Monday, November 2, 2020

Election Week Links

  • The more I read about polling, the more confused I get. From what I understand, the industry used to rely on normal people to pick up their old landline phones and talk to pollsters. Now, apparently, the response rate is very low and very non-representative. So pollsters apparently “correct” for their non-representative samples by overweighting some demographics and underweighting others. But isn’t this entirely circular reasoning? The whole point of polling is to determine how many of each group will show up to vote, and an initial assumption about the makeup of the electorate will shape the poll’s outcome. I’ve been listening to a lot of FiveThirtyEight podcasts recently, and they’ve done nothing to answer my questions. For “elections gurus” their analysis is surprisingly non-technical and superficial. Not to mention arrogant and smug. The more I listen to them, the more I suspect that their predictions might be substantially off. Also, they all have “NPR voice”. Extremely grating. [Sailer]
  • It offers an end to fracking and other Cuckoo California dreams that will cost the economy and the people who most need work right now. “Good-paying green jobs” are probably not jobs for Pittsburgh, or Cleveland, or Toledo, or Youngstown. [PPG]
  • The effect of inflation on real bank profits has been widely discussed in the economics and finance literature. Two competing and conflicting models exist. Alchian and Kessel (A-K) argue that banks are net monetary creditors (i.e., their nominal assets are greater than nominal liabilities). Rising prices would then decrease the value of their nominal assets more than diminishing the value of their nominal liabilities. Consequently, banks will lose during an inflation. On the other hand, the inflation tax school has argued that since banks' demand deposits are a portion of the money supply, they should capture a portion of the inflation tax and therefore gain during an inflation. We will show both the A-K and inflation tax hypotheses are correct, but only under special and differing circumstances. In brief, if inflation is unanticipated and continues to be unanticipated, then banks, being net monetary creditors, will lose. On the other hand, if inflation is fully anticipated, all interest rates will rise to include an inflation premium; the real value of all assets and liabilities, except demand deposits and reserves, will then be unchanged. Demand deposits, net of reserves, however, will shrink in value as prices rise. Consequently, the liabilities of the bank fall in real terms and banks gain. Otherwise put, the banks then have captured a portion of the inflation tax. Whether banks gain or lose depends crucially on the particular circumstances of expectations and portfolio adjustments. [link]
  • [L]ess informed investors earn the highest (and lowest) rates of return on their total portfolios because they irrationally believe they have a more favorable risk-return opportunity and hence invest in securities with a higher return. In effect, their ignorance effectively diminishes their risk aversion, and in the long run allows a lucky few of them to reap the financial rewards that would accrue to the less risk averse (one could call it the 'Forrest Gump' effect). As opposed to speculation weeding out the irrational traders and making only the best opinions matter, the irrational can dominate the class of winners. [CBS]
  • What is clear is that Exxon will keep bleeding cash at current oil prices. Its operating cash flow can’t cover outlays needed to maintain the business and to cover dividends. In fact, Exxon needs West Texas Intermediate prices to be at roughly $50 a barrel for it to manage its payout and maintenance-level capital expenditures from operating cash flow, according to Pavel Molchanov, equity analyst at Raymond James. [WSJ]
  • Neglected stocks — I measure it by the ratio of market cap to average dollar volume. 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, National Western Life Insurance Company, CVR Energy, and Berkshire Hathaway. These companies have few analysts; there is no way for a brokerage to make money off of them. Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner. But if they are well-run, they can be great places to invest. The dominant investor has his interests aligned with yours over the long haul. This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold. Strong hands hold the stock, which is typically a good place to be. [Merkel]
  • Eventually this will come to an end. I agree with David Einhorn who says that tech stocks are in an enormous bubble. It’s not the same as 2000, where tech stocks had no profits. It is different, as tech stocks have extremely high valuations relative to their profits. And that may be no difference at all, as the sum of the weights of technology and communication stocks have hit an all time high this year. The highest weight sector tends to underperform. The only question is when does the momentum fail. I’m not giving up. My principles have a strong theory behind them. My efforts are not just value, but deep value, and I have gotten my share of kicks to the gut as a result. At some point the tide will turn, even if it is private equity absorbing value stocks out of the market. The investment math is hard to break. If companies are cheap on net worth and earnings, they will appreciate. [Merkel]
  • A modern employee, let’s use a white collar office worker as an example, will usually get around 8 hours of sleep, will work around 8 hours a day, spend 4 hours commuting going to the gym, having meals, and then end up with 4 hours to him or herself during the day. So they own 4 hours. We can call this class of people 4HLers. It may seem vulgar to reduce a person’s life to the amount of hours he has free in a day, but then again, how many hours you have to yourself is kind of a big deal. Time is an important concept to a 4HLer. He is obsessed with time. he has to be. His livelyhood depends on it. So he has an alarm clock, because he has to wake up at the same time everyday, he has to take lunch around the same time everyday and get off of work around the same time everyday. He has deadlines that are due and he has to be reliable. It’s his job to be reliable. But wait, isn’t his job to do his job? Not quite. [Paul Skallas]
  • America had this massive home building boom in the 20th century. But like the nouveau riche that they are they focused on square feet instead of Lindy rich ceiling height. [Paul Skallas]
  • Space doesn’t “grab” the human like other things grab the human. I can’t tell you why. Maybe it’s because there is nothing out there. But that isn’t what this newsletter is about. I’m just sharing you something visceral and obvious that no one wants to talk about. Space fascination is held up by the government, 20th century hack Sci-fi culture and media tricks. It’s not on the level. It can’t hold up on its own without help. The human doesn’t feel drawn to it. There is no “pull”. [Paul Skallas]
  • Twitter is a great tool. News was traditionally, throughout history, a two way street. You gave news and you received news. Like a barber shop. So you can create a lindy compatible community to engage with rumor/gossip. But what happens is people treat it like the 20th century media monoculture, where they just rained bad news on you in a one way communication. They get the upside (clicks, salaries) you get the downside (anger, messing up your mood). You lose in this transaction. [Paul Skallas]
  • I was inundated with cheap companies, more than I had capital for.  I started to experience analysis paralysis, I couldn't decide which cheap companies were the best, or what "best" even meant.  Did I want better FCF yields, or a lower NCAV, or better dividends?  In the end I decided that I needed a sound system, one that could be followed and one that was simple.  I decided to buy stocks trading at 2/3 of NCAV, that were profitable, paid a dividend, and were stable companies. [Oddball Stocks]
  • Long time readers know that I've toyed with the Japanese net-net market.  I've done numerous posts on Japanese equities, and even bought a few Japanese net-nets.  Each time though I keep coming back to the same problem, there are so many Japanese net-nets, how do I choose the ones to invest in?  I've translated financial statements in an effort to pick the "best" cheapest companies.  I've built out spreadsheets of various metrics, yet I've never had the feeling that I'm fully capturing the cheapest companies.  Do I purchase the ones at the lowest P/NCAV, or the ones with the highest ROE, or the ones with the best dividend yield?  I really don't know what will work the best in the future. [Oddball Stocks]

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