.

The latest strategy they are using to gain tiny time advantages is using new, hollow fiber optic cables. Light travels faster in air than in fiber. Billionths of a second speed benefit for modest distances.

I hate high speed traders.

JR

 

[john12ax7]

A transaction fee or tax on each trade could go a long way to alleviate / eliminate the high speed trading problem while also raising money for many needed things.  Even something as high as 1% (which is extremely high) would do relatively little harm to the long term investor.

 

[JohnRoberts]

A transaction fee or tax on each trade could go a long way to alleviate / eliminate the high speed trading problem while also raising money for many needed things.  Even something as high as 1% (which is extremely high) would do relatively little harm to the long term investor.

be careful what you wish for... transaction taxes have long been considered as vehicles to tax the rich...

Just like I have suggested using internet postage to cut down on spam, HST (high speed trading) is not the same mechanism. They use high speed data transmission to get a tiny edge on price discovery.

Speed bumps in all trades help prevent HST gaming, but then exchanges sell HST special access for premium prices.

One solution is outfitting regulators with enough high bandwidth data capture, and storage, and analysis, to document the funny business that should already be illegal, and if it isn't already illegal, make it so.

JR

PS; The fed is still putting their thumb on the scale. They just allowed banks to repurchase their own stock which will boost bank stock prices. This is odd, since allowing the banks to dividend out the surplus capital would be more stimulative to broader economy, vs stimulating the stock market. Of course what would I know? But there is an old saying, don't fight the fed, so don't short bank stocks. 

 

[JohnRoberts]

Have I mentioned that I don't like high speed traders....

Robin Hood a popular trading platform with novice investors, was just fined $65 M by the SEC for non-disclosure of their routing trades through two high speed trading firms for compensation.. this was Robin Hood's major revenue source at one time a few years back. The high speed traders took advantage of the inexperienced new traders skimming some from almost every transaction with worse than best price trade settlements.

I don't like HST and now I don't like robinhood either.... not that I ever did, but I do like the general idea of getting kids into the market for long term gains.

JR

 

[john12ax7]

Some info for those relying on index funds.  You can estimate future market returns based on earnings, growth,  and price paid. A big factor to consider will be interest rates.  If they stay low then getting 6-7% annual return would be possible.  This seems unlikely though. If they rise to more  historical average levels then 0% or even negative returns is quite possible. Best guess is that 0-3% would be a realistic expectation for the next decade.

 

[JohnRoberts]

Some info for those relying on index funds.  You can estimate future market returns based on earnings, growth,  and price paid. A big factor to consider will be interest rates.  If they stay low then getting 6-7% annual return would be possible.  This seems unlikely though. If they rise to more  historical average levels then 0% or even negative returns is quite possible. Best guess is that 0-3% would be a realistic expectation for the next decade.

The market is a little cra-cra... big tech is slipping while value is gaining some support.

I am looking at EEM as a weak dollar play.

I should sell more but damn it keeps goin up.... My BP is now above water for now, and boeing is soaring...

My recent silver position is up and my not recent gold is still down.

I have been hearing touts to own 20% BTC instead of 40% bonds.... I'll pass.

JR 

 

[Script]

I should sell more but damn it keeps goin up.... My BP is now above water for now, and boeing is soaring...

My recent silver position is up and my not recent gold is still down.

BP is British Petrol or blood pressure ? Gas has become more expensive over here.
Gold was up a lot (I sold one miner) and then it went down again.

 

[JohnRoberts]

BP is British Petrol or blood pressure ? Gas has become more expensive over here.

yes the out of favor oil company, had a huge dividend.... I don't like it long term but like it better now that it is profitable.

Gold was up a lot (I sold one miner) and then it went down again.

I have a tiny position in gold (just to buy ammo with after the economy collapses).

Day trading stocks has replaced gambling on sports during the covid shut down (my speculation). I have heard studies about how much of the covid stimulus checks ended up in the stock market... People my age just bank it, but kids now have low friction options to trade stocks.

I expect a significant fraction of the next round of stimulus checks to put another short term bid under the US market. Crazy to sell before this hits (IMO).

JR   

 

[john12ax7]

Certainly some stimulus money will go into the market,  but it's effect is way overblown, at least on the individual end. The individual checks are way too small compared to the other money involved.

At most the individual checks would contribute a 2.5% rise in the S&P. Anything more is other forces involved.

 

[boji]

If they stay low then getting 6-7% annual return would be possible.

Will our national debt ever reach a point where inflation/deflation is reintroduced? If so, won't that play on index fund returns?

Blasphemy, crazy talk?
https://www.youtube.com/watch?v=jwgOVPJ2FnU
Michael Saylor on Bitcoin Economic 'Calculation' (divination?)

 

[JohnRoberts]

Will our national debt ever reach a point where inflation/deflation is reintroduced? If so, won't that play on index fund returns?

The old school monetary theory used inflation to pay back debt with inflated (cheaper) currency. Modern monetary theory doesn't seem to worry about ever paying off debt, just fire up the printing presses.

Blasphemy, crazy talk?
https://www.youtube.com/watch?v=jwgOVPJ2FnU
Michael Saylor on Bitcoin Economic 'Calculation' (divination?)

I still wouldn't buy bitcoin if I had all your money, but I am hearing suggestions to use BTC as a gold or bond substitute in portfolios (sorry not for me, but I can't even stomach buying bonds in this environment).

Some smarter people then me, advocate using index funds, I am still old school... It seems almost everything is corrupted by the high high flying MAGA stocks, hard to not be exposed to them.

I am sitting on a lot of cash in my personal stock account and not finding many obvious suspects to buy. In the last year I increased my Berkshire Hathaway position and even Warren Buffett is buying his own stock, because he can't find anything better to buy.

Buffett is even older than me and I am optimistic that when he croaks they may start paying a dividend, ASSuming I outlive him (not a certainty).

JR

 

[john12ax7]

Will our national debt ever reach a point where inflation/deflation is reintroduced? If so, won't that play on index fund returns?

Blasphemy, crazy talk?
https://www.youtube.com/watch?v=jwgOVPJ2FnU
Michael Saylor on Bitcoin Economic 'Calculation' (divination?)

I will listen to the link when I get more time.  Could you give a brief synopsis?

I definitely view inflation as a growing concern.  If stocks go +5% but inflation is +10% your real return is negative. Diversification could help.  Real estate,  foreign and emerging markets,  commodities. US based stocks with stable cash flows,  and pricing power, can the business increase prices during inflation? If not they will lag behind. Buffet recently bought VZ,  fits the requirement and a nice dividend too.

Gold is always desirable imo.  Bitcoin is a good choice too as a hedge/insurance policy.  But perhaps no more than 1% of a portfolio.

Michael Burry of The Big Short fame is warning of hyperinflation and presents some compelling evidence.  Worth reading what he has to say.

Inflation seems inevitable in the longer term.  Short term there could big downward price corrections. That's the difficult question.  Get out of cash now, or wait for a better opportunity that may or may not come.

 

[Script]

Inflation seems inevitable in the longer term.

This has been said many times in the course of the last 10 years+. But today it indeed looks closer than ever. Maybe it is finally moving toward what they had always wanted: the magic agreed-upon 2% of inflation.

However, who said that all the money distributed right now has been money for free ? In the same way they can print and distribute it, they could easily collect it again later once the economy recovers -- collect it all, or at least some of it, but elsewhere. On the other hand, such state debt is a comparatively safe game. So in the long run, this pandamic and all the new debts could offer the chance of being able to better 'engineer' the desired inflation rate.

Also, state debt is the safest debt on earth, if anything like that exists at all. Of course, with debts, it always depends on who it is owed to. Owed by a state to other parties (see e.g. Greece) is very different from debt owed by a state to its own population. If owed to other parties, high inflation for all is desirable, but at some point grace debt negotiation might become inevitable -- A owes B, B owes C, and C owes A (of course it's more complicated than that) but clean the slates.

Short term there could big downward price corrections. That's the difficult question.  Get out of cash now, or wait for a better opportunity that may or may not come.

The same as always... ; ) ...probably higher volatility...

 

[john12ax7]

This has been said many times in the course of the last 10 years+. But today it indeed looks closer than ever. Maybe it is finally moving toward what they had always wanted: the magic agreed-upon 2% of inflation.

I started listening to the link boji posted and agree with the inflation part.  The whole CPI thing is kind of ridiculous,  you need to measure inflation by the things people buy or desire to buy.  When you factor in essentials like food, housing,  education, healthcare, we have been way over 2% for a long time.

The other startling thing is that,  even after increasing money supply 24% this past year,  going forward they are still planning to increase money supply 10-15% a year.  It's hard to imagine this ends well.

 

[Script]

Oh, I see. Yeah that video -- very long indeed. I need a teaser or halfway decent synopsis...

 

[john12ax7]

Oh, I see. Yeah that video -- very long indeed. I need a teaser or halfway decent synopsis...

I listened to most of it while doing some simulations.  The general premise is that money supply should keep pace with economic growth to have price stability.  More causes inflation,  less causes deflation. Growth tends to be +2% but money supply has been increasing at 6% or so.  So there already is inflation when you look at things as a whole,  not just the cherry picked cpi. Interesting fact was that gold supply also tends to increase at 2% a year which causes its long term value to be relatively constant.

This past year has seen money supply increase 24%, causing further inflated asset prices. It will continue to increase 10-15% a year. Therefore you need to put cash into something that returns at least that just to break even.  Then it was a lot of reasons as to why this should be bitcoin instead of other assets since it will return 20-100% per year. I tuned out a bit here as it got very pro bitcoin,  which I think has its place, but perhaps not to the extent being argued.

Side rant: There is so much wealth inequality in the world I don't know why central banks are ignored,  as they are a principal  cause of things.  Here in the US there has been about 8 trillion in money printing and stimulus.  Could have instead given each citizen 25k. Which would have helped people more? Plus the whole notion of 2% inflation target is complete bs. Easily achievable in even the cpi by given the money to where velocity is high,  those low income earners who spend it.  Instead it goes to the top earners and gets parked into inflated assets further increasing the wealth gap and making upward mobility even less likely.  It's quite infuriating actually.

 

[JohnRoberts]

Side rant: There is so much wealth inequality in the world I don't know why central banks are ignored,  as they are a principal  cause of things.  Here in the US there has been about 8 trillion in money printing and stimulus.  Could have instead given each citizen 25k. Which would have helped people more? Plus the whole notion of 2% inflation target is complete bs. Easily achievable in even the cpi by given the money to where velocity is high,  those low income earners who spend it.  Instead it goes to the top earners and gets parked into inflated assets further increasing the wealth gap and making upward mobility even less likely.  It's quite infuriating actually.

Not to feed the veer but this is newly in fashion... The "covid stimulus" (cough) bill contains redistribution and even veiled reparations. As if this isn't enough they are now testing the water for adding new wealth taxes (confiscation).

This was inspected after the Occupy movement several years back and a flat wealth distribution is not the natural order.

But the unfairness is, unfortunately, not unexpected. What the protesters are fighting (consciously or unconsciously) is the 80/20 rule – variously called Pareto's principle, Zipf's law, the long tail or Benford's law, depending on what you are studying – a staple in scientific, economic and business textbooks, the go-to idea to show how the frequency of a set of natural events is not always what you might recognise as, well, natural.

The maths underlying the 80/20 rule, known as the power law distribution, is found in many natural systems over which no single human has much influence. Its concentration of the extremes seems built into the fabric of complex systems that depend on numerous factors that continually change over time.

https://www.theguardian.com/commentisfree/2011/nov/11/occupy-movement-wealth-power-law-distribution 

As I have counter argued before a remarkable number of people have been raised out of poverty over recent decades by capitalism and free trade. Using government force to redistribute wealth is a less than zero sum game, destroying wealth.

Of course opinions vary....

JR

 

[Script]

I listened to most of it while doing some simulations.  The general premise is that money supply should keep pace with economic growth to have price stability.  More causes inflation,  less causes deflation. Growth tends to be +2% but money supply has been increasing at 6% or so.

Thanks for the summary. Sounds like something that I could listen to while matching resistors or something. Well, just like most others, I am also not an expert, but... ; )  -- that famous line... --  price stability is what Japan has had for quite a long time now, some say for two decades, other say since the 1960s (price of a ramen soup, wait, oh, portion have kept getting smaller) -- and they are not really happy with it.. But Japan is also one of the world's leading creditors and that may also plays into it. What they do know for sure though is that deflationary tendencies are toxic -- not necessarily for big companies but for people.

Increasing the money supply post Lehman-shock has been a big experiment and the exact opposite of what the US (and others!?) did as a first response after 1929 and we all know what that led to. Now money supply has accellerated even further, but there is also a very real and unhealthy reason for it -- a reason that we should all hope is comparatively short-lived. I like to believe that the people with their fingers on the printing presses are not utter nincompoops, but I am afraid some politicians might very well be ; ) But luckily, as we all now, those come and go.

P.S.: Yes, I also do see that personal, maybe even corporate, accumulation of wealth (i.e. beyond common-sense proportion or utterly over the top -- and it is politicians who will have to define where to draw the lines, ouch !) might become a topic.

 

[john12ax7]

I disagree regarding deflation.  It can be toxic,  but that is in overleveraged debt based economies. That's the US,  and I believe Japan as well. For investing the studies have shown that it is inflation that is most detrimental to real returns.