Wednesday, January 31, 2018

What Causes Recessions?

Why does the market and our economy cycle through up and down phases?

It seems like a simple question - why do we have this boom-and-bust cycle in the stock market and the economy?   I mean, in a steady-state system, it should just chug along at a nice pace and everything should remain, well, stable.   And until this year, we pretty much had that - a steady if not overwhelming economy with growth under 3%.   Many folks said this was horrible, as we should have skyrocketing growth - but then again, whenever the skyrocket goes up, well, it falls back down.

If you studied control theory, what our markets do is less of a mystery to you.   And you don't have to get into the higher levels of that science to see how it affects everyday economic transactions.  Hysteresis, for example, is something you may be familiar with in your home thermostat.   If you set your furnace at 70 degrees (which is way too warm, but let's take that aside), it will kick on only when the house temperature drops to 69 or even 68 degrees, depending on how much hysteresis the system has.   The furnace will stay on until it hits about 71 or 72 degrees, and then shut off.

Over time, the house cools down as heat is lost through the walls and windows, not to mention the opening and closing of exterior doors.   When the temperature hits 69 or 68, the furnace kicks on again, and the cycle repeats.   Why?   Why not have it kick on at 70 and shut off at 70 and maintain a "perfect" set temperature?   Well the reason is, the furnace would be turning on and off every minute or so, which is not good for the furnace.  It would also be annoying to the homeowner as the thing came on and off.   So instead, we dial some hysteresis into the system so that it runs more smoothly.

Now, with modern split-system heat pumps, more precise control can be achieved.  That's the Japanese for you -solving problems like this.   They figured out how to throttle the system using inverter technology so that the system provides the correct amount of heating (or cooling) to match the load in the room, and eventually achieve a steady-state condition.   However, even in those systems, there is some overshoot, particularly when you first turn them on, until they settle down to a steady-state condition.   And when the load changes (the sun comes up, someone opens a door) it may cycle for a bit before it finds a new equilibrium.   So even very finely made machinery will undershoot and overshoot on occasion - just like the cruise control on your car.

With markets, we have the added problem of emotional thinking on the part of investors.   And as more and more small investors, who tend to think emotionally, get into the market, it becomes more unstable.  These are the sorts of people who bid up the price of stocks without even knowing what they are buying.   The Long Island Iced Tea Company changed its name to the Long Blockchain Company and the stock went through the roof.   People bought it without even bothering to know what the company made.  Yes, they make iced tea drinks still, but claim to have plans to partner with a blockchain company.   That was enough to send the stock soaring well nearly 300%.   Does this sound like rational investing to you?

So on the way up, the market overshoots, as people become exuberant and think that nothing can possibly go wrong - after all, everyone is making money on paper.   And subconsciously, we all get drawn into it, humming "happy days are here again!" and going out and buying that new outfit we had our eye on, but thought maybe was a little to pricey.   And we stop noticing how much things cost - buying stuff without looking at prices, or accepting small increases in prices.   So business does well, as everyone is spending more money.

More people do things like go out to eat.  The restaurant has to hire more people.   There is a labor shortage (sound familiar?) so they offer more money to get more help.    This raises their costs, so they raise the price of beer by  50 cents a glass.  The customers are giddy after seeing their latest 401(k) statement and don't grouse about the price increases.   Inflation starts to creep up.

It becomes an upwardly moving spiral, where increased spending leads to increased wages, which leads to increased prices.   And it is what we are going through right now, in the second-longest bull market in history - seven months shy of being number one.

So why doesn't this just go on forever?   People spend more, people pay more, people get paid more.   Everyone is happy and prosperous and the world is a paradise.   That's what Republicans argue will happen - but history has shown them to be wrong, time and time again.   And a tax cut for corporations may throw gasoline on this economic fire and keep it burning a while longer, but eventually every bull market turns bear.

And the signs are usually there - increased debt loads for companies and consumers.   Companies that appear to be doing well, but are actually hollowed out.   Some change in world economic patterns (a hike in the price of oil, some natural disaster, a war) that causes economic patterns to shift.   Or it could be that people just run out of things to buy, get bored of buying, or just run out of money to spend, or worse yet, money to borrow.   Tightening and loosening of credit, as well as government money policies also play a factor.

Whatever the cause - or causes - one day people wake up and realize that they are living in a house of cards.   Or maybe just one person realizes it.    One person says "Sell!" when everyone else is buying, and others get nervous - what does he know that we don't?    And maybe someone else loses their job or needs money and they decide to sell.   Or they cut back on spending, and suddenly that restaurant owner has an empty table, and a highly overpaid waitress.   And he realizes that even though business was booming, his increased expenses meant he wasn't making more money.

Emotions kick in.   People get nervous.   People start to look at prices and think about cutting back.   As the market starts to decline a bit, people get more nervous.   Go out to the restaurant tonight?   Um, no, we need to start cutting back on extravagances - have you seen our monthly report from Fidelity?   It's scary!

So, just as the upward spiral of the bull market feeds upon itself, the downward spiral of a bear market feeds upon itself - and again, in control theory, we would call this a feedback loop.   The difference, as I see it (from being through this cycle several times in my life) is that the bull market is generally a steady increase over time - not very dramatic, except at the end - while the bear market can be easily identified by a sudden crash or drop in prices - in a matter of months, weeks, days, or even hours or minutes.

Catastrophe theory as applied to sports performance.

And again, there is a mathematical model for this in catastrophe theory.  Things build up over time and increased stimulation eventually leads to a collapse.   Sort of sounds like an orgasm, and maybe that is an appropriate analogy.   Things build up, and build up, and finally - blammo!   Cigarette?

The funny thing is, we saw this happen not that long ago.   In fact, I started this blog in response to the last blow-up, in 2008, when everything went to hell in a hand-basket, pretty damn quickly, and everyone wondered, what happened?

What happened was a pretty predictable pattern - the same one I described above.  Exuberance and good times and a lot of fun - and people not thinking about how much things cost or how much they were borrowing.   People paying $750,000 for a house that two years earlier sold for $400,000 and two years before that sat unsold at $200,000 - and no one asking why some slum shack was suddenly so valuable, only how do I get in on this deal before it costs $1.5 Million?

Again, a pattern you may see today - in Real Estate, in cryptocurrency, and yes, even in stocks.   The economy is doing well, so everyone decides now is the time to invest.   After all, now we have money to invest - right?   You see how this bootstraps itself.   In a recent article in Bloomberg, is this distressing note:
Mom-and-pop investors are pouring money into retirement accounts as the economy picks up speed. Consumer confidence, which measures Americans’ optimism about their own and the economy’s well-being, is at a generation high.
When the grocery clerks are trading stock tips, it is time to get out of the market.   This is not to say the market will crash tomorrow - or the next day - but that eventually, overheated and overvalued stocks will be corrected.   And when that happens, the market will overshoot in the other direction.

Stung by declining asset values, Mr. & Mrs. Middle-America will put off buying that new car, or new refrigerator, or new dress, or even that restaurant meal.  That in turn means less revenue and lower profits for a host of companies - who in turn will lay off employees (the last ones hired, before the bust!) who in turn will panic and cut back on spending as well.

And then the quarterly reports come out and Mr. & Mrs. Middle-America realize their stock portfolio has taken a hit and they start thinking about cutting back more.   Or maybe the Mr. loses his job, too.   It starts this death spiral.

The good news is twofold, maybe three.   First, these things happen pretty quickly and rebound just as fast.   There is a lot of blood and anguish as people lose jobs, houses, cars, and savings.  But things start to rebound, almost right away.   Companies go under, and other companies snap up their assets at bankruptcy sale and now have a much lower cost overhead - and can offer products and services at far lower prices - which the stressed consumers can now afford.   Second, historically, these things have always recovered over time.   Indeed, it sort of has to be that way - unless our species went extinct.   Some sort of economy eventually takes hold and things move on - how long this takes often depends on a number of factors, one big one being government intervention or lack thereof, either of which can shorten or lengthen a recession.

The third thing is, it can be an opportunity to invest for the person who is astute.    If you sold out at the peak or bought in at the valley, you will do well.   The majority of the plebes - the get-rich-quick idiots - are buying in right now and will sell when it all blows up.  Buy high, sell low - the dumbest way to invest!

But timing the market is hard to do.  I sold out of real estate in about 2005 - about two years too early.  But that was far better than my friends who sold out (or were foreclosed upon) two years too late.

The best that I can do is to not buy in when the market is overheated, which is why I am sitting on a lot of cash right now.  I don't see any "opportunities" in a market where everything is at record-high prices.   Will it go up that much further?   Perhaps, right before it crashes down.   And like a rubber-band, the further this is stretched, the further it will hurt when it snaps back.

The other thing that is important to do, I think, is to not let the exuberance get to you.  It is all-too-easy to let your personal expenses creep up over time as an economy improves, as you start thinking (wrongly) that "hey, things are going great!  I don't need to cut back on spending!  Let's go to the club!  Let's go to the restaurant!  Let's order a pizza for delivery! Let's get cable TV and a new smartphone!  Let's SPEND more - let's ENJOY our money!"   And these are all things I heard before the last blowup and things I am hearing today - particularly the part about "enjoying" money.   But squandering cash never is enjoyable, at least in my book.  My greatest enjoyments in life are often things I bought cheap or better yet, got for free.   It makes the satisfaction that much sweeter.

What got me thinking about this was a restaurant bill.  We took a friend out to lunch and with tip the bill was over $80, which seemed kind of excessive to me.   That's enough to buy sacks of groceries, and quite frankly, the food and service weren't that great.   And yet, it is tempting, after seeing your net worth jump up $40,000 in a week during the "Trump Bubble" to think, "hey, I can afford this!"

And all I thought to myself, was, "Gee, I am picking up all the bad habits I used to have, once again!"

Tuesday, January 30, 2018

Sue the Bastards! Maybe Not....

You are far better off just not engaging with sketchy people than trying to use lawsuits to get your way.  For the average citizen, suing people is just out of the question.

In many online forums, I read about someone getting ripped off, and like clockwork, someone else will chime in, "Well, you should hire a lawyer and sue them!" as if this was a simple matter of a few phone calls.  You never have to worry about getting ripped-off in America, as our legions of lawyers are ready and waiting to sue on your behalf, get all your money back and all at no cost to you!

Well, reality is a little different than that.  In fact a lot different.   Let me explain the process and maybe you'll understand why relying on lawsuits is an illusory remedy.   You are far better off just not engaging with shady characters and shady businesses, because civil law likely won't protect you.  Hell, even criminal law hardly protects you!

Say you get scammed out of some money.   $1 or $1M it makes no difference, other than the jurisdiction you can sue in, and whether a lawyer will take your case.   As we shall see,  only the largest cases are worth pursuing, so if you lose, say, $10,000 in some scam, you likely will never see that money again and can't afford to sue.   But saying you do want to sue, what do you do?

1.  Find a Lawyer:  This seems like an easy one - after all, they advertise on billboards just like TGI Fridays!  All you have to do is call up and they get your money back!   Well, maybe not.  The lawyers on billboards are personal injury attorneys, and they are interested in suing deep pockets, such as trucking companies and insurance companies.  And as I noted in another posting, these sorts of lawyers will take these auto-accident and slip-and-fall cases and settle for pitiful amounts - often less than what the insurance company would have offered you, and often years and years later.   They are not likely to take your investment scam case.

And the best of lawyers don't advertise on billboards, and the best of lawyers will likely try to talk you out of suing, unless you really have a case.  The worst lawyers will eagerly take your case - and your money.  Which leads us to....

2.  Pay a Retainer:   Most "I'm going to sue!" people stop the process right here.  They lost thousands of dollars in some scam or whatever, and then find out the lawyer wants $10,000 in a retainer just to start the process.   I talked with one Estate Attorney and she wanted ten grand up front, plus the right to charge my credit card - open-ended - as the work progressed, always keeping that ten grand on account.   As you might imagine, I took a pass.   Attorneys don't work cheap, and they are under pressure to bill, bill, bill (and doctors are too, sadly) so they have a financial interest divergent from your own.  As one young lawyer I used to know would quip:  The Attorney-Client Relationship is itself a conflict of interest.

3.  File Suit:  Now supposing you found a lawyer who will take the case (and he isn't a crook who is going to victimize you further) and you came up with the retainer money, now we need to file suit.  Preparing the papers isn't that hard - broad allegations are all that is necessary at this point.  But you have to figure out who to sue and where.  You have to hope the company that screwed you is located in the United States, and hopefully near you.  Trying to sue overseas is next to impossible (and scales up the litigation costs by a factor of 2-5).   Foreign courts are prejudiced in favor of their own citizens - act shocked.   So you have to hope you can find these scam artists in the US and sue them in a friendly, nearby venue.   Good luck with that.  Scam artists are smart, and often locate overseas, and failing that locate their assets overseas, which we will address later.

4.  Pre-Trial Phase:  Assuming you have passed the previous hurdles, found the people, served them, and have your lawsuit pending, now you have to be prepared to wait - years and years.   Civil matters are low priority to overburdened and overworked courts.   Particularly money matters - judges expect you to settle these types of cases before trial.   So rapid justice isn't in the cards.  Besides, there is a lot of work to be done - all of which you will be billed for.  There is the discovery phase - document requests, requests for admissions, deposition of witnesses, and hiring of expert witnesses, if necessary.  All of this takes hours and hours and is all billable - to you.  That ten grand retainer was just the initiation fee.  There's a lot more to spend!

Of course, the opposition has to respond to all of this - and they will, with their own document requests, request for admissions, depositions, and so forth.  It becomes a race-to-the-bottom, with each side inflicting financial damage on the other in the form of legal bills.  It often is like those games of poker, where the guy with the losing hand can "win" simply by outbidding his opponent until he folds.  And guess what?  You are the guy with far fewer chips on the table.   Your opponent (who stole your money and is paying his lawyer with it) can afford to bleed you to death.

Then there is pre-trial motion practice - filing of motion after motion with the court.  You have to respond to each one, otherwise the case is lost.   And you may lose the case at this stage if the judge grants a motion to dismiss.  Nothing is assured.

5.  Trial:  Now assuming you have passed all these daunting hurdles, and haven't gone broke in the process, you might actually get to trial, several years after filing suit - and several hundred thousand dollars, in some cases, depending on the complexity of the case.   At a minimum, you've spent fifty grand to get this far.  In Patent litigation, we could bill that in a week or two.  So you see the problem right there - if you lost, say, $10,000 to a scam artist, it isn't worth spending $100,000 in legal fees to get it back.   And trial is just starting!   You'd better be ready to pony up just as much again for the trial phase.

The opponent has a right to a jury trial, and they likely will claim it, as jurors have an average 8th-grade education and are easy to sway.   So now you have to hire a jury expert and voir dire the jury.  If the con was complicated and difficult to explain to the jury, chances are, you will lose.   You will spend all your time with expert witnesses and trails of boring paper, trying to explain to sleepy jurors that you were scammed out of your money.   Meanwhile, the handsome and persuasive CEO of WeConCo will take the stand and charm the jury.  Hey, he charmed you at one time, right?

You have a 50/50 chance of winning, at best.   And you may not win much, either.  The jury might award you less money than you spent on legal fees, rendering then entire process moot - or a loss for you.

6.  Enforcing Judgment:   Once you win at trial, (which is highly unlikely, given the cost and odds) you need to enforce your judgment.   You won a million dollars!  Whoo-Wee!   Time to cash in!  But where?  The con artist isn't going to smile and write you a check.  He is going to make you work for it.  So you have to track down his assets - houses, cars, bank accounts - and start seizing them.   Even if you have someone in the country - like O.J. Simpson - it is hard to collect from them if you obtained a judgment.  It is all-too-easy to hide assets.  Or they may in fact be broke.

For an off-shore operation or a con artist who keeps his money off-shore, it is next to impossible.   He may have a million-dollar mansion on the coast of Florida, but that is protected by the State's homestead act - you can't attach it!   Again, O.J.    If you want to attach foreign bank accounts, you'd have to go to court in that country - spending tons more money - and it is highly unlikely that country would allow you to attach the bank account (and by then, the money has flown off to somewhere else).

It is damn hard to enforce a judgment against sketchy characters.   Big American Corporations with lots of assets?  Sure.  Now you know why the lawyers-on-billboards want to sue big trucking companies and insurance companies.   They don't want to take your case if you are hit by an illegal immigrant in a stolen, uninsured car.   Damn little money in that!

7.  Appeal Process:  And this is assuming the defendant doesn't appeal.   If he does, well, you have to pay your lawyer even more money.   And odds are, whatever you won at trial will be reduced on appeal.   Oh, and by the way, you might have to wait a year or more for that decision to come down, and you can't go after the defendant's assets in the meantime.  And if the defendant loses on appeal, he can appeal to an even higher court.   It can take years - more than a decade even - for some lawsuits to be fully resolved.

* * *

Now after reading all that, you may wonder, why do we have a legal system at all?  And the answer is, the system is there to police our society, not to make it even-Steven.  In criminal matters, the Police solve a minority of cases - particularly property crimes.  Even in murder cases, if you don't count the cases where the perpetrator was a family member or was caught a the scene of the crime, holding the bloody knife, declaring, "I dunnit!" the success rate in solving cases is very low - despite what you saw on C.S.I. - that's television not real life.   We have a criminal law system to catch as many as we can and also deter crime.  It is, by its nature - not perfect.

The high cost, complexity, and time needed to litigate cases acts as a filter to filter out smaller matters that really are not worth the court's time.  In Federal cases, for example, in order to obtain jurisdiction, you must allege a minimum amount of damages ($75,000 or so).   The courts aren't interested in the ten grand you lost to an Invention broker or a Nigerian scammer.  You should have known better is what they are saying.

It is like when you got your bike stolen.  The policeman shows up and asks you if you locked it.  And you say, "No, I didn't" and he says, "Well, you really shouldn't leave your bike in a sketchy part of town unlocked!" which you could say is blaming the victim or just common sense.  The same is true with being scammed, which is why you have to use your own skepticism as your first line of defense and not "I'm going to sue!" as your last.   Because the scam artists will laugh when you say that - they know the score.

But what about small claims court?   Yea, I wrote about that before as well.   It is kind of a cruel joke for a number of reasons.  Odds are, you will lose there, or if you win, you will still have to collect.  And if the defendant doesn't cheerfully hand you a check, odds are it will be difficult for you to attach his assets.

Again, the law is a last line of defense, not your back-stop for everyday financial transactions.   The best defense is a good offense.   And that is to say, be skeptical about people who promise something-for-nothing, and for any transaction that goes beyond handing someone money and them handing you goods at the exact same time.

The figurine above is from the desk of one of my law professors, John Banzhaf.  He became sort of famous or infamous, depending on your point of view, with his cry of "sue the bastards!"  He taught a litigation course that at one time required students to sue someone as part of the class.  This was viewed as a bit unseemly, as a lawsuit should not be some sort of lark for students to get a grade - after all, there are people on the other end of these lawsuits.

When I was at GW, one student sued a local dry cleaner for charging more to launder women's shirts than men's shirts.   It is an odd thing, but many laundries charged more to clean women's clothing - don't ask me why.  Some claim there are technical reasons for this.    Others claim it is just plain gender discrimination.  Whatever the cause, the unfortunate small businessman on the receiving end of a student's school project had to hire a lawyer and pay them (see steps #1 and #2 above - the process for being sued is about the same as suing only worse).

The student, on the other hand, had all the free time in the world to prepare and file papers and of course had nothing to lose if they lost.  Yes, we have something called Rule 11 sanctions for frivolous lawsuits - they are rarely, if ever, enforced.   So the poor dry cleaner settled for some token amount of money and, well, the student got an "A" and today many laundries and cleaners still charge more to clean women's clothes than men's.   I am not sure that accomplished much, but it did garner some headlines.   And yes, some jurisdictions have passed laws against shirt cleaning gender price discrimination - such as in California (big shocker).   But it is not the law of the land.

So while a lawsuit may provide temporary and emotional gratification, it hardly makes one whole or solves the world's problems.  Class-action suits are even more toothless - being merely a vehicle for lawyers to enrich themselves at the expense of their clients.   Hmmm.... come to think of it, I guess all lawsuits are about that way.

Like my friend said, "The Attorney-Client relationship is itself, a conflict of interest!"

UPDATE:  The only positive thing about this is, if you run into someone who says, "Well, sue the bastards!" over some trivial matter, you can be sure you are dealing with a real loser.  He probably also believes in the 100-mpg carburetor and other conspiracy theories - and has a justice boner a mile long.   But more about him in my next posting.

Monday, January 29, 2018

How To Walk

While the Fab-4 are properly demonstrating how to use a crosswalk, they would be inconveniencing people a lot less if they weren't walking single-file at this point.

You'd think walking was a simple thing.  We learn it at an early age and it stays with us for life.  Few people need lessons in how to walk, unless they are incapacitated by accident or illness and need to go through rehabilitation therapy.   Of course, there are some trendy yuppies who are buying these walking "sticks" (a trend that seemed to fade quickly) that look like ski poles and taking lessons in how to hike.

But daily walking?   Well, people just assume they know how to do it - just as they assume they are good drivers, when in fact they suck.   And maybe bad driving habits start with bad walking habits.   After all, a pedestrian is just someone who has parked their car.

This struck me the other day when I was driving to the art gallery.  They moved the museum to temporary quarters near the gallery and two ladies had parked their car and were walking to the museum.   Easy enough, right?  Well, the road is narrow - barely two lanes wide - and these ladies for some reason decided to both walk facing traffic, on opposite sides of the road, each about four feet from the edge, leaving me just enough room to thread between them.

Why they were walking like this was a mystery to me.  I slowed down as I approached them, and they glowered at me, as if to say, "How dare you drive an automobile on this roadway designed for automobiles that we just drove our own automobile down?"

And it struck me that people really don't know how to walk, at all.  They don't know the "rules of the road" so to speak, so as to walk in a manner which is safest for themselves and more convenient for everyone involved.

So I figured, I'd better lay down the rules, since no one else has.   And here they are.
1.  Walk Facing Traffic When On The Road:   In America at least (I don't know how they do it in the UK) we drive on the right hand side of the road but walk facing traffic on the left side.  This rule does not apply to bicycles, which are vehicles and ride on the right side of the road.   Walking while facing traffic is a good idea, as if you see a car coming toward you, you can step aside and avoid being hit - that is the idea, anyway. 
2.  Keep Right, Elsewhere:  When not on a roadway, however, most people walk on the right - just as we drive.   And in fact, on most bike paths, there is a sign to this effect - both bicycles and pedestrians keep to the right, with bicycles overtaking pedestrians on the left.  The same is true on escalators and moving walkways.   You keep right and let people pass on the left - they put up signs saying this, but few read them.  In corridors and on sidewalks, it is also a good rule - and most people seem to follow this instinctively.  Walk on the left and you are constantly plowing into people.
3.  Face Your Direction of Travel:  Walking backwards or sideways is a sure way to collide with others, or fall down an open stairway.   And yet, I see many people do this.  Two secretaries coming back from lunch are talking.  One turns to take the elevator, and the other continues the conversation with her friend by walking away, backwards, raising her voice as they separate in distance.  I guess she wants to continue the conversation and get where she is going, so she walks backwards.  It is like texting-while-driving.  Take your eyes off the road and you run into things.   And inevitably, the backwards or sideways walker plows into somebody or some thing (parking meters are a bitch!).   Just watch where you are going, and if you want to chat, then stop and chat.   Stop trying to multitask!
4.  Cross Roads at a 90 Degree Angle:  I touched on this before - people want to cross a busy road to get to their car, and decide the quickest way is to cross at an oblique angle of 45 degrees or less.   In some ridiculous circumstances (that I have seen!) the person ends up walking down the road for nearly a quarter-mile, most of the time in the center of the roadway, oblivious to the cars lined up behind them, gunning their engines.   Not only does this inconvenience other people, it is downright unsafe.   Cross perpendicular to the road and limit the amount of time you are in the road.   Then change direction and walk toward your car.  It may take a little longer, but it is far safer as you spend less time in the roadway.
5.  Walking Abreast:  We all like to walk and talk, and a long walk with a friend in conversation is a great thing.   But on a busy street or sidewalk or bike path or corridor, it is not only rude, but dangerous and inconvenient.   When you walk abreast, you block the path for others - people coming the other way and people wanting to pass you.  It is akin to riding the left lane in your car, never passing that truck in the center lane.  It is rude and inconvenient.  If you are walking abreast and see people ahead of you or behind you, move to single-file until they pass.  And if you are walking in the road, go to single-file or get off the road - or you might get killed.   And yes, I see people, often with kids, walking two, three, or four abreast in the roadway, expecting motorists to stop and follow them at a walking pace.  It is madness.
6.  Choke Points:  This is more of a standing than walking issue, but for some reason, it is human nature to stand at a "choke point" in a corridor, sidewalk, or entryway.   They say that at any house party, everybody always ends up in the kitchen.   I would amend that to say, everybody always ends up blocking the kitchen doorway.   For some reason that I cannot fathom, it is in our nature to stand and chat at the one part of the hallway that is constricted, or is an entryway or doorway.  In the grocery store, two people decide to chat right where the store decided to drop a mid-aisle display, so that their carts and bodies block further movement.  Ditto for parking shopping carts - it is instinct, I guess, to park them in the narrowest part of the aisle.  Never park yourself a the choke point - it is rude.
7.  Baby Buffer:  Using your stroller as on offensive weapon is distasteful on a number of levels.   Your baby is in there for starters, so when you decide to ram people with your stroller, you are using your child as a human shield.  And nowhere is this more true than at crosswalks.  I've seen, over and over again, Mothers and Fathers thrust their strollers - with children inside - right into the path of oncoming cars, in order to make the car stop so they can cross.  The lives of their children are apparently secondary to their need to get somewhere.  It is a variation of the "I have a baby, ergo I am special" mentality.  Your baby is indeed special, you, on the other hand, aren't.
8.  Use the Sidewalk:  When there is a sidewalk, walkway, bike path, or other type of walking path that parallels the main road, use it.   For some reason, there are folks who think that the sidewalk is not for them, and insist on walking in the road, often with traffic instead of facing it.  When it comes down to you versus a 4,000 lb car, the car always wins.   So I am not sure why people do this, other than to be annoying or because they have a death wish.  I've seen people walking in the road, with traffic, eschewing the sidewalk a mere feet away, and then suddenly move into the front of a speeding car, for no apparent reason whatsoever.   Trying prove a point?  Or maybe it is just Darwin culling the herd?  For whatever reason, I simply don't get it.
The list goes on and on, but you get the idea.  Pay attention to where you are going and what you are doing and accommodate the needs of others.  A lot of people are injured every year - some seriously - just from walking.   And it is not the walking that hurts or even kills them, but the tripping, falling, and colliding.  And as you get older and older, walking becomes more and more dangerous to you.  A simple fall at age 70 or more can lead to months if not years of rehab, if you break your hip or pelvis.

And a lot of these bad walking habits come down to passive-aggressive games.   People pretend not to notice where they are going, for example, so as to make you change your path (They win!  But what?).   Or the pedestrian who speeds up or slows down their pace with one thing in mind:  To intercept the car at the crosswalk so as to make them stop.   Again, they win, but what?

And yes, I realize that my rules for walking will fall on deaf ears.  People, particularly in tourist towns, tend to move with Brownian Motion more than anything else.  In fact, that is how you can spot a tourist, just about anywhere - they are looking up, looking behind them, looking to the side of them, looking everywhere except where they are going.   And that is why it is so easy for thieves and pickpockets to spot and victimize tourists - they sort of announce themselves to the world as rubes, much as someone does, making eye contact on the subway.

End of the Honeymoon For the Airlines?

Will the boom in air travel and airline profitability last forever?  Methinks not.

UPDATE:  This article on Bloomberg (among others) illustrates the problem.   Airlines are increasing capacity at a rate higher than travel is increasing.  Fuel costs are going up, but airlines can't raise prices for fear of losing seats.  Fare wars may start, causing all airlines to lose money.

* * *

Back in October, the President of American Airlines boasted that they "never would lose money again!" which scared me to death.  I sold all my airline stocks the next day.   One thing I have learned over the last 50 years is that when someone says something will never drop in value, it is likely due for a huge drop.  Pride goeth before the fall, or in this case, hubris.

And a recent article online seems to confirm that, at the very least, the halcyon days of the airline business are behind us.  Several factors are conspiring to change the way airlines have worked for the last decade or so.   We could go back to the dog-eat-dog model of the 1980's and 1990's.

In case you missed class, airlines used to be a heavily regulated Oligopoly.  The government set routes and fares, as well as the type of equipment to be used.   Air fares were staggeringly expensive - costing enough to buy a good used car back in the day.   Planes flew with empty seats - often half the plane or more.   Frequent flyer miles were used to entice business travelers to fly a particular airline, as "free flights" for the family vacation basically sold seats that were empty anyway.

Each country had its national "flag carrier".  The UK had BOAC.  France had Air France.  Italy, Alitalia, and so forth.   We didn't have a "flag carrier" although Juan Trippe heavily lobbied Congress to make Pan Am that carrier - and he went so far as to put huge American flag decals on the tails of his planes.   Perhaps that is why American Airlines chose the name that it did.

Back in the day, before deregulation, I flew on a 727 from Syracuse Hancock to Hartford Bradley, with a stop in Albany, and I was one of maybe five passengers on the plane.   That's how messed up regulations were.  Then in the late 1970's, airlines were deregulated under Jimmy Carter, and everything changed.  Suddenly, there was competition in the air - small carriers bought used planes and offered cut-rate fares.  Richard Branson started "Virgin" airlines.  The entire airline industry changed.

And as a result, profits vanished overnight.  The high overhead and outright waste of the traditional regulated carriers - as well as high union wages - sent them on a slow path toward bankruptcy.   Pan Am ended up stricken, and the Lockerbie disaster put it over the edge.   Even without that terrorist incident, Pan Am would have foundered in short order - they were already selling off routes and trying to downsize.  And after 9/11 airlines suffered more, as people stopped flying in droves.  The economic recession of 2009 certainly didn't help matters, either.  Airlines have been in and out of bankruptcy court for the last few decades, on a regular basis.

But in the last decade, since the economic recovery, it seems like we've entered a new era.  Fuel prices were relatively low, and air travel was up.   Airlines stopped the self-destructive fare wars, and indeed, seemed to be cooperating behind the scenes (and price and route-fixing has been alleged).  Mergers and consolidation have reduced the number of carriers and reduced competition.   Airlines no longer have to worry about some upstart low-cost carrier with a fleet of used MD-80's stealing away their lucrative Florida business.

New fares were introduced - and new fees.  Profits soared.  Air travel became more and more unpleasant - but more and more people traveled.  The airports, once the enclave of the "jet set" and the upper classes, became the new bus terminal, as the great unwashed masses took to the skies.

But all of that might change, and change soon.  The price of oil is creeping up, despite increased production in the United States.  Oil prices are subject to the laws of supply and demand - and demand is way up.  People are buying gas-guzzling trucks and SUVs, and air travel is up as well.   So while we have all this fracking oil, we are burning it as fast as we frack it.

Competition is heating up as well.  As the United article notes, cutting back on routes and seats turned out to be a disaster for that company.  Investors pestered the board to cut back on routes after the Continental merger.   United did, but just ended up handing seats and routes to American and Delta.   Now, those same outside investors are demanding the company increase routes and capacity.  Maybe companies shouldn't listen to outside investors! 

But the net result will be a return to fare wars, as overcapacity will force airlines to slash fares to poach customers from one another.   Combine this with increased fuel costs and increased labor costs (in a tight labor market) as well as rising interest rates and inflation and... well, I sold my airline stocks.  I did well, made capital gains, got paid dividends and then got out.   Stocks are not forever.

Speaking of labor problems, the idea that airline personnel are overpaid is sort of a thing of the past.  It depends on which airline you are talking about and how much seniority the person has.  Some of the "old school" pilots from legacy airlines are raking in the dough, and getting all the choice routes.  But new pilots, starting out on commuter routes are hardly making anything.   In a tight labor market, this could spell trouble.  A walk-out or even the threat of a strike could create havoc for the airline industry.   And rising labor costs certainly won't help the airlines' bottom line.

The media is postulating that 2018 will be a banner year, with tax cuts driving the economy to new heights.   But if you read the tea leaves, you see signs of trouble.   The tax cuts may drive the economy to an artificial high, I suspect, as this one time repatriation of income drives a flurry of mergers and acquisitions as well as expansions.   The problem is, eventually the system reaches a new equilibrium.   When corporations get lower taxes, this may mean windfall profits for a year or two, until a competitor lowers prices (as they can now afford to do) and thus, every player in that market space has to follow suit.   The big profits go back to being competitive profits, in short order.

And I think right there is the problem for the airlines, or indeed, any business.   While they may start out as wild profit-making ventures in new markets, eventually others see these profits being made and decide to jump in.   Railroads, Automobiles, or Smart Phones, it makes no difference.  Eventually, the item in question becomes a commodity item and the profit margins get thinner and thinner.   It is the nature of our capitalist system, and indeed the genius of it - it provides lower cost products, over time.

This is why I get nervous when an airline CEO says that they will never lose money ever again.  Or why I am skeptical that Apple can keep selling products for huge profits indefinitely.  The history of business tells a different story - competition drives prices and profits down, over time.   And so it will be, for the airlines.

Sunday, January 28, 2018

Never Try to Teach a Pig to Sing

"I have never swindled a man.  At most I kept quiet and let him swindle himself.  This does no harm, as a fool cannot be protected from his folly. If you attempt to do so, you will not only arouse his animosity but also you will be attempting to deprive him of whatever benefit he is capable of deriving from experience. Never attempt to teach a pig to sing; it wastes your time and annoys the pig." 
-- Robert A. Heinlein Time Enough For Love, The Lives of Lazarus Long
A lot of people don't understand this Heinlein quote, as it is often taken out of context.   Heinlein is using it in the context of foolish people who fall for cons.   And as he notes, all you have to do to con a person is "keep quiet and let him swindle himself" - a tactic a smart car salesman knows, if the customer becomes enamored of the car he is being shown.

It also illustrates how the people who defend the con-artist are most likely to be the conned.   Folks, when they buy into a con, "invest" themselves emotionally in it, and when you challenge them, they get defensive - backed into a corner - and come out fighting.  Fighting for the person who stole their money!

Don't believe me?  Go to a timeshare seminar sometime.  The loudest voices in the room for "investing in your vacation" are the victims of the con.   Oh, sure, the pump is primed by the salesmen and the brochures and the presentation - as well as the shills planted in the room.   But once people buy into the concept, they themselves become the best salesmen.

Or take payday loans and check cashing stores.  The loudest voices defending them are their paid lobbyists, of course.  But many in the ghetto defend such institutions as well!  Their very victims will be the first to argue that $25 check-cashing fees and 300% interest are "good deals!"

As I noted in a posting on the Jamaican lottery scam:
The victim often still believes that their big check is only days or weeks away. And even when family members intervene and show the victim that they were scammed, they will vehemently denounce the family members and still insist that riches are only moments away. 
When Chris Poland, his 53-year-old son, heard of it he was furious. He wanted to know why his dad, who had spent his life working at a factory, was giving his hard-earned money away. 
Albert Poland, an ordained deacon and long-time Sunday School teacher, took his own life the following day. 
In his suicide note, the father and grandfather of two urged his family not to spend a lot of money on his funeral service and said he hoped he would be vindicated once his $2.5million lottery prize arrived.
It is very sad, but this sort of thing goes on a lot. As I noted in another posting, Chelsea Clinton's father-in-law got caught up in Nigerian scam, stole money from his clients, and ended up in jail. These are often smart people who get caught up in these things - smart people who maybe slip a cog a bit
The man was ready to kill himself - and did - but still defended his abusers up to his last breath.   From the grave, he felt he would be vindicated, when all that lottery money came in!

And today, we see the same pattern.  Go on any cryptocurrency discussion site and see what I mean.  Oh, sure, just like the goldbug era, there are shills and trolls planting comments and stories to gin up the take.   But the biggest salesmen for the thing are the people who bought into it - convinced their ship has finally come in.

And when you try to school them otherwise?   Don't bother trying to teach a pig to sing!

Now, I am using crypto as just the latest example of the frenzied "investing" con-games that are always out there - or on the horizon.   There are many more examples of cons and bad deals, perhaps in your ordinary daily life - and you may find yourself defending them, on occasion.  People come to me asking how to "get rich quick" and I tell them there are no ways to get rich quick.  Even the dot-com billionaires had to do some work to get where they are today - nothing happens overnight, even if the press reports it that way.

For the average citizen, the best way to "get rich" is to accumulate wealth and the easiest way to do this is to stop giving it to other people.   Act rationally in an irrational world.  While others are throwing their money away on get-rich-quick schemes, just invest in a panoply of rational things and invest - put aside income instead of spending it.   The idea that you can leverage a few hundred or a few thousand into billions is idiotic.

And when I say there are scams in your everyday life, I don't just mean Glenn Beck hawking gold, or the cryptocurrency bubble, or the latest shady IPO, but a lot of things people perceive as "normal" activities, but in fact are utter rip-offs.   Leasing cars.   Eating out five nights a week.  Paying $5 for a "coffee drink" that is mostly ice cream.  Paying hundreds of dollars a month for cable plans or cell phone plans.   That sort of thing.   The sort of thing that the victims defend as "rational spending" by using excuses like, "It's our only luxury!" or "Compared to [insert obscene luxury here] it is a good deal!" or "Sometimes you come home from work just too beat to cook!  You just want to flop down in front of the TV and order a pizza!"

Because the same people who claim to "never have any money" are the same folks who fritter away their money on "small" purchases like this.  These are the same people "investing" in cryptocurrency by purchasing bitcoin with a credit card.

I am not trying to "convert" these folks to my way of thinking - that is idiotic as Heinlein points out.  But then again, Heinlein wasn't trying to convert anyone to his way of thinking, either.   He just wrote stories, and if you get something out of them, good for you.   If you don't, then don't read the book.

And that's why I say that if you don't like my common-sense approach and are convinced there are "secrets to wealth!" that are just waiting to be discovered (by you and five billion other people) then don't read my blog.   Because when you come right down to it, you can't teach me to sing, either.

Saturday, January 27, 2018

Bullshit or Bearshit?

Is the stock market poised to take off even further?  Or are people getting ahead of themselves with giddiness?

One thing that puzzles me again and again, is that throughout history, whenever something has gone up in value dramatically, the average man on the street buys in only after it has gone up.   Buy high, sell low - the sure recipe for disaster.

And this goes back centuries.   During the 1800's, railroad stocks took off, and the small investors jumped on at the end of the bubble - often pouring money into sketchy johnny-come-lately railroads that went from nowhere to nowhere and were the first to go bankrupt.  Why did they do this?

In a way, it is similar to Bitcoin or other sketchy investments today.   People see Bitcoin shoot way up in value.   So they think, "I will buy this and it will go up further in value!" and of course, it "corrects" and goes down in value.   The small investor then panics and sells for less than they paid, and goes on to look for some other "next big thing!"

Or they might look at Bitcoin and think, "Well, that's already gone up in value to the point that I can't afford it!" so they buy some other "crypto" which they think may be poised to shoot up in value like Bitcoin.   This is akin to buying the Durango Railroad or some other small, narrow-gauge line that will surely go belly-up when the market collapses (and the mines it serves peter out).

Now, what is interesting about this, is there is a predictable pattern of human behavior at work here.   And it doesn't matter if the "thing" they are investing in is railroads, cryptocurrencies, real estate, precious metals (hey, silver is almost as good as gold, right?), dot-com stocks, or even tulip bulbs.   People behave in a predictable quantum pattern.   You can't predict the behavior of the individual, but you can predict the behavior of the crowd.

And since a new crop of young investors comes along about every ten years or so, you can predict this pattern will repeat, again and again - and again.

When I was in my 20's and 30's, I did the same sort of thing - trying to divine what was "a good investment" based on the price history of a stock.   The market was going nuts under the Clinton administration, and I thought, "Gee, I should get in on this too!"   Grocery clerks swapping stock tips - it happens to every generation.

The reality was, of course, that  I was already in the market in the form of my 401(k) at work - as well as Mark's.   And the money I squandered trying to "beat the market" would have been better spent just parking it in that 401(k) and letting it grow organically over time.   And like every generation before me, and every generation since (and every generation to come) I had to learn this lesson after losing a few thousand dollars - money I could ill-afford to lose in my income bracket at that point in my life.

Why do young people think this way?   Or even some older people?   My finances at the time were a clue.   At that age, I had a recurring balance on my credit card - intractable credit card debt that I could never seem to pay off.   I didn't balance my checking account, other than to look at the monthly statements and perhaps try to write down the checks I wrote in the "register" of the checkbook.  Those little carbon-copy checks helped a bit, but not much.

What changed?   Well, starting my own business forced me to learn about accounting methods.  I had no idea what "Accounts Receivable" and "Accounts Payable" meant when I started.   I got paid and deposited the money to my bank and then I wrote checks to buy things I thought I needed.   I was pretty stupid.

After a year, I took an adult education course in Arlington on how to use Quickbooks, and I learned a bit about accounting methods and also how to keep track of what was owed to me, what I was spending, and moreover, how much I had in the bank.   This got my business accounts in order - but it took several years before I applied this to my personal life.

Run your personal life like you would a business - and that might mean learning how to run a business first.  Sadly, basic accounting and finance are not taught in school - not high school, not college - unless you plan on majoring in accounting.   So most folks are as ignorant as I was for half my life, about "where all the money goes".

But getting back to investing, my pattern there mirrored the pattern in most people's lives - and the pattern we are seeing today.   It isn't shocking that people today are throwing money at things and hoping it sticks - that is human nature.   It is just like this "Tide Pod Challenge" nonsense - people used to swallow goldfish and do other stupid things.   Just look at the haircuts we used to have in the 1970's - it makes you cringe.

Today, in addition to sketchy investments like cryptocurrency, people are just throwing money into the stock market.   This started after the election, based on the premise that Trump would slash regulations and American businesses would take off.   And when the new tax law was passed, it went into overdrive.   Surely this big cut in corporate taxes would unleash a new era of growth and prosperity, right?

Maybe, maybe not.   As I noted in another posting, while the old corporate rate was indeed 35%, there were so many loopholes in the law that many if not most corporations never paid close to that rate.   In fact, it was a constant rant on the Left how such-and-such a corporation "didn't pay its fair share of taxes!" - a charge often leveled at General Electric, which given recent events, seems like a quaint notion today.

To younger investors, who haven't seen the downside of the Bull market before, this seems like a great time to invest.   A 24-year-old today was 14 when the economy melted down in late 2008 and the banks and auto companies were bailed out.  What he remembers about the market back then - and the signs of the coming meltdown (which happened when he was 10-12 years old) might not have made much of an impression on him.   When you don't have money in the game, what the market does is sort of irrelevant.

For example, I am often surprised to read about market meltdowns in the past, when I was younger, as I failed to notice them - not having anything invested in the market.   When I was 18-22 years old, we had high inflation, high unemployment, and rationed gasoline.   These were things I remember from the consumer side of things as that's what I was.   I remember the peanut butter and coffee shortages in 1979.   I could not tell you how the stock market was doing at the time, as I had no stocks back then.

But the more I was invested in things, the more I noticed - and started piecing together pieces of the puzzle and realizing the patterns in the market were there - and had been there before, but I just failed to notice them.   I was stung in the real estate crash of 1989, but not by much.   I just had to grin-and-bear-it and wait a few years for our house to be worth what we paid for it.  It wasn't much of a crash, compared to 2007 or thereabouts.   Some people who bought houses at the peak of the market then are still underwater on their homes.   Indeed, the home we own today is worth, on a good day, maybe what we paid for it.   It's a good thing we don't have a mortgage - or worse yet, a funny-money mortgage.

But we did OK in the last go-around because we sold most of our investment real estate before things got really bad.   And since we held most of it for a decade or more, even when we sold one property after the peak, we still sold it for almost three times the purchase price.

Now the stock market meltdown, which peaked (or valleyed) in February 2009 (Black President!  Sell Everything!) was something we didn't really anticipate or time very well - but then again, timing the market is hard to do.   We had to grin-and-bear-it and within a year, we were back on track, although if we had sold in December of 2008 and bought everything back in March of 2009, we could have easily have double the amount of money we have today.

Timing the market is difficult to do.   But what seems odd to me is that the novices seem to have a knack for reverse-timing the market.   When the market goes up, they buy, buy, buy.   And when it crashes, they sell, sell, sell.   I recounted how an oldster here on the island "sold it all" in February of 2009, so he "wouldn't lose even more!"   As it turns out, he sold at the bottom of the market and locked in his losses.  Greed and Fear drive the market, it is said, and if you give into these two emotions you will end up screwed.

The Greed part is easy to understand.   Everyone is making money, why shouldn't I?   So people buy things they don't understand and end up broke.   And it is a hard impulse to suppress.   If you see someone doing well at something, you want to copy their behavior.   But oftentimes, it is impossible to copy other's behavior without a working time machine.

The Fear part is a little more complex, and we'll get to that later.  Suffice it to say, when people see they are losing money they often panic and try to "do something" about it - but the only thing they can do is to sell at the bottom of the market, which is not a smart choice.

But getting back to Greed, when I was doing well in Real Estate, some friends decided that, seeing me make money at it, they should buy investment properties, too.   I kept reminding them that the reason I was doing well was that I bought a decade earlier when prices were low and banks were desperate to give properties away.  I bought when fear ruled.  They bought during the greed cycle.   A decade after my friends bought, the same pattern repeated, only worse - banks were desperate to give properties away, and because of fear, no one was buying.

Today, the hot thing is the stock market, and many folks are sounding the alarm - just as people did in the past regarding real estate, dot-com stocks, and today with "cryptocurrency".   And just as in the past - and as is happening today - these warnings are shouted down.   Obviously they are wrong!  Look how far the market has shot up!  Look how much Bitcoin has gained!

But things shooting up in value is the one sure sign that they may correct over time.   Markets are unstable and undamped systems - many times - and as a result, prices tend to overshoot and undershoot their real values.   The idea that "market value" for something reflects a real value is a myth.   Market value is a perceived value of things, and perceptions can be radically skewed.

In a recent CNBC article (disclaimer:  This is the same network that employs the shouting guy, who says "now is the time to invest!") they note that an index calculated by Bank of America indicates that the market may already be overheated:

While the inflows have helped push the market higher, they also can be seen as a contrary indicator when they flash signs of excess. BofAML uses a proprietary "Bull & Bear" indicator that gauges when inflows or outflows point to investors moving too far to either side. 
The current reading on the indicator of 7.9 is the most bullish since a reading above 8 in March 2013 — a sell signal. Michael Hartnett, BofAML's chief investment strategist, said the Bull & Bear indicator has shown 11 previous sell signals since 2002 and has been correct each time. 
In the near term, around February and March, that suggests a technical pullback for the S&P 500 to 2,686, which would represent a drop of close to 6 percent, Hartnett said.
This is not to say the market will crash, only that it may be ahead of itself and a correction is due.  If you are investing for the long-haul - a horizon decades away - then this should not concern you.  After all, a 6% pullback after a 7% gain in a month is not that bad a deal.   That still represents an annualized 12% gain for the year.   You may see your investments go down, but they should recover, provided you are not investing in crazy things like crypto, gold, or some new dot-com IPO bullshit.

If you are invested in rational things, for the most part, they survive these pullbacks.  Companies that are making money and selling things will turn around the fastest.   The market may go down, but then people realize that ACME company now has a P/E ratio of 10, and pays a regular dividend and just reported decent profits.

Of course, there could be a bigger pullback on the horizon.   There is a lot of systemic rot in our system today, and the recent debacle at GE is a case in point.   It seems management has been hiding the real extent of the company's troubles.  Gone are the days when they could afford to own their own vacation island.  They have a huge pension and health care liability, and their insurance division over-sold long-term care policies without properly funding them.   In fact, most of GE financial has a net worth of zero these days.   Only the divisions making things like jet engines and turbines and medical equipment appear to be worth much - and they may be spun off.   Of course, this raises the question, how many other companies are hollowed out from the inside like this?

We hear about the bankruptcy of Toys 'R Us, and the Amazon Washington Post claims that it was Amazon that done it - driving them out of business with Amazon's low-low prices.  Sign up for Prime today!   The real reason wasn't Bezos' relentless pursuit of market share (at the expense of profits) but that Toys 'R Us was loaded to the gills with debt, due to a private equity buyout.   It was a classic bust-out scheme, but unlike what Tony Soprano does, perfectly legal.

But you have to wonder, how many other companies are in a similar situation - loaded down with debt, but getting by, because interest rates are at an all-time low.   Those corporate bonds are coming due and interest rates could be up at least a point or two - enough to wipe out the modest profits these companies are eking out.

The problem for the small investor, of course, is that life circumstances often dictate when you buy or sell investments, far more often than market timing.   We buy stocks when we are younger, to save for retirement.  When we are older, we sell these investments and live on the money - often forced to do so at age 70-1/2 by the IRS.  So for me, I am at a stage in life where I am selling more than buying.  You may be in a different position.

I am not Bullish or Bearish, but a Realist.   The market goes up over time more than it goes down.  Being Bullish is nonsense - the market doesn't need cheerleaders.  But if you can detect the signs of rot, decay, and over-enthusiasm, that's where you can make money.   People don't get rich from spotting things that have went up in value.   But folks who can spot when something is going down - or is undervalued - can make a mint.  The folks who "spotted" the real estate crises cleaned up.  Warren Buffet doesn't make money buying things that are hyped by Jim Cramer - quite the opposite.  He finds "diamonds in the rough" and polishes them up - often buying things that the "smart" people laugh at.

But if I had to guess, I'd say this present exuberance will be short-lived, in part simply because things are going up too fast, too soon.   But there are other factors to consider as well:
  1. Real Estate is again overpriced in many markets.
  2. Interest rates are climbing, which will make refinancing debts more costly.
  3. Corporations are heavily in debt (see #2) which will cut into profits.
  4. Individuals are heavily into debt, limiting their ability to buy things.
  5. A tariff war will raise prices domestically and reduce exports
  6. Farm income is off by half.  The tariff war could bankrupt many farmers.
  7. When bubbles burst, it creates uncertainty in the market.  Bitcoin.
  8. Too many amateurs are getting into investing.
  9. Amateurs are looking for huge short-term returns. 
  10. World Politics. 
 The list goes on an on - maybe you have some factors as well.  And maybe I am wrong about this.  But a decade-long bull market has to end sometime, and let's just hope this one ends well - with a gentle, "pffffft!" and not an explosive "Bang!"

Friday, January 26, 2018

A Look Back At the IPO Decade

Facebook Share Price, from May 18, 2012 to present - a 489% gain.

DJIA, from May 18, 2012 to present a 216% gain.

The last decade or so has been an interesting time in America. It seems that in the last few years, more than ever, we have been continually grasping for success. One after another, things were presented the average American as a means of getting rich very quickly and with little or no effort. We were exhorted to buy houses or gold or Bitcoin or stocks.

And each time, we were told this was a sure thing that would make us rich.  And each time, after an initial period of success, it all came falling apart. And each time, we went right back to the well, convinced that this time, for sure, we would make it big - unlike the last three or four times where we were suckered into investing in something we didn't really understand.

And one of these things over the last decade was the Initial Public Offering or IPO - when stocks are first sold to the public.  I think many young people today think that IPOs are regular part of the financial landscape.  But when I was a youth, we never heard about such things.  The number of new companies starting up in America was very small, the average citizen didn't invest in start-up companies. We all bought Blue Chip stocks if we bought stocks at all, because most of us had pension plans in our old age.  The IPO, as we know it today, basically didn't exist 20 or 30 years ago.

IPOs were touted as "The Next Big Thing!" and the chance for Joe Littleguy to get in "on the ground floor of the next Microsoft!"   But was it?   Or was it really just, at best, an average deal, and at worst, throwing your money away?  It has been a while and the dust has settled on many of these IPOs, and we can tell now in retrospect which were winners and which were losers - something we could not tell back in the day.

And let's just stop for a moment and remember that we don't own time machines nor do we have crystal balls to see into the future.   Sure, in retrospect, we can say that one stock was a winner and another was a loser - and that if you selected the winner you'd win.   This is idiotic.   It is like going to the race track the day after the races and then "spotting the winner" from yesterday's race.  I can also tell you the winning lottery numbers - from last night's drawing.

My take on these speculative deals is this: Since we can't afford to gamble, it is best to walk away from all of them, rather than bet "just a little bit" on some of them.  Because just like the racetrack, yes, someone always wins and it could be you.  But the majority of people who play the ponies, lose.  And that is far more likely to be you.  Quantum investing is looking at the overall odds, and not taking wild bets on long-shots - even if some of them will win.

And the winner here, in the IPO race, is Facebook.   And I was skeptical of the Facebook IPO and still am skeptical of the long-term staying power of that website.   Why?  Because we've seen similar things that looked pretty damn permanent that turned out to be ether.  And the granddaddy of them all was AOL - a website and ISP that became so wildly overvalued that they bought Time-Warner, which was a real company making real profits.  Years later, Time-Warner managed to extricate itself from the deal.  AOL still exists, but really isn't much to write home about.  And the Internet is littered with the carcasses of formerly "hot" websites that went to "Not".

Now maybe Facebook will escape this fate.  Maybe, like Google (and its panoply of related sites) it will have long-term staying power.   Or maybe Google will screw the pooch.  It is hard to say - we use sites and software and then one day switch and forget about the old sites.   Surfing MySpace on Netscape Navigator was once "a thing" and just as suddenly wasn't.   Again, we can't predict the future.  Maybe this "fake news" Russian Troll business could kill off Facebook - or worse, Facebook's attempts to filter out viral media, fake news, and rumors will backfire.   It seems to me that the very things they are trying to get rid of is what Facebookers like the most!

As the above chart shows, Facebook has done well - but in part because people are overpaying for it.  It's P/E ratio isn't staggeringly high - just about double of where it should be for a profit-making company.  And not surprisingly, its stock price is about double what the DJIA did in the same time period.  So if you bought the Facebook IPO stock, and hung on during the initial crash, you did pretty well.  Well, provided you sold it sometime - as you never have received a dividend from your investment.   Your gains are all on paper, so far.

And that is one reason why, when a stock goes up in value to double what I paid for it, I sell half of it. That way, I am assured I at least made my money back.   Rapid rises make me nervous, so I tend to sell when I see them.   A reader chides me for being so conservative - but this is my life and livelihood we are talking about, not Monopoly money.   If the stock goes up still, I make more.  If it crashes down to nothing, I don't have to eat cat food.   It is nice to think about all the profit you could have made, but money you did make is more tangible.

Tesla is another "winner" IPO, starting at $19 a share and trading today for about $350.  But the company has yet to make dollar one, and is hemorrhaging cash.  If they can't push those Model-3's out the door pretty quickly (before depositors change their minds) it could all come crashing down in short order.  The rapid-fire new product announcements, as well as the taking of deposits on vehicles that don't yet exist, remind me too much of the Elio fiasco.

Don't get me wrong, I want to see Elon Musk succeed, even if he looks a bit like a creepy Bond villain.   A world with electric cars charged by solar shingles and rockets to the moon sounds like a wonderful fantasy.  Well, the rockets are at least doing well, although Space-X, as a private company, doesn't have to report financials, so we don't know if they are stealing launches away from Boeing by selling for below cost or not (given Musk's business model, I suspect that is the case).   Let's hope he doesn't run out of money before he starts to turn a profit.

But as an investment?  For my retirement?  To support me in comfort for the rest of my life?  Uh, no thanks, way too risky.  I will leave this to the private equity people and Billionaires to bite on.   They can afford to lose Billions, I can't even afford to lose a hundred bucks.

But what about the other IPOs?  It is hard to find data that isn't cheerleading for tech IPOs.  Even this "geek" review of 100 IPOs is startlingly positive.   They claim that 2/3rds of IPO stocks are selling for more than their IPO price.  This sounds great, but selling for a penny more after five years isn't making money, it's losing it.  I would be interested to see how many of these stocks did better than the DJIA or the NASDAQ or even Grandma's Christmas Club account at the Credit Union over the same time period.  I suspect the percentage would be less than 2/3.   You have to have something to compare these things to, and the fact that the "geek" people don't tell us this is, in itself, telling.

They do admit, however, that a lot of these IPOs were real stinkers.  What is interesting to me, however, is that of both the "winners" and "losers" they profile, most are for companies I never heard of.   Yea, I heard all about Tesla and Groupon.  The others?   Didn't make it to the financial channels.  The hyped IPOs, like Snapchat IPO, haven't done so well.  And it is interesting that if you google "top 10 IPOs" or whatever, most of the articles are talking about previous IPOs in relation to Snapchat.   Snapchat has lost about half its value since the IPO, is losing money and subscribers, and appears to be overtaken by Facebook's own applications.

That is the problem for a lot of this so-called "tech" - anyone can copy it, as most of its has no Intellectual Property to protect it (and keeping others out of the market with IP is damn hard to do!).  And the barriers to entry are often pretty low - and the big-pocket competitors, if you don't sell out to them at the get-go, will just copy your business model and take every last penny you have.

Which brings us to Groupon.  Groupon is now trading for about five bucks a share, down from a high of about twenty.  The idea was not protectable.  The founders could have sold out early on for a lot of money and decided not to do so.  It was a fad that wore off as consumers got bored with it and retailers got frustrated with it. And the big players created their own knock-off "me too" coupon deals, diluting the market and basically killing it off.

But at the time the IPO came out?   Well, it was the cat's ass - and if you were skeptical about it, you were shouted down in financial discussion groups.

And yes, a few got rich on these IPOs, but most of those were the insiders who founded the company or were pre-IPO early investors.   The majority of people who bought IPO sticks either broke even or lost money.  There was no "Next Big Thing!" for them - at best a thing.

But Bob!  How can you get rich if you don't take wild risks?   That is the conundrum,  ain't it?   And the  answer is, you might not get wildly rich by merely investing for the long haul, but you won't go broke, either.  And we can't afford to go broke. 

Again, quantum investing.  What is most likely to happen to you if you consistently seek out long-shot deals?  The odds are stacked against you.  Odds are, you lose, big time.

But what about gambling "just a little bit? "  People tell me they can afford to lose a few hundred or a few thousand dollars on some risky investment that might pay off.  Gamblers tell me the same thing

But over time you realize that you wished you saved that money instead.  Even small amounts of money invested over time add up.  And it is sad that young people in particular get caught up in these get-rich-quick schemes, as they could really clean up on compound interest over timeThe bulk of my wealth did not come from long-shot investments or getting lucky on specific stocks, but from investing consistently over 30 years and re-investing the profits from those investments.  Compound interest is a bitch - when you're paying it.  It's a beaut - when you're earning it.   And if you are young, time is on your side.

The other problem with gambling is that it leads to more gambling.  One you are hooked on deals like this,  it is hard to quit.   They let you win just enough to keep you in the game - enough to think that you might gamble your way out of trouble.  And when you lose?   Many folks double-down on their bets, and take the next wild risk to come along, hoping that "this time" it pays out and makes up for their previous losses.

And a lot of people today are doing just that - after jumping on gold at the peak, and losing money, are jumping on Bitcoin at the peak and losing money.   And this is after they lose money on IPOs, real estate, and, well, just about everything they touched.   It isn't bad luck - it's bad investing.