Capitalogix

Here Are Some Links For Your Weekly Reading - November 8th, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Video: An Exclusive Look inside Microsoft's Election Security War Room'. (ABCNews)
• Forget Traditional Election Maps – This is What the US Vote Really Looks Like. (NYPost)
• Taught by Nature: New Technology Inspired by the Animal Kingdom. (Flipboard)
• Psychedelic Psilocybin 101: The Science of Magic Mushrooms. (Flipboard)
• Want to Calm Your Anxiety in Just 8 Minutes? Neuroscience Says Take a Deep Breath and Listen to This. (Inc)
  
  

Trading Links:

• Texas Becomes First State to Top One Million COVID-19 Cases. (24/7 Wall St)
• Fears of Transition 'Chaos'. (Barrons)
• FTC Likely to Sue Facebook on Antitrust Violations by End of November. (Politico)
• Here Comes the next IPO Wave. (TechCrunch)
• Warren Buffett's Berkshire Hathaway Swings Back into Action, Spending a Net $4.8 Billion on Stocks and a Record $9 Billion on Buybacks in the 3Rd Quarter. (BusinessInsider)

A Look at the Top 25 PE Firms

PE firms sometimes take a bad rap, but many well-known companies have been saved by PE firms including Hilton, Toys'R'Us, and Energy Future Holdings. 

VisualCapitalist put together a chart of the top 25 PE firms funds raised and their notable investments. Check it out. 

 

via VisualCapitalist

In 2019, PE firms raised almost a trillion dollars, though the rate has dipped in 2020.

That being said, the largest PE firm - Blackstone - has raised almost $100B over the past 5 years. 

I expect PE to be much more active in 2021. 

How about you?

The VIX Going Into The Election

Tuesday is election night - so there's a lot of fear and uncertainty from both sides about the consequences. 

So how do you track and understand that fear? With the CBOE's VIX. 

The VIX is an index that's commonly known as the "fear gauge." It tracks how quickly asset prices move (or, in other words, their "volatility"). 

While you can't invest in it directly, you can invest in derivative products like VIX futures, ETFs, inverse ETFs, and more. 

The infographic below is a good primer, and you can download RCM's full white-paper here.

 

Covid cases are building, the Senate didn't pass another support bill and is now adjourned until November 9th, and you have pre-election market jitters.  As a result, the VIX trading volume is hitting new highs. 

Overall, a higher risk environment than normal. 

For context, the VIX has averaged 26.30 since August but got as high as 82.69 in March. 

In the past week, after a pretty bad S&P 500 sell-off,  it's gone back above 38. 

There are many ways to study and use the VIX, but ultimately, tracking it in any form helps you understand the current state of fear in market participants. 

I'd love to hear how you use the VIX or other tools to measure or forecast market stress and volatility.

Here Are Some Links For Your Weekly Reading - November 1st, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• The Science of Nerdiness. (Scientific American)
• The Rise of SpaceX Elon Musk's Engineering Masterpiece. (TheFuturist)
• The Alignment Problem' Review: When Machines Miss the Point. (Wall Street Journal)
• A New Scam Uses Google Drive to Send out a Deluge of Dodgy Links. (Wired)
• The Risk of Losing Trust in the Media: Curated by Alan Miller. (Flipboard)

 

Trading Links:

• 2020 Presidential Election Odds & Senate Race Predictions: 70% of Money Bet Backs Trump over Biden. (Forbes)
• Texas Early Voting Exceeds Total of All 2016 Ballots. (APNews)
• More Than 20 Million Americans Expected to Relocate Amid Rise in Telework. (PennLive)
• Is Wall Street Losing Its Tech Enthusiasm?(TechCrunch)
• Steve Cohen Buying the New York Mets is a Dream Come True for FansAnd a Nightmare for the Wilpons. (Forbes)

The Art and Science of Economics

Today, I want to focus on one issue that's a commonality in trading and economics. 

It's the tendency for us, as humans to create stories about why things happen ... even in the absence of enough data to . 

The Federal Reserve Chairman, Jerome Powell, gave a speech in October with a dizzying amount of statistics. His portion starts around the 9:30 mark.

 

via Yahoo Finance

In this talk, he mentions a lot of interesting stats, but notice how many are focused on the change (or rate of change) within a relatively small window of the available data. 

Also, notice how he crafts a story around the direction of the numbers rather than acknowledging or contextualizing the numbers themselves.  This isn't inherently bad – but it's something to be aware of when interpreting what it means to you. 

When making decisions, the direction and intensity of movement are important, but so are more objective measures. 

Stories can help make us comfortable with a temporarily bad situation, but if you get lost in the story and aren't cognizant of the bad situation, it can be harder to correct. 

In trading, traders often tell themselves stories about why a movement happened, but markets and economies are more complicated than any heuristic. Those stories can be helpful retroactively - but they're rarely a powerful predictor. 

Economics and trading both have hard sciences behind them. You can look at technical indicators, you can look at historical events, and you can build algorithms with advanced technology that look for the patterns you miss. But it's what you do with those inputs that matters. 

Mark Perry wrote an article about why "it’s really hard to ‘beat the market’ over time."  In it, he states that over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.  Stated differently, over those 15 years (from June 30, 2003 to June 30, 2018), only one in 13 large-cap managers, only one in 21 mid-cap managers, and one in 43 small-cap managers were able to outperform their benchmark index.

It’s hard to admit to yourself that you aren't better than average. Nonetheless, over any period of time, this is true for half of us.  This "truth" is especially hard to accept for people who have achieved a lot in their lives and have the money to invest.

The trick is to find a way to separate "luck" from "skill" ... or to avoid being fooled by randomness.

We live in interesting times!  The signal-to-noise ratio is already tough to deal with ... and I suspect that we are in a period where we have to expect even more noise.

I've written a couple of posts on Economics that might help.  Here are a few of the more popular ones, if you are interested.

• The Disconnect Between The Stock Market and Consumers (August 2020)
• Eight Major Forces Shaping Our Economy (Nov 2018)
• Visualizing The Economy (November 2018)
• What Is The State of The Economy (September 2011)

What stories are you telling yourself about the economy? About the markets? About the election?

There's a difference between guessing and knowing, and knowing is more profitable!

Be careful!