Capitalogix

WallStreetBets Analysis: Market Crashes & Oreos

During the Robinhood & Gamestop debacle, I wrote an article about r/WallStreetBets where I essentially said that most of the retail investors that frequent the site don't know what they're doing, but there is the occasional real post with strong research you would see at a real firm. 

As an example of good research done by the subreddit, here's a link to a post where a user (nobjos) analyzed 66,000+ buy and sell recommendations by financial analysts over the last 10 years to see if they had an edge. Spoiler: maybe, but only if you have sufficient AUM to justify the investment in their research. 

There are also posts that show a clear misunderstanding of markets, and more jokes than quality posts, but I saw a great example of correlation ≠ causation. 

In the past I've posted about the Superbowl Indicator and the Big Mac Index, but what about Oreos?

The increasingly-depraved debuts of Oreos with more stuffing indicate unstable amounts of greed and leverage in the system, serving as an immediate indicator that the makings of a market crash are in place. Conversely, when the Oreo team reduces the amount of icing in their treats, markets tend to have great bull runs until once again society demands to push the boundaries of how much stuffing is possible.

https://en.wikipedia.org/wiki/List_of_Oreo_varieties https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

1974: Double Stuf Oreo released. Dow Jones crashes 45%. FTSE drops 73%.

1987: Big Stuf Oreo released. Black Monday, a 20% single-day crash and a following bear market.

1991: Mini Oreo introduced. Smaller icing ratios coincide with the 1991 Japanese asset price bubble, confirming the correlation works both ways and a reduction of Oreo icing may be a potential solution to preventing a future crash.

2011: Triple Double Oreo introduced. S&P drops 21% in a 5-month bear market

2015: Oreo Thins introduced. A complete lack of icing causes an unprecedented bull run in the S&P for years

2019: The Most Stuf Oreo briefly introduced. Pulled off the shelf before any major market damage could occur.

2021: The Most Stuf Oreo reintroduced. Market response: ???

 - LehmanParty via Reddit

It's surprisingly good due diligence, but also clearly just meant to be funny. It resonates because we crave order and look for signs that make markets seem a little bit more predictable.

The problem with randomness is that it can appear meaningful. 

Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy. The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.

More people than you would hope, or guess, attempt to forecast the market based on gut, ancient wisdom, and prayers.

While hope and prayer are good things ... they aren’t good trading strategies.

A good reminder that even if you do the work, if you're looking at the wrong inputs, you'll get a bad answer. 

Garbage in, garbage out. 

Assessments and You

Over the years, I've used a number of different assessment tests on myself and our team. It's a great way to help people better understand each other and the different forms of communication and problem-solving styles we use.

Here are several of the tests that have proven themselves time and again:

1. Kolbe: measures a person's instinctive method of problem-solving, and identifies the ways they will be most productive.
2. Predictive Index (PI) - helps you understand the way their traits manifest in relation to their true nature and their perceived role.
3. StrengthsFinder: helps people uncover their talents, so they can do more of those things each day.

On top of my normal tests, as a team of data scientists, it's always fun to see what's available. 

For example, Ray Dalio recently created a personality assessment called PrinciplesYou that you can take for free. I've seen a number of articles claiming that the assessment is not only accurate, but that it also has impressive insights.

Less meaningful, but still fun, I also found a website that lets you test your performance on various reaction and memory tests. Unsure how scientific it is, but it was an interesting use of 10 minutes nonetheless. 

via Human Benchmark

 

Progress starts by telling the truth ... most often to yourself.  

Timeless Wisdom From Socrates

Small distinctions separate wise men from fools. Perhaps one of them has to do with what the wise man deems important.

Socrates' Triple Filter

In ancient Greece, Socrates was reputed to hold knowledge in high esteem.  One day an acquaintance met the great philosopher and said, "Do you know what I just heard about your friend?"

"Hold on a minute," Socrates replied. "Before telling me anything, I'd like you to pass a little test. It's called the Triple Filter Test."

"Triple filter?"

"That's right," Socrates continued.  "Before you talk to me about my friend, it might be a good idea to take a moment and filter what you're going to say. That's why I call it the triple filter test.

The first filter is Truth.  Have you made absolutely sure that what you are about to tell me is true?"

"No," the man said, "Actually I just heard about it and…"

"All right," said Socrates. "So you don't really know if it's true or not. Now let's try the second filter, the filter of Goodness.  Is what you are about to tell me about my friend something good?"

"No, on the contrary…"

"So," Socrates continued, "You want to tell me something bad about him, but you're not certain it's true.  You may still pass the test though, because there's one filter left.  The third filter is Usefulness.  Is what you want to tell me about my friend going to be useful to me?"

"No, not really."

"Well," concluded Socrates, "If what you want to tell me is neither true, nor good, nor even useful … then why tell it to me at all?"

With all the divisiveness in both media and in our everyday conversations with friends, family, and strangers ... this is a good filter for what you say, what you post, and even how you view markets. 

How Does That Apply to Me or Trading?

The concept of Socrates' Triple Filter applies to markets as well.

When I was a technical trader, rather than looking at fundamental data and scouring the news daily, I focused on developing dynamic and adaptive systems and processes to look at the universe of trading algorithms to identify which were in-phase and likely to perform well in the current market environment.

As we've transitioned to using advanced mathematics and AI to understand markets it becomes even more true. 

Filter Out What Isn't Good For You.

In contrast, there are too many ways that the media (meaning the techniques, graphics, music, etc.), the people reporting it, and even the news itself, appeals to the fear and greed of human nature.

Likewise, I don't watch TV news anymore either. It seems like story after story is about terrible things. For example, during a recent visit with my mother, I listened to her watch the news.  There was a constant stream of "oh no," or "oh my," and "that's terrible". You don't even have to watch the news to know what it says.

It's also true with what you feed your algorithms. Garbage in, garbage out. Just because you can plug in more data, doesn't mean that data is adding value. Deciding what not to do, and what not to listen to is equally as important as deciding what to do. 

Artificial intelligence is exciting, but artificial stupidity is terrifying. 

What's The Purpose of News for You?

My purpose changes what I'm looking for and the amount of attention I pay to different types of information. Am I reading or watching the news for entertainment, to learn something new, or to find something relevant and actionable?

One of my favorite activities every week is looking for new insights and interesting articles to share with you and my team.  If you aren't getting my weekly reading list on Fridays - you're missing out. You can sign up here. 

Getting back to Socrates' three filters and the business of trading, I often ask myself: is it important, does it affect our edge, or can I use it as a catalyst for innovation?

There's a lot of noise out there competing for your attention. Stay focused. 

Onwards!

 

Gaining Insight & Ideas from Hedge Fund Letters

Most Hedge Fund letters are hard to come by. They're sent to their investors and are not generally posted publicly. 

However, Milton Financial Market Research Institute puts out a quarterly collection of letters they've curated since 2016. 

These letters contain a lot of insight into not only the performance and approach of the funds but also the markets and the world as a whole. 

 

via Milton FMR

This is a valuable resource to gain a more holistic view of the markets and the fund industry.

Hope it helps.

Also, please let me know if you are aware of other sources like this.

Ikigai in the Post-Quarantine World

Getting old is tough ... and it gets tougher the older you get.   As a result, finding your 'reasons for being' and joy in life become increasingly important as well. 

2020 was a year of massive upheaval for many. Stress, change, pandemics, quarantine, new jobs, new goals ... or at the other end of the spectrum, lack of change, lack of a job, or lack of purpose.

Regardless of the reason, many people struggle to get up in the morning. This is a shame because life is so much better than the alternative (and life becomes even better when you learn to enjoy living and let go of what isn't serving you). 

There's a Japanese concept called Ikigai that may help.

Ikigai centers around finding purpose as you grow older.  Paradoxically, it makes sense to start the process as early as possible. 

Here is an infographic that lays out some "Reasons for Being."

  

via InformationIsBeautiful

Finding your "reason to be" and living with purpose are keys to making the most of your time.

The beauty of 2021 being a fresh start is that you can also change your approach and your vision.

The graphic highlights something interesting (yet almost counter-intuitive) ... When two areas intersect, it creates something positive (e.g., a passion or a mission).   However, where three areas intersect, it creates a pain point (for example it could be what you're good at, you love doing it, the world needs it ... but it doesn't make you any money – so now you're struggling).

Worth examining and thinking about for a bit.

On a related note, here is a TEDx talk about the 9 common diet and lifestyle habits that help people live past 100.

 

TED-ED via YouTube

And here is a link to Dan Sullivan's free e-book on his plan to live to 156. 

Live long and prosper!

Is Cryptocurrency Here to Stay?

I've always been a fan of Blockchain, but I've always been a bit more cautious of cryptocurrencies. 

Blockchain is the technology foundation behind cryptocurrencies and an important enabling technology for the next generation of technological innovation.

This week Coinbase went public at an astronomical valuation.  They were backed by venture capital firms like Andreessen Horowitz and Union Square Ventures.

This makes sense to me because the VCs were able to capitalize on the "Fear of Missing Out" and "Animal Spirits" driving the market without the concentration risk of a particular cryptocurrency.  In a sense, it is the same reason I am bullish on Blockchain itself.

Making sense of cryptocurrencies, however, is tougher for me to justify. There are over 1000 currencies out there – and the list is growing.  But valuation isn't really about first-mover advantages or features ... You also must consider government policies and regulations and a host of other issues.

Consequently, it's hard to recommend putting money in any coin as an investment.

Speculating (or "trading") is a different conversation. 

Clearly, there is a lot of money being made and lost ... but how much of those gains and losses can be attributed to luck and how much to skill?  A better question is ... If you traded cryptocurrencies, how much of your gains or losses would be due to luck versus skill?

For the past few years, it felt as if the buzz had died down a little. Despite that, Bitcoin prices and many other cryptocurrencies continued to increase in value - though with much more volatility than normal investments. 

This week, Dogecoin (a cryptocurrency that started as a meme) jumped from $.07 a coin to $.35 a coin, capitalizing on press and support from Elon Musk.  But it's not the only cryptocurrency doing well. 

 

via How Much

A lot of the jump in the price of many coins recently coincided with the GameStop trading surge and was likely driven by the sentiment of those same retail traders. 

Crypto's are interesting, in part, because they're a digital currency decentralized over a peer-to-peer network.

The more people are willing to accept it as a medium of exchange, the more valuable it becomes (and the more it becomes a stable store of value).

Supposedly, decentralization provides it safety from censorship and government interference - meaning it has value as an international currency, and as a currency for black-market transactions.  But, in my opinion, that remains to be seen (and I consider it unlikely for most cryptocurrencies).

However, the worth of a Bitcoin clearly isn't just based on sentiment (on one hand, there are desires to avoid fiat currency vagaries, government interventions and scrutiny, while having a fair price discovery method, etc.  ... on the other hand, there are also the costs to mine a Bitcoin, transaction fees, etc. and crypto has recently been under fire for its huge environmental impact).

Compared to a reserve currency – whose worth is primarily influenced by trade value and other macroeconomic factors - watching crypto's volatility can be scary. 

That being said, as adoption increases and more businesses enable it, it's possible that it will continue to legitimize. For the time being, I remain a long-term skeptic because there is too much working against it. 

For an extra laugh, here's a still relevant video from 2017 on why you should invest all your money in Bitcoin. 

 

via AwakenWithJP

 

AI Meets Dr. Seuss

Dr. Seuss was recently in the news for stopping the release of 6 of its books. 

Whether it was a marketing ploy or not, I've been seeing a lot more Dr.Seuss content. 

To start, here's a video of an A.I. written Dr. Seuss book with animation. 

 

via Calamity AI

In addition, here's an A.I. remastered World War II cartoon written by Dr. Seuss with a character named Private Snafu. It's one episode of a series of shorts that were banned post-WWII, and it's one of the more tame episodes.  For an extra piece of trivia, the name of Private Snafu and his series of shorts was based on the military acronym for "Situation Normal: All F***ed Up". 

It's an interesting piece of history ... enjoy. 

 

via Adam Maciaszek

While produced by Warner Bros., these shorts which were made for the US military did not have to go through the Production Code Administration and thus got away with raunchier humor, foul language, and what we would today categorize as racist propaganda against the Japanese and Germans. 

While it's okay to acknowledge that we should be doing better today, I also think it's interesting and informative to watch older materials in the context and time period they were written. 

Racism isn't okay, but if you don't know history, you're doomed to repeat it, and art can be discussed and enjoyed within that context as well.  

 

A Quick Look At American Debt

Markets are not the economy, but it's still important to understand and follow economics.

One of the unfortunate "trends" of 2020 was the increase in debt at various levels. Now, debt can be a good thing ... it greases the international wheels and can be an important part of long-term financial plans for countries (in the same way you or I might use it.)

But too much of a good thing is a bad thing, and doing that math gets pretty complicated on the national level. 

To help put it in perspective, I want to look at the U.S. debt on different scales. 

First, you can look at this US Debt Clock for a staggering interactive visualization of the inflows and outflows in America. Click the image to watch it update in real-time.  I encourage you to look at some of the components tracked.  It made me think about our future differently.

 

via US Debt Clock (4/9/21)

The U.S. has a GDP of about $22 Trillion and our national debt is currently over $28 Trillion, but our net worth is still approximately $120 trillion. 

For more perspective: 

• 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.
• The U.S. has the largest percentage of the world's debt, but Japan has the worst debt-to-GDP rate at over 224% (compared to America's approximately 127%)
• During 2020, debt held by the US public increased by $4.2 billion - the largest dollar increase in history. A large part of that increase in debt was due to the federal deficit which was reported at $3.1 billion
• Over 39% of U.S. Federal debt is foreign-owned, though we earn more from our assets abroad than we pay to foreign investors
• The average American has over $90,000 in debt, and approximately 80% of Americans are in debt 

What about on the state level?

As a result of snowballing debt, President Biden's $1.9T economic stimulus package promised $350B in direct aid to states. 

Forbes via HowMuch

To help understand the image, Texas is actually a great case study. Texas's bubble is big because it has one of the highest total debt levels, but is green because its debt ratio is pretty good at 62.5%. 

California has the highest total debt, but is very light pink, stating that its debt ratio isn't bad.  Some states' liabilities outweigh their assets by a factor of 4x or 5x which is scary. 

This is a helpful illustration of the delicate balance of taking on debt. It's okay to take on large amounts of debt if you have a reasonable belief that revenue outstrips interest. To contrast that, some of these states have unsustainable debt levels - and only survive because they're a part of a bigger whole - the U.S. - and have an extra safety net. 

What about Consumer Debt?

Most of America's debt is Federal - but consumer debt accounts for a non-trivial portion as well.  Here's a chart that shows the change in U.S. Household debt since 2003. 

Federal Reserve Bank of NY via HowMuch

Student, Auto, and Home Owner loans have all increased substantially - with the cost of student loans raising over 500%. Almost every category of consumer debt has increased. 

While our country has gotten richer, and the standard of living has increased, we also have more people living in large amounts of debt. 

Things To Consider

These charts are startling. Debt is a powerful tool ... but comes with risk as well. The question is, are we as a country and individuals managing the risk appropriately?

It's hard to look at these charts and say that there isn't an issue. The hope is that the government stimulus packages will make a difference - but Band-Aids won't fix the root of the problem and can even lull people into a false sense of security. 

What do you think the solution is?

 

The Rise of Augmented Reality

Last week, Microsoft won a contract to provide the U.S. army augmented reality ("AR") headsets. It's worth up to $21.9 billion over 10 years, and they'll be providing over 120,000 AR headsets. Porn has been the leader in VR/AR innovation, but it's unsurprising that war is also being used to drive innovation. Human nature is human nature. 

Virtual reality (VR) and augmented reality have been around for a long time, but there's been a massive boom in innovation and interest over the last 3-5 years. Not only are the technologies becoming more affordable, but the animation is becoming more realistic, headsets are becoming more portable and longer-lasting, and our physical and virtual realities are beginning to blend. 

We're moving towards a world where technology envelops every aspect of our lives ... figuratively and literally. It's funny because I felt the same way in the late 90s as cell phones and the internet proliferated. It feels quaint in comparison to the ubiquity of technology today. Even our toasters are smart now. 

The following (still fictional) video is thought-provoking. What happens when these new technologies are used to influence behavior, decision-making, and even your identity?  

 

Keiichi Matsuda via  Vimeo

Like many things, these technologies make possible awesome new capabilities (if used well) and horrific consequences (if abused or used in authoritarian ways). 

Your doctor or nutritionist could help you make better choices for yourself. Your therapist or coach could help you perceive and respond differently to the challenges life presents you. Marketers could better influence your purchases. Employers could better monitor and measure your performance and productivity. And governments will not be far behind ... doing what they do. It all toes the line between beneficial and creepy. 

Because of where we are in the adoption curve, it is becoming more common to discuss bioethics and AI ethics.  Likewise, as we accelerate into an age of exponential technologies and mindsets, be prepared for increasing scrutiny of the promise versus the peril of various new technologies and capabilities.

We live in interesting times, and only getting more interesting as it goes!

 

 

Mindfulness & Exponential Technologies

Have you noticed that it's easier for most people to identify and solve someone else's problem than it is to do the same for themselves?

Humans are emotional creatures.  As a result, our decision-making often suffers from fear, greed, and discretionary mistakes. 

As an entrepreneur, I strive to be objective about the decisions I make. Towards that goal, using key performance indicators, getting different perspectives from trusted advisors, and relying on tried-and-true decision frameworks all help. 

Combining all three creates a form of "mindfulness" that comes from dispassionately observing from a perspective of all perspectives.

That almost indifferent and objective approach is also where exponential technologies like AI excel.  They amplify intelligence by helping make better decisions, take smarter actions, and continually improve performance. 

I shot a video about mindfulness and the future of A.I.

 

Artificial intelligence is cool. The truth, however, is that AI is still relatively limited. Individual techniques (or algorithms) are good at "something".  The challenge is that they only focus on what they need to come up with their answer, without considering a different perspective. While it is good at what it is good at, it isn't necessarily good at empathetically understanding that a different technique, which comes up with a different answer, might be "right" as well.

The future of AI likely will be based on swarm intelligence, where many specialist components communicate, coordinate, and collaborate to view a situation more objectively, better evaluate the possibilities, and determine the best outcome in a dynamic and adaptable way that adds a layer of objectivity and nuance to decision making.

One of the lessons I teach to our younger employees is that an answer is not THE answer. It's intellectually lazy to think you're done simply because you come up with a solution. There are often many different ways to solve a problem, and the goal is to figure out the one that comes up with the best results.

Even if you find THE answer, it is likely only THE answer temporarily.  So, it is really just a step in the right direction that buys you time to learn, improve and re-evaluate.

Hope that helps.