Capitalogix

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.

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

 

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. 

 

Here Are Some Links For Your Weekly Reading - April 4th, 2021

Happy Easter!

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

Lighter Links:

• CDC Says Travel is Safe for Fully Vaccinated People, But Opposes Non-Essential Trips. (NPR)
• Here's the Story Behind the Amazing Moscone Center Vaccine Playlist. (SF Chronicle)
• April Fools' Day: 10 Stories that Look Like Pranks But Aren't. (BBC)
• How NFL Teams Use Sophisticated AI Projections in the Draft. (ESPN)
• Mark Cuban On the Company that Made Him a Billionaire: Why He Knew It Would Succeed Despite Many Naysayers. (CNBC)

 

Trading Links:

• The Microchip Shortage Explained: How It's Impacting Car Prices and the Tech Industry. (USAToday)
• The New Stock Influencers Have Huge and Devoted Followings. (Wall Street Journal)
• 3D Printed Architecture that Shows Why this Trend is the Future of Modern Architecture. (YankoDesign)
• What the U.S. Can Learn From China's Infatuation With Infrastructure. (Wall Street Journal)
• The Death of the American Mall Was a Warning Sign that Our Dystopian Future Was Closer Than We All Thought. (BusinessInsider)

 

Tracking Shipments with Import Yeti

While I'm not really in a supply chain business, they are interesting to me because they do with physical things, many of the same things I do with virtual things.

Supply chains use complex systems to achieve "simple" goals.  Figuring out how to streamline processes is both an art and science. 

Global supply chains remind me of the complicated machinery and gearing that goes into a finely made analog watch ... the watchmakers know that even if you don't know how the watch was made or what a mechanism does, it's still interesting to watch it tick and admire the engineering. 

Recently I found a website - ImportYeti - that tracks over 60 million companies' sea shipment records.   Here is an example showing Tesla.

via Import Yeti

It uses bills of lading and other public information to tell you information about the frequency of shipments, the suppliers, and what they delivered.

There is a ton of interesting information here.  Hope you find some creative ways to use it. 

If you are interested in this, I also suggest looking at Eli Goldratt's The Goal, which describes the "Theory of Constraints," which deals with how bottlenecks limit performance. 

 

What Are NFTs?

This month an NFT by an artist named Beeple sold at Christie's for over $60 million. That sentence raises more questions than it answers. 

To make it even stranger, here's an example of Beeple's art. 

via Beeple

Yes, that is Tom Hanks wearing a Bubba Gump shirt punching Covid-19. 

So, what is an NFT, and why are they becoming so popular?

NFTs stand for non-fungible tokens, which are unique digital assets on the blockchain. They've been around since 2014, but only recently blew up in popularity.  They're essentially collectibles ... but digital.

An NFT might be an image, a gif, a video, etc. But, because they're given a unique code on the blockchain, the ownership and validity of that item can be tracked. 

Surprisingly, owning that NFT does not give you copyright of that digital asset. In fact, some images have been made into multiple tokens, and some tokens include multiple pieces of art which have been sold individually. The digital files themselves are still infinitely reproducible ... but that code on the blockchain is not.

In a sense, that means that NFTs are the digital equivalent of an autographed item. 

In the past, when I've talked about Blockchain, digital art wasn't something I actively considered. Blockchain made sense to me as a way of proving provenance and helping establish the authorship and authenticity of an object - but I assumed it would be high-end physical art. 

At the end of the day, if someone will pay for it, then you can sell it. That's part of the beauty of Capitalism. Most collectibles don't make sense from a macroeconomic value sense. They're worth something because of their value to their collectors. 

Think about Beanie Babies, or Pokemon Cards, or even more mainstream collectibles like Sports Memorabilia or Whiskey. 

While I won't say that "I get" the appeal of NFTs ... I get it. As the world becomes increasingly digital, "real" and "tangible" have new meanings.

Is something not "real" just because it's digital? 

It reminds me of a painting by René Magritte called "The Treachery of Images."  The painting shows an image of a tobacco pipe. Below it, Magritte painted, "Ceci n'est pas une pipe," which is French for "This is not a pipe."

 

The famous pipe. How people reproached me for it! And yet, could you stuff my pipe? No, it's just a representation, is it not? So if I had written on my picture "This is a pipe", I'd have been lying! — René Magritte

 

If you're still a little lost, SNL had a funny skit last night with an NFT rap song. Enjoy. 

 

via SNL

 

 

 

 

Spotting a Bubble

I spend a lot of time doing research ... not the way data scientists do, but I enjoy keeping an eye on the pulse of things. 

Recently, I've noticed increasing talk about bubbles. One of the most obvious potential "bubbles" being the relatively stable bullish performance of the markets, despite the lack of a full economic recovery. 

Interestingly, Ray Dalio's bubble indicator says that stocks aren't at dangerous levels, though it does say the top 5% of the top 1,000 US companies are in an extreme bubble. Many of those companies are emerging technology companies. 

via Ray Dalio

So, without making a prediction, caution is probably fair, but recognize that people aren't blaring sirens and running with their arms flailing in the air. 

Instead of focusing as much on today's bubbles, I thought I'd share a great summary on "how to spot a bubble" by Barry Ritholz. 

He suggests 10 elements: 

1. Standard Deviations of Valuation: Look at traditional metrics –  valuations, P/E, price to sales, etc. — to rise two or even three standard deviations away from the historical mean.

2. Significantly elevated returns:  The S&P500 returns in the 1990s were far beyond what one could reasonably expect on a sustainable basis. The years around Greenspan’s “Irrational Exuberance” speech suggest that a bubble was forming:

1995    37.58
1996    22.96
1997    33.36
1998    28.58
1999    21.04

And the Nasdaq numbers were even better.

3. Excess leverage: Every great financial bubble has at its root easy money and rampant speculation. Find the leverage, and speculation won’t be too far behind.

4. New financial products: This is not a sufficient condition for bubble, but it does seems that each major bubble has new products somewhere in the mix. It may be Index funds, derivatives, tulips, 2/28 Arms.

5. Expansion of Credit:  This is beyond mere speculative leverage. With lots of money floating around, we eventually get around to funding the public to help inflate the bubble. From Credit cards to HELOCs, the 20th century was when the public was invited to leverage up.

6. Trading Volumes Spike: We saw it in equities, we saw it in derivatives, and we’ve seen it in houses: The transaction volumes in every major boom and bust, almost by definition, rises dramatically.

7. Perverse Incentives: Where you have unaligned incentives between corporate employees and shareholders, you get perverse results — like 300 mortgage companies blowing themselves up.

8. Tortured rationalizations: Look for absurd explanations for the new paradigm: Price to Clicks ratio, aggregating eyeballs, Dow 36,000.

9. Unintended Consequences: All legislation has unexpected and unwanted side effects. What recent (or not so recent) laws may have created an unexpected and bizarre result?

10. Employment trends:  A big increase in a given field — real estate brokers, day traders, etc. — may be a clue as to a developing bubble.

11. Credit Spreads: Look for a very low spread between legitimately AAA bonds and higher yielding junk can be indicative of fixed income risk appetites running too hot.

12. Credit Standards: Low and falling lending standards are always a forward indicator of credit trouble ahead. This can be part of a bubble psychology.

13. Default Rates: Very low default rates on corporate and high yield bonds can indicates the ease with which even poorly run companies can refinance. This suggests excess liquidity and creates false sense of security.

14. Unusually Low Volatility: Low equity volatility readings over an extended period indicates equity investor complacency.

via Barry Ritholz, June 9th, 2011

There are many ways to make money trading ... and even more ways to lose money trading.  If it were easy, everyone could do it.  There is a mix of art and science combined with hard-to-quantify factors at play.

But, survivorship bias is big in trading because hindsight is 20/20. It's easy to look at a popped bubble and say "oh, obviously that was a bubble" ... but if it was that easy, trading wouldn't be so hard.

Trends continue until they don't ... but at some point, they don't, and that's where people get hurt. 

My gut tells me it is time to pay closer attention.

Onwards!