Capitalogix

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.

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! 

Getting Rid of Cognitive Biases

We make decisions all the time.  To make that easier, we use shortcuts to make processing more efficient, more effective, and more certain.

At least it feels that way to us.

Mental heuristics are great - they do often save us time or effort.  And, for many people, they enable better decision making. But, as with any generalization, there are exceptions that can be dangerous. 

That's where cognitive biases come in; we have biases toward how we remember things, how we view ourselves, how we make decisions, and what we make things mean.

We're all victims to them, to some extent. But hopefully, by understanding them and becoming aware of them,  we can limit their impact. 

Here's a great infographic with 50 of the most common cognitive biases. Click to see the full-size image. 

via VisualCapitalist 

For a bigger infographic with 180+ cognitive biases, click here. 

 

Before You Vote: Getting Educated

Early voting has started, but, if all goes to plan, we'll know who will be the President on November 3rd. 

The fears of fake news and the growing echo chambers around candidates (and policies) mean it can be tough to truly make an educated decision. The reality is, most of our news sources are tinted by the lens of their ideology - which is okay. That means they're appealing to their targeted audience. 

That being said, it may also be worth looking at the same news story from a comparative news source from the other spectrum - or even better, a primary source when it comes to science/economics. 

Here's a chart that shows where news sources rank. You can click the image to go to an interactive version with more details. And, if you're curious about their methods, click here. 

via Ad Fontes Media

On top of reading various news sources, there are a couple of other tools I like: 

• FiveThirtyEight - Uses graphics to tell visual stories on valid statistics. Named after the number of electoral votes. Also has a visual presidential forecast. 
• RealClearPolitics - Aggregates news from various sources, as well as writing their own opinion pieces. Also has a good visual on the current state of the presidential, senate, and house races. 
• Brittanica ProCon - Tracks the stated positions of politicians on various issues. Can be sorted by candidate, and by issue. It also has a quiz you can take to assess which candidate you actually resonate with. 
• Politifact & FactCheck - Both sites fact check presidential statements, party statements, and more. We know politicians often lie by omission, or focus only on the specific stats that are relevant to their point. Fact-checking helps you gain a more holistic picture. 

 

As a last warning on believing anything you hear, most polls I've seen put Biden in the lead ... but if you remember 2016, you know the polls are working on incomplete information. Clinton had a lead on most polls and lost to President Trump. 

We live in interesting times!

Here Are Some Links For Your Weekly Reading - October 18th, 2020

 

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

Lighter Links:

• The Only Four Books Bill Gates Has Rated Five Stars. (Medium)
• Meet the 2020 Nobel Laureates. (Flipboard)
• How Crowd Forecasting Can Predict the Future. (Axios)
• Nvidia Will Build the 'World's Fastest AI Supercomputer'. (TechRadar)
• Record Avalanche of Early Votes Transforms the 2020 Election. (APNews)

 

 

Trading Links:

• Six NFL Teams Return Positive COVID-19 Tests in 24 Hours, and Why It's Important. (NESN)
• Fed Officials Call for Tougher Regulation to Prevent Asset Bubbles. (Reuters)
• As US Election Nears, Hedge Funds Gauge Far-reaching Market Impact of Trump-Biden Battle. (HedgeWeek)
• Beware Stock Market Divergence and Double Top Patterns!. (SeeItMarket)
• Young and Dumb' Traders Have Created a Total Nightmare' in the Stock Market, Fund Manager Warns. (MarketWatch)

 

Have You Voted?

It's election season! Early voting is now open in most places. 

Regardless of your preference, it doesn't count if you don't vote. 

Gandhi once said, “Be the change you wish to see in the world." This wasn't exactly what he meant … nevertheless, one of the ways you can impact the world is by impacting who gets chosen to represent us in government.

 

2020 has shown how important choosing the right leader is for the country and each of us.

 

I have friends on both sides of the political spectrum, and I hear complaints from both sides. The one thing we all can agree upon is that not enough people (who claim to care) actually get out and vote.

 

It is one thing to whine about the status quo … It is quite another to get up, get out, and do something about it.

 

Combat fake news and media sensationalism by doing some research choosing candidates you think will leave us better than they found us.

If you're not sure where your polling location is, check here. 

Here Are Some Links For Your Weekly Reading - October 10th, 2020

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

Lighter Links:

• The Quantum Internet Will Blow Your Mind. Here's What It Will Look Like. (Discover)
• The US Military is Trialing Augmented Reality Goggles for Dogs. (CNN)
• Modern Science Didn't Appear until the 17Th Century. What Took So Long? (NYT)
• Qantas Airways 'Flight to Nowhere' that Sold out in Minutes Takes Off. (FoxNews)
• What Really Happens When You Become an Overnight Millionaire? (Marker)

 

 

Trading Links:

• Tesla Plans to Offer Machine-learning Training as Web Service with Its New 'Dojo' Supercomputer. (Electrek)
• Analysis: We Read the Antitrust Case against Amazon, and these are the Key Takeaways.  (GeekWire)
• Father of VIX Warns Options Glitch is Costing Investors Millions. (Bloomberg)
• Economists are More like Storytellers Than Scientists Don't Let the Nobel for Economic Sciences' Fool You. (TheConversation)
• The Stock Market Won't See the Bullish Outcome It's Expecting from a Biden Win Unless There's a Full Blue Wave, a JPMorgan Stock Strategist Says. (BusinessInsider)

How Machines Learn: Big Brother Is Watching

The ubiquity of Machine Learning algorithms remains a topic of interest because we, as a society, still haven't come to terms with what "acceptable" use looks like, and what privacy looks like in the post-AI world. 

Algorithms are helping you pick out your next gift on Amazon, controlling what you find on Google, they're suggesting new music for you on Spotify, and they're doing their best to keep you on their website.

They're following you in stores, on the streets, and many would argue they're tracking your phone calls, text messages, and more. 

With all that being said, I do think it's important to have a cursory knowledge of the things that impact our lives ... so, even if you're not an AI-aficionado, I think it's important to somewhat understand how machines learn, and how powerful they're becoming. 

The video is a bit simple in its explanations, but it describes some important concepts.

 

CGP Grey via Youtube

The video focuses on Genetic Algorithms, which is one type of machine learning – and neglects some of the other more complicated approaches.

As machine learning gets more complicated and evolved, it gets harder for a human to understand what makes it good … and that's okay. Understanding the direction AI is heading is more important than truly understanding the intricacies. 

It's human nature to feel safer when we understand something. It's human nature to envision machines as making human-like decisions, just faster.

Of course, just because it suits human nature to believe something, that doesn't make it true. 

Part of what makes machine learning exciting is that it can do a lot of things well that humans are really bad at. 

In reality, it doesn't matter why a bot is making a decision, or what inputs the bot is making the decision on. What matters is the performance and level of decision-making in relation to itself and to other options (and whether the bot is biased).

With respect to trading, focusing on the markets is a distraction.

For the most part, I don't care how markets are doing.

I care how our systems are doing and I care how the portfolio is doing.

It's a brave new world, and not only is big brother watching, but algorithms are too.

Live long and prosper!

What It Was Like Buying a Computer in 1994

We take for granted a lot of the technology we have today. Computers and phones have evolved so fast that it's hard to remember that they haven't been around for many years. When my youngest son was born in 1993,  cassette tapes and the Sony Walkman were still popular, I had a wired phone in my car, and we had a Macintosh-II in the study. 

Everything in this photo now exists in the cheapest of smartphones. 

For a blast from the past and a look back at what used to be top-of-the-line ... here's a video of people buying a computer in 1994. 

 

via David Hoffman

Video transfer and playback. 160-megabyte hard drive. 32 megahertz. All for the low price of $2,000. 

Pretty cool to see how far we've come!  Still, someday soon, they will look back at the tech we have now as "primitive" and "quaint".

I can't wait!