Weekly Insider (Inches, Ounces, Rant on Rants)
A rant on all the rants: Remember this: as they say in my native Brooklyn: the one thing you can know for sure-- nobody knows nothin’.
Expectations and emotions rule the day. The market looks and feels like a skateboarder on a half-pipe: up-and-down and up-and-down, a few tricks that wow the crowd, eventually investors (the skateboarders) will adjust to (or tire of) volatility and things will settle down. High expectations give way to low expectations. Remember also: when climbing a mountain, good news adds a few feet, bad news send you off a cliff.
My friend and fellow investor Mike G wisely wrote, “Whatever the case, I stand proudly by my aversion to fiction — no writer’s imagination compares to the actual unfolding of history”.
Just check these two WSJ blurbs and remember: Do not act in desperation, else you’ll suffer gambler’s ruin. “On Monday night, after a day when stocks took their worst hit in years, Don Case bought a lottery ticket on his way home from work. Mr. Case, a 42-year-old data analyst in O'Fallon, Ill., is worried about the stability of the life-insurance policy he bought a few years ago from AIG…he's also concerned about his 401(k) and his…college savings plan. With a venerable institution like Lehman Brothers Holdings Inc. crumbling, "I'm sure all companies are vulnerable," he says. "If I win the lottery, I won't have to worry.”
The second headline read: “More Firms Tied to Tainted Formula”. It took me reading an inch of text to realize it was about ounces (ie. China baby formula) not equations (ie. flawed Black-Scholes, and all financial models based on normally distributed bell-curves). It ain’t what you don’t know. It’s what you know for sure that just ‘aint so.
Yes, it was the filling of a recipe for baby's food--not the falling of a recipe for disaster. When will the Nobel committee revoke an award for a failed theory? When will business schools stop teaching “professional” finance practitioners Black-Scholes and mean-variance theory as a measure of risk It’s like the doctor who teaches his medical students an outdated and incorrect procedure because its easy to teach: our financial businesses and our business schools teach incorrect formulas. 'Tis better to be roughly right than precisely wrong. Will someone –ahem, New York Times—please also hold Ben Stein accountable for being precisely wrong.
Here’s what you need to know: as a person or a business: if you spend or borrow more than you make or have you risk going broke. Nassim Taleb long ago called it. Bleed vs Blow-up. Make money, make money, makey money... file for bankruptcy. When banks were brokers they were fine. They were in the moving business, not the storage business. This business model is a "sold lottery ticket", an insurance claim or a sold-call on your equity and assets (remember Liabilities=Assets-Equity). Think of a lottery operator that sells you lotto tickets. Every day he collects a little bit--when the payday comes, you claim his stuff--all of it. All these banks were like a “7-11.”
VC is the inverse, we bleed a little everyday, spending, spending, spending...homerun.
Simply put: here's what's happening: credit contraction, asset deflation.
It’s the mirror image of what happened. Equity bubble, housing bubble, credit bubble. Capital was cheap. Lots of dollars. Residential construction boomed then peaked. Home prices boomed then dropped. Credit expanded then stopped. Profits rose, then fell. Employment rose, then stopped. Consumers spent then recessed. Lots of dollars meant cheaper dollar. That will change.
Jeremy Grantham was right. Profits are mean reverting and we're in a secular bear or range bound market, with lower earnings, smaller P/Es, stock prices falling and people selling what they have to.
What will happen: Interests rates rise. Dollars rise. Jobs fall. Stocks fall. Fund of funds redeem. Hedge funds sell. Stocks fall more. Maybe, just maybe time horizons lengthen, attention spans lengthen, reporting periods lengthen (hundredths of a second tickers on CNBC, monthly redemptions, quarterly reporting add only noise). Distressed sellers sell. Some go to the hosptial, some the morgue. Cash-rich buyer buy. Others save-or start.
If you didn't think you had to save, you spent. If the stuff you owned went up, you could always sell it later--until you couldn't. Tech stocks, your house. Like the scene from Bronx Tale, "Now you's can't leave".
‘Global warming’ takes a back row to ‘global meltdown’. Investors in project finance lose shirts. Reputations fall. Oil and commodities fall. Decoupling is debunked. Emerging markets have emergencies. Radical Islam took root in Indonesia after '98 Asia collapse. Hitler took root after Germany's post WWI economic collapse. Castro as Battista looted Cuba. Attention will turn to new theaters of operations: Venezuela, Pakistan.
Here’s what worries me: Dictators and despots rise when economies fall. It is the desperation of the destitute, their hopeful ears and nodding heads, that fashions his sword and forms brigades behind him--and marches.For the long term, I'm less worried about "Fuld folding", than "Putin's Put" or the "Chavez Shuffle".
If you think there’s safety in the crowd, come join the crowd next month in Boston at the Lux Executive Summit:
http://www.regonline.com/Checkin.asp?EventId=618658
Expectations and emotions rule the day. The market looks and feels like a skateboarder on a half-pipe: up-and-down and up-and-down, a few tricks that wow the crowd, eventually investors (the skateboarders) will adjust to (or tire of) volatility and things will settle down. High expectations give way to low expectations. Remember also: when climbing a mountain, good news adds a few feet, bad news send you off a cliff.
My friend and fellow investor Mike G wisely wrote, “Whatever the case, I stand proudly by my aversion to fiction — no writer’s imagination compares to the actual unfolding of history”.
Just check these two WSJ blurbs and remember: Do not act in desperation, else you’ll suffer gambler’s ruin. “On Monday night, after a day when stocks took their worst hit in years, Don Case bought a lottery ticket on his way home from work. Mr. Case, a 42-year-old data analyst in O'Fallon, Ill., is worried about the stability of the life-insurance policy he bought a few years ago from AIG…he's also concerned about his 401(k) and his…college savings plan. With a venerable institution like Lehman Brothers Holdings Inc. crumbling, "I'm sure all companies are vulnerable," he says. "If I win the lottery, I won't have to worry.”
The second headline read: “More Firms Tied to Tainted Formula”. It took me reading an inch of text to realize it was about ounces (ie. China baby formula) not equations (ie. flawed Black-Scholes, and all financial models based on normally distributed bell-curves). It ain’t what you don’t know. It’s what you know for sure that just ‘aint so.
Yes, it was the filling of a recipe for baby's food--not the falling of a recipe for disaster. When will the Nobel committee revoke an award for a failed theory? When will business schools stop teaching “professional” finance practitioners Black-Scholes and mean-variance theory as a measure of risk It’s like the doctor who teaches his medical students an outdated and incorrect procedure because its easy to teach: our financial businesses and our business schools teach incorrect formulas. 'Tis better to be roughly right than precisely wrong. Will someone –ahem, New York Times—please also hold Ben Stein accountable for being precisely wrong.
Here’s what you need to know: as a person or a business: if you spend or borrow more than you make or have you risk going broke. Nassim Taleb long ago called it. Bleed vs Blow-up. Make money, make money, makey money... file for bankruptcy. When banks were brokers they were fine. They were in the moving business, not the storage business. This business model is a "sold lottery ticket", an insurance claim or a sold-call on your equity and assets (remember Liabilities=Assets-Equity). Think of a lottery operator that sells you lotto tickets. Every day he collects a little bit--when the payday comes, you claim his stuff--all of it. All these banks were like a “7-11.”
VC is the inverse, we bleed a little everyday, spending, spending, spending...homerun.
Simply put: here's what's happening: credit contraction, asset deflation.
It’s the mirror image of what happened. Equity bubble, housing bubble, credit bubble. Capital was cheap. Lots of dollars. Residential construction boomed then peaked. Home prices boomed then dropped. Credit expanded then stopped. Profits rose, then fell. Employment rose, then stopped. Consumers spent then recessed. Lots of dollars meant cheaper dollar. That will change.
Jeremy Grantham was right. Profits are mean reverting and we're in a secular bear or range bound market, with lower earnings, smaller P/Es, stock prices falling and people selling what they have to.
What will happen: Interests rates rise. Dollars rise. Jobs fall. Stocks fall. Fund of funds redeem. Hedge funds sell. Stocks fall more. Maybe, just maybe time horizons lengthen, attention spans lengthen, reporting periods lengthen (hundredths of a second tickers on CNBC, monthly redemptions, quarterly reporting add only noise). Distressed sellers sell. Some go to the hosptial, some the morgue. Cash-rich buyer buy. Others save-or start.
If you didn't think you had to save, you spent. If the stuff you owned went up, you could always sell it later--until you couldn't. Tech stocks, your house. Like the scene from Bronx Tale, "Now you's can't leave".
‘Global warming’ takes a back row to ‘global meltdown’. Investors in project finance lose shirts. Reputations fall. Oil and commodities fall. Decoupling is debunked. Emerging markets have emergencies. Radical Islam took root in Indonesia after '98 Asia collapse. Hitler took root after Germany's post WWI economic collapse. Castro as Battista looted Cuba. Attention will turn to new theaters of operations: Venezuela, Pakistan.
Here’s what worries me: Dictators and despots rise when economies fall. It is the desperation of the destitute, their hopeful ears and nodding heads, that fashions his sword and forms brigades behind him--and marches.For the long term, I'm less worried about "Fuld folding", than "Putin's Put" or the "Chavez Shuffle".
If you think there’s safety in the crowd, come join the crowd next month in Boston at the Lux Executive Summit:
http://www.regonline.com/Checkin.asp?EventId=618658
Labels: Ben Stein, credit crisis, gamble, investment banks, risk, venture capital
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