Thoughts about the markets, automated trading algorithms, artificial intelligence, and lots of other stuff

  • Law of Diminishing Returns

    At some point, more of the same stops paying off …

     

    Law of Diminishing Returnsvia Sketchplanations

    Nature (and common sense) reminds us that equilibrium is important. For example, when you exercise too much you get injured, when you drink too much water you get poisoned, etc. 

    This concept applies almost everywhere.

    • It's why diversification is so important in portfolio construction theory. 
    • Or, why you don't want to put all your eggs in one basket (concentrating your risk).
    • And, my favorite, it's also why you shouldn't only eat vegetables.

     

    A related nugget of wisdom from the extreme … too much of a good thing is a bad thing

  • A Debt You Can’t Pay

    The concept of "Debt" can be confusing to a layman. Most people understand what it means when they take on debt with a local bank, but it can be harder to understand the role debt plays in global economics.

    Compounding the confusion, the implications of debt change on a macro level. 

    Many worry that our "excessive" government debt levels impact economic stability, the strength of our currency, and unemployment. The national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt, or default. 

    The idea behind our current global debt structure is that if two nations are mutually obligated and dependent on each other, they are less likely to go to war. And that has held relatively true so far. Of course, it's not a perfect system, and it can break down, but as yet, it's working compared to previous systems such as the balance of power.

    In some ways, it's fake money, so paying off our debts seems insurmountable. Yet, our economy is reliable so we're allowed to continue borrowing. Debt is also an important part of the economic machine – it can be argued that we wouldn't have money without debt. 

    Ray Dalio created a simple (but not simplistic) and relatively easy to follow 30 minute animated video that answers the question, "How does the economy really work?"  Click to watch.

     

    via Ray Dalio

    To learn more about Dalio's Economic Principles visit: http://www.economicprinciples.org.

    The global economy has hugely increased in size in the last 50 years as developing nations prosper. The average global GDP per capita has gone from ~$1000 to over $10,000 in my lifetime.

    So it makes sense that the amount of debt is also increasing with the size of the money supply required to conduct all the transactions in the global economy.

    The U.S. tops the list with debt to GDP at 104.3% and almost $22 Trillion in debt, but is dwarfed by #2 Japan's debt to GDP rate of 237.1%. 

    World-debt-2019 via Visual Capitalist 

     

    Meanwhle, China has increased its indebtedness by $2 trillion in the last two years. 

    The market is not the economy. Meaning, the performance of markets is not necessarily linked to the performance of the economy (and the converse is true as well). Even though you may be more interested in trading, economics is still important to understand and follow

    If one thing is clear, it's that 2020 will be an interesting year for markets and the economy. 

    There is a lot of opportunity in crisis and chaos.

     

  • A Serendipitous Moonshot

    Hope you’re enjoying the New Year!

    On January 2nd, 2020,  after many years of hard work, we launched the Capitalogix Absolute Return Fund.

    It’s been a long and hard road … but also a labor of love.

    On a related note, I’ve talked about moonshots, playing a different game, and getting comfortable being uncomfortable.   These themes come up because they define what we do at Capitalogix and what was necessary to create the technology platform that runs the fund. 

    Speaking of getting comfortable being uncomfortable, I spent the last week on a family cruise through the Caribbean.  

     

    551DF189-D1A7-450B-A5CA-CADEAE122602

     

    We celebrated many important events including my mother’s 80th birthday, my sister’s 50th birthday, and Jennifer and my 12th wedding anniversary.

    We happened to be in Grand Cayman on January 2nd, the day fund launched.

      

    8364B550-D9CB-44AA-944A-CAD4E01C785A

     

    I had a chance to stop by Walker’s (our fund lawyers) to commemorate the day with them as well.

     

    5CB3AFEF-C8B4-4671-B713-4992A54FF056

     

    It was a great start to my year!

    Let me know how your year started too.

     

  • Growth of the US In 2019 (and into 2020)

    The US economy and its financial markets have proven resilient – if you look at the timeline of our history, there's almost unbridled growth. 

    For all the hiccups, issues, downturns, etc. our economy is enormous and still growing. 

    US-GDP-by-Year-Compared-to-Recessions-and-Events-v7-1600-e87avia howmuch

    In fact, our largest growth came on the backs of the Great Depression and WW2 … it makes sense, but it's a reminder of resiliency.

    Looking at 2019, we've seen volatility, fear, uncertainty – but we've also seen a banner year for the S&P 500, and continued GDP growth. 

    According to visual capitalist, the key sectors for growth this year were semiconductors, credit services, aerospace/defense, electornic equipment, and diversified machinery. Oil, wireless communications, foreign banks, apparel, and foreign telecoms took a hit. 

    Stock-market-winners-losers-2019via Visual Capitalist

    I share these images, not to say we're invincible, or that growth will continue forever, but to say that as we start the new year it's important to be optimistic and keep an eye on what's possible, not what obstacles we may face along the way. 

    Onwards!

  • Starting Your New Year The Right Way

    This is the first year that my team's plan for 2020 almost 100% matches my vision for it, without my input. I think that's a good sign that we're taking the right steps.

    We talk a lot about the vision for the next 5, 10, 20 years … but it's easy to have the same target and want to walk different paths. 

    I'm also doing a better job in my personal goals – as mentioned in October

    As we reach the last week of 2019 – and enter a new decade – I want to revisit how I think about personal New Year's resolutions. 

    Happy-new-decade

    Hopefully, you can use some of these concepts.

    • Focus on What You Want.
    • Focus on Why You Want It.
    • Focus on Ways You Might Get it.
    • Focus on the Progress.

    Below, I'll take you through an example each of the four steps.

    Moving Towards a Solution, Rather Than Suffering with the Problem.

    Before I got back into my health, my first instinct was to think "I need to lose weight".  Knowing that "you're fat" isn't helpful … my head, quickly translates that to something a tad more positive, yet generic, like: "I choose to be healthy and vital, and to live a healthy lifestyle".

    Blah, blah … They are just words.  What I needed was something specific, measurable and actionable.  How about: "I will lose 15 pounds and stop eating after dinner."  OK, but that isn't inspiring, and there isn't much for me to do. I can do better than that.

    Figure-Out a Big Enough WHY, Rather Than Worrying about the HOW's.

    This post isn't about health and fitness, it is about the mind-set and techniques you can use to set empowering goals and plans in any situation.

    So, while I could list a lot of ways to lose weight; and I might even remember to do some of them, when you create a driving force, the momentum takes care of itself.  The first step in doing that is knowing WHY you want something.

    I really do want to be healthy and vital (it sure beats the alternatives), and I want to have the energy and confidence to live and enjoy my life fully.  The world is my playground, and I want to take advantage of more opportunities to play with family and friends.  In order to do those things, I must find better ways for me to live a healthy lifestyle.

    The WHYs are just as important for business goals too.

    Focus on Potential Solutions, Rather than Problems or Challenges.

    Obstacles Exist. The bad news: I don't eat fish and I don't like vegetables (unless French Fries are vegetables).  My joints aren't close to healthy from years of violent contact sports. I rarely get 7 hours of sleep, and who'd have thunk it, but being a CEO of a fast-growing startup is stressful.  The good news: is none of those things matter; and even if they did, it just would mean that I have a lot of room for progress.

    It is natural to focus on obstacles. But most obstacles are surmountable – with a big enough WHY, even I'll start to eat vegetables. Instead of dwelling on the limitations,  use them as a reminder to focus on potential solutions instead. They are beacons, pointing the way.

    How do you do it?  To focus on solutions, you can make two action-based lists: one is of things To-Do … and another is of things Not To-Do.

    Here are some of the sample To-Do Items:

    • I will drink more water than coffee.
    • I will stretch, or do basic calisthenics, on days that I do not go to the gym.
    • I will make a healthy shake as a meal replacement rather than a meal supplement.
    • I will focus on relaxation and meditation, as much as I focus on strength & physical exercises.

    Here is the actionable list of Not To-Do Items.

    • I will not buy new pants or wear stretchy pants.
    • I will not eat snacks out their container, and will portion-out what I want first.
    • I will not compare my current level of fitness to what I used to be able to do. Instead, I will focus on my actions and improvement.

    Create Healthier Habits.

    It is easy to follow your routine.  So, make your routine better.  Here are some examples of things you could do to make being healthier happen with less effort.

    • Pre-sort your vitamins into daily doses, and keep them by the coffee machine.
    • Buy healthy snacks, like fruit, raw nuts or organic energy bars (instead of chips).
    • Make exercise time, the time you enjoy listening to music or listen to a book/podcast. Dedicating time to something, doesn't mean you can't be multitasking.
    • Park at the end of the parking lot, so you get to walk.
    • Meet with friends at the gym or at a hiking spot, rather than a bar or restaurant.

    You get the idea.  Get in the habit of looking for ways to create better habits.  What habits could you alter slightly, to make a big difference?  Which things can you automate or outsource?

    Focus on Your Progress.

    In this case, it really is about the journey.  Instead of keeping track of how far you have to go … notice how far you've come. Utilize an internal locus of control. It is about creating energy, momentum and a sense of possibility.  You may have a big, hairy, audacious goal in mind.  That's fine, as long as you realize that reaching each milestone along the way is still an accomplishment.

    • Find shoes that don't hurt your feet.
    • Pick a gym, or a personal trainer.
    • Run more than two laps without stopping.

    It doesn't matter what they are are … they all count, as long as you know that you are moving in the right direction.

    Summary

    The point of this exercise as was not really to focus on fitness. These techniques and goal-setting tools work in any situation. The principles are:

    1. First, figure out what you want, and why it is important to you. 
    2. Second, find something you can do, right now, which moves you in the right direction.
    3. Third, notice which things create (rather than take) energy. Spend your time on those, and automate or create routines to take care of the rest.
    4. Fourth,  plan forwards, but measure backwards. Set milestones so that you can recognize and celebrate your progress.

    In business, this translates to Capitalogix having a mission and vision – it's what we want, and why it's important to us. I then create a yearly "Big 3" goals that move us toward that long-term vision. My team creates SMARTs (goals that are specific, measurable, attainable, relevant, and timely) and KPIs (key performance indicators) so they know where to spend there time, and what milestones tell them they're on the right track.

    Hope this helped.  

  • Beware The Siren Song

    Imagine that aliens have landed on earth, and of everyone on the planet – they end up in front of you. It's now your responsibility to explain the rules of life to these hypothetical aliens.

    Like you, they are facing a new year and an opportunity for a new journey. 

    Would you tell them to let the media, politicians, and the economists determine what kind of a year they would have?

    Or would you explain that they have a lot of freedoms, one of the most important being the freedom of thought; that they can think and make whatever plans they choose.

    Admittedly, this is rather ridiculous question, as we both know you are not going to be instructing any aliens (or are you?!). But, it is a thought experiment to get you focused on the positive polarity.

    We are facing a new year and we do have freedom of thought. You and I can plan to enjoy tremendous results this year. However, with all the negative energy swirling around the us, it's important to be deliberate. Without such plans it's easy to be swept into the "I can't because …" rut, and it's way easier to maintain a habit than to dig yourself out of a bad one.

    Positive framing won't substitute for hard work and intelligence – but it will act as a force function. 

    Beware of Stories!

    On a related note, here's an interesting TedTalk.

    Economist Tyler Cowen loves a good story. But he asks us to step away from thinking of our lives — and our messy, irrational world — in terms of simple narrative.

     

    Tyler Cowen via TEDx

    The moral: pay attention to what's really happening and respond intelligently. 

    It's not what humans are best at – it's why I love robots – but, it's an important task nonetheless. 

    We're headed into a new decade … honestly ask yourself how the last year, and the last 10 were, and then ask yourself what you need to do to make the next ten better than the last ten. 

     

  • The Market Doesn’t Care About Trump’s Impeachment

    On Wednesday, Trump became the  third U.S. president in history to be impeached. The Democratic-led House of Representatives passed charges against him for "abuse of power" and "obstruction of Congress." 

    Wednesday was also the day that I learned many of my friends don't understand the impeachment process. Trump has not been removed from office, and with the vote to remove him coming from the Senate (assuming that the parties will vote along lines) it seems unlikely he will be removed. 

    While impeachment still matters – it's essentially a demerit. He's been called to the principal's office – but he hasn't been expelled, and he's still allowed to finish the year and apply for next year. He'll likely finish his first term, and has a chance for a second term. 

    So why go through with the process?

    Democrats hope to convince "moderate" Republicans to vote against party lines, and Republicans believe this is a farce/smear campaign that will only solidify support for Trump and embolden their base.

    Currently, it feels like Nancy Pelosi is going through the motions just to say she went through them. 

    It's a seemingly futile exercise in partisan politics … but it will take until the results of the upcoming Presidential election to truly decide. 

    Regardless, the market currently doesn't care … at all. 

    The Bulls Live On 

    Before impeachment, Trump warned that the stock market would plummet if he was impeached. 

    By the end of Wednesday's regular session, equities had weakened slightly, but all major indexes were trading near all-time highs.

    It makes sense. Republicans and Democrats voted along party lines, and they'll do the same in the Senate. So, there's little reason for the market to worry. 

    M6wsypotwj541via cub3dworld

    Even if some Republicans voted against party lines, the vote needs a 2/3 majority to pass. 

    Markets respond to fear and excitement – and while there's political grandstanding on both sides, nothing really has happened. Even if Trump were removed, Pence would remain a supporter of Trump's policies. 

    In the long-term, this raises questions about who will govern us in the future, what policies will be passed, etc… All things that will influence the market. 

    Time will tell what the results will be, but it feels like we're safe from major political news until Super Tuesday in March.