Sorry! No “Best Things” last week because I was busy with something.

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The Dumbest Financial Story of 2021
(Slate)

A commentary on the Archegos blowup which is undoubtedly the Wall Street story of the week. The markets pretty much treated it a non-event and the S&P500 is now at an all-time high above 4000.

Brutal truths about Modern Dating in Singapore
(Growing your tree of prosperity)

Christopher Ng’s hilarious mental model of dating in SG. Worth a read.

Non-compete
(The Reformed Broker)

Really important post. I have a group of colleagues and friends where we occasionally talk about investing and personal finance and the I always tell them that the most important thing I’ve learned is to know which game you’re playing.

Someone made 1000x returns on a stock or crypto by doing a YOLO trade? Good for them. I’m not about to tell them about the virtues of diversification or that the result of their trade is more luck than skill.

Someone in the office trying to work behind the scenes to get somewhere higher up in the world? By all means, go ahead. I’m not in the office because I’m trying to ascend the ranks for fame and glory.

Know the game you’re playing and play your own game.

Well, well, well…It looks like the rates are going to continue their upward march after all. And the decision is mainly due to the Fed allowing a some regulation to expire. Nothing new. The markets were already expecting this earlier this month as I highlighted in the ‘Best Reads’ two weeks ago.

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Reverse Wealth Transfer on Steroids
(The Reformed Broker)

Josh Brown puts out a PSA on not taking your (if you’re in the US and qualify for it) stimulus money and putting it into nonsense like the crap out there put on an NFT or SPACs. Read the whole piece and you will either conclude that (1) Josh Brown is a boomer or (2) the whole thing surrounding NFTs, SPACs, and other new-fangled technology is temporary insanity.

I’m with Josh Brown on this. Look at how the media’s (esp. here in Singapore just because the fella turns out to be based here) glorifying the “spending” of US$69m on a piece of digital art backed by a NFT. The logic bomb that’s going off on this one is off the rails.

Obviously, if ETH he was spending was really worth US$69m, he could have gotten a lot more bang for his buck. The fact that he chose to spend it on buying a piece of “art” shows that there are very few places right now that lets you use cryptocurrencies as a medium of exchange.

The next questionable decision is what if the cryptocurrency he used to pay for the “art” is expected to increase in value, then wouldn’t it mean that the actual price paid is going to be much more? Third, even if the cryptocurrency used isn’t expected to go up or retain its value, what makes the buyer of the “art” sure that the piece of “art” will do any better?

The man may be a good programmer but for sure, he’s a terrible investor and is a product of the times we’re in where people are making questionable financial decisions by hiding behind a veneer of techno jargon where things are created out of thin air and the value of something is pretty much based on the amount of hot air pumped into it.

These Singaporeans Lost Money in a Financial Scheme. What Can They Actually Do About It? (RICE media)

Jeez, isn’t this the year 2021? How are people still falling for these things?

A Very Eventful Early Retirement Case Study (Investment Moats)
When Should I Retire (The Wealthy Accountant)

Retirement two-fer reading. Nothing technical, just some perspective on the whole idea. I’m still not sold on the whole “retirement means that I don’t have a job/work to do” idea. My idea of retirement is more in line with the idea of having freedom to do whatever you want.

Yes please, let’s talk about ‘cancel culture’
(Academia.sg)

This has become something of a hot topic in the recent days because of a commentary written by a younger undergraduate published in the local papers. I took a snarky swipe at the commentary too on my social media and a former student messaged me to ask me why I made the remarks I made.

I’ll go more into that but first a comment or two on the Cherian George piece linked above. It’s mainly about how ‘cancel culture’ is also linked to censorship and oppression. He’s coming from the political angle of things which I guess would apply more in the Singapore context one to two decades ago.

Back to the original commentary, I thought that what was troubling about the whole piece is not that the writer is missing the bigger picture. Sure, as Bertha Henson has defended her student, the commentary taken literally and at face value makes sense.

In her defense of Dana, I think Henson basically doubled down on the fact that it was her judgment that led to the piece being published in the major papers. She must be taken in by the fact that the essay was all style while ignoring the fact that there was no substance.

But once you look past words like ‘woke’ or ‘cancel culture’, the whole idea here is that of a group, or groups of people coming together to perform a boycott. ‘Cancelling’ something or someone is not something new or troublesome. The fact is as a society, we have to reject or boycott ideas that may be dangerous or stupid. This notion isn’t limited to any one society. You wouldn’t find much protestations against ‘cancelling’ ideas like Neo-Nazism or Islamic extermism.

So, let’s get this straight, ‘cancel culture’ is not wrong, or bad, or even anything new. The more important thing would be whether this idea is being fairly applied.

Next, the whole idea of being ‘woke’ really seems to me to be a term that conservatives, or the majority, like to use to defend the status quo. It’s a passive-aggressive mockery of the fact that someone is coming to the defense of a group that may be less represented in society. Now, I don’t claim to know what these groups are or whether they have hidden agendas but I would think that if we want to be a more inclusive and cohesive society, the majority should be looking out for the minority. It’s simple logic that those in the majority are more likely to be represented and have the rules or society working for them.

Therefore, it is on the onus of those in the majority to make sure that those in the minority (be it due to race, religion, sexuality, gender etc.) are heard and represented. So, by saying “I’m afraid to be ‘cancelled’ so I’ll remain ignorant” is one the most convenient excuses and leaps of logic that I’ve ever read.

And in this case, is Dana being “cancelled”? I don’t know. If I were Dana and reading criticisms such as the one you’re reading right now, I would take this as feedback to focus less on sounding witty and smart and instead, focus on the actual intent and meaning of what you’re writing.

If you’re writing to show off how smart you are, or to basically be malicious, pretentious, or unkind, I think people can tell.

Somehow the default fonts on this thing has changed. Anyway, 1Q of 2021 is almost over and the it looks like the markets have COVID-19 firmly in the rearview mirror. Up next? The concern seems to be about whether all the measures taken by governments around world will lead to quicker than expected inflation or not.

I heard a podcast interview with Jim Bianco where he expects to see inflation in the second half of this year. But in case you’re thinking of inflation in the Zimbabwe or the 1970s, you better hold your horses. He’s thinking that it’ll be more like 2.5-3% on the 10-year which is essentially…2018?

And on the other hand, I heard another podcast interview with Michael Pettis where he, as he has been, is not bullish on the Chinese growth story and that inflation in the US and around the world as a result of stimulus may be more of a boogeyman than anything.

If anything, I’m actually quite bullish about the local markets in the near-term.

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That didn’t turn out as planned…
(Klement on Investing)

This is funny in a sad way…By the way, any one at LTA doing a similar study for SG roads? I would think that the messages on our electronic signboards vary enough to do a study on the impact of the various messages to drivers.

Estimating Future Stock Returns, December 2020 Update
(The Aleph Blog)

David Merkle doesn’t feel too hot on U.S. stocks that were all the rage last year.

SPACs, the investment term you won’t stop hearing about, explained
(Vox)

Honest to god, I wanted to do a similar article to educate myself on the various inner workings of SPACs but I came across this which explains everything. So, no sense reinventing the wheel.

Also, check out the Scott Galloway’s recent podcast episode with Aaron Ross Sorkin where they also talk about SPACs and how these things aren’t exactly a good deal for the retail investor.

Rush to bitcoin? Not so fast, say keepers of corporate coffers
(Yahoo! news)

I particularly like this bit:

“The general consensus among treasurers is that very few of them are going to follow this trend initially,” said Naresh Aggarwal at the UK’s Association for Corporate Treasurers.

“As a treasurer, if I am right and the price doubles, the company may sell its holding and make a profit. Whilst the company may be worth more, it won’t be reflected in my compensation,” he added.

“But if the price falls, I am pretty confident I will be fired. Why bother putting my neck on the line?”

So rates have started rising and “markets” are spooked. I say “markets” because honestly it’s mainly in the high flying names of last year (e.g. TSLA, the ARK ETFs etc.) that have been hit. But honestly, even if those names get hit for a total drawdown of 50%, it’s going to be hard to say if it’s cheap to buy.

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Special Edition: Will ARK Invest Blow Up?
(The Bear Cave)

I like this post not because I’m anti-Cathie Wood or anything but the post does make some good points about the illiquidity of some of the various ARK ETFs’ holdings and how it can come to haunt them when there are redemptions. Maybe Cathie Woods’ time is up now that even a personal finance site in Singapore like Seedly thinks she’s enough of a household name for Singaporean retail investors? I think that’s pretty much like the curse of the cover of BusinessWeek Magazine.

What If Interest Rates Don’t Matter as Much as We Think?
(A Wealth of Common Sense)

Honestly, it’s not the first time that I’ve seen this argument where rising rates are actually good for equity markets. The first time I heard about it was many years ago on a YouTube video. If you’re an equity investor, you really don’t have to be so worried about rising rates.

Unless, you’re in moonshots where rising rates mean rising opportunity cost of investment.

Analysis: Fixed-income markets wary of Fed decision on bank capital relief (Reuters)

Speaking of rising rates, it appears that the rising rates have go to do with more a structural issue and banks are just acting rationally in the bond market due to the uncertainty over whether there will be an extension of a regulation that is due to expire on 31 March. I first heard about this on the Bloomberg Odd Lots podcast where they interviewed Credit Suisse analyst Zoltan Pozsar who’s also featured in this article.

Why Global Trade Won’t Depend on Bitcoin
(Marc Levinson)

Marc Levinson is a trade economist and he pretty much wrote the book on the economics of container shipping.

Wow wow wow, I thought we were going to see some action in the market and then J.Pow talked and the markets brushed aside all fears of a steepening yield curve and continued the relentless march upwards.

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The tortoise, the hare, and the snail
(Klement on Investing)

Good point made by Joachim Klement on the paralysis by analysis. I’m guilty as charged.

The Psychology Behind the Boom in Collectibles
(A Wealth of Common Sense)

I asked some friends a question that I think is both fundamental and crucial to the way we think about why stock prices change. The Beanie Baby story told in the link above is a great illustration of one way to think about why stock prices change. The bigger question is that if this is your belief about markets, then what does it mean and by extension, what should you do?

There are no easy answers.

THE ODDS OF OUTPERFORMING THROUGH ACTIVE MANAGEMENT
(evidenceinvestor.com)

I think there’s been plenty of studies done by now that show that it’s tough to beat the market. Here’s one more.

The Simple Alternative
(FWP)

Less is more.

Busy, busy few weeks for me,
But we all still need to keep ourselves smart.
So here’s some Best Reads.

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The Algebra of Wealth
(No Mercy/No Malice)

I first heard Prof. Scott Galloway talk about this on the episode of his podcast that dropped this week. You may not agree that it’s algebra but I would think that he has the main components of getting wealthy right. Also, nice anecdotes and reminder to focus on the downside of getting it wrong, given the environment that we’re in where FOMO is starting to set in for many people.

Respect the Base Rate
(Of Dollars and Data)

Another great post that deals with the idea of numerical literacy. One of the most common mistakes that many people make is to forget what the baseline is. If you recognise what the base rate is, I believe you’ll end up making better decisions in general. It’s just like how a few backs, people were going ballistic over the reduction in interest rates earned in a savings account when the actual change amounted to something so insignificant that it was hardly worth mentioning.

If you want to know more about numerical literacy, I highly recommend Tim Harford’s latest book, The Data Detective.

The Big Long
(The Reformed Broker)

I sent this to a friend when I first read it. Basically, describes the times we’re living in.

Chinese microlending is getting weird and dangerous
(Protocol)

I can’t remember exactly how I came across this but it’s a fantastic article. Maybe besides reminding Jack Ma who’s really in charge, Chinese regulators are on to something after all.

Ok, so Bitcoin is back. I’ve written a fair bit on bitcoin previously (see the list here) but in this post, I thought I should examine the various reasons that have been thrown around as to why we should be bullish on Bitcoin. Note that some of the reasons discussed apply to other cryptocurrencies as well but for what it’s worth, Bitcoin is THE representative of the crypto space. In this respect, a helpful analogy would be thinking of the crypto space as precious metals within the tradable commodities space and Bitcoin is gold.

Investment thesis 1: Bitcoin is the next form of currency

This thesis basically subscribes to the idea that fiat currency issued by governments of the world is subject to manipulation by those that control the respective currencies and with low interest rates and high debt levels, major world governments will debase their currencies in time to come. Therefore, it’s better to hold cryptocurrencies or Bitcoin which cannot be manipulated or controlled by any one world government.

Bitcoin, being a currency that belongs to no one, will also not face the restrictions on payments that other currencies may face. Furthermore, Bitcoin, by virtue of a fixed upper limit on the number of coins in existence will not be debased and therefore will not lose value as a currency.

If sufficient people turn to this form of currency, this currency will become more valuable in future and therefore, it makes sense to start holding it now. However, as I wrote previously, the moment you have an asset whose value fluctuates wildly or is only going to go up, then it will lose it’s utility as a currency.

After all, if you believe that the value of something will only continue to go up, why use it now? This is particularly true if the value of the object is expected to increase by many times in the near future.

Investment Thesis 2: Bitcoin is going to go up in value and will be a great store of value

This argument pretty much relies on the same points above but it recognises that the volatility of crypto or Bitcoin prices pretty much makes it a lousy currency. But it could still be a great asset! Digital gold, perhaps.

This is the argument that people like Mike Novogratz has been making and it is the one argument that I’m more amenable to. After all, gold is pretty much useless except for the fact that it’s shiny and indestructible. Gold, for all intents and practical purposes is useless.

It’s only useful if you would like to signal how rich you are to someone else or if you need to store wealth and escape with it in times of emergencies. Even then, if you had to escape, there would be a limited amount of gold you could carry with you. In that respect, cryptocurrencies are more portable.

However, you have to remember that just like the value of gold, the value of Bitcoin or other cryptos depends heavily on what someone else thinks it’s worth. Both gold and Bitcoin have no means of production. In other words, both aren’t assets in the traditional sense because typical assets produce something of value and by extension, can be ascribed some value. For example, a cow is probably worth the sum of the amount of milk and meat that can be derived from the cow. In contrast, gold and bitcoin’s value is derived solely from its price which is a function of how much the marginal buyer and seller thinks it’s worth.

Perhaps, once enough people believe that Bitcoin is a thing, it WILL be come a thing as a result of some self-fulfilling prophecy. The problem I have with that logic is then, why Bitcoin?

Why not some other coin like dogecoin? And in fact, it turns out that dogecoin suddenly become a lot more valuable because Elon Musk suddenly showed some interest in it. So the problem I have with cryptos is that I don’t think the barriers to entry are high enough for one coin to remain THE coin for a long period of time. It also seems to me that everyone from hobbyists to China is interested in having their own cryptocurrency. Throw in the regulations that will eventually come due to the concerns over anti-money laundering and I’m not sure if the hype over Bitcoin is worth it.

How will it end?

You have to remember how it started. The current interest over Bitcoin and some other cryptos is mainly due to the fact that institutions are coming on board. This pretty much started with MicroStrategy CEO, Michael Saylor, using a huge chunk of the company’s cash hoard to buy Bitcoin. Tesla has recently announced that it also “invested” $1.5b into Bitcoin. Couple that with the fact that various payment platforms like PayPal and Square have allowed Bitcoin on their platforms, and the banks getting lots of queries on trading bitcoin and you have the recipe for bullish interest in Bitcoin.

Now, you have to realise that no matter what, the banks are only giving the customers what they want. As long as the volume transactions are high, banks are going to make money off people trading Bitcoin. Therefore, the thing I think is key is the fact that companies looked to Bitcoin as a place to park cash.

The main reason for parking cash in any other asset is because the returns on cash (i.e. interest rates) are low and therefore, the way this ends badly is when the Fed starts to raise rates, thus making the holding of cash more attractive. As long as rates remain low, I think the crypto party will continue. Meanwhile Saylor and Musk will look like geniuses for getting what looks like huge returns on a asset that seems like it can only go up.

Happy Valentine’s Day! Or Happy Lunar New Year! Whichever you’re celebrating this week. Looks like the markets have quietened down after the WSB action and furore over restrictions on trading of highly volatile stocks. What’s next? Who knows.

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What do short-sellers really do?
(Noah Smith)

Noah writes a really good piece on the role and function of short-sellers. A healthy financial market needs price discovery and for all the bad press short-sellers have been getting, you can’t deny that they are the one area of the market that contributes to negative price-discovery.

How to be a genius
(Aeon.co)

Interesting read that a friend of mine sent me.

THE RISE AND FALL OF BITCOIN BILLIONAIRE ARTHUR HAYES
(Vanity Fair)

If crypto is going to revolutionise finance, you can be sure that some of the early abrasive figures are going to be taken down. Speaking of crypto, I have some thoughts on that matter and will be coming up with a post on that soon.

A must-read paper on USA vs. China
(Klement on Investing)

I really think that this will be the core theme of the world over the next few decades. How the U.S. and China decides to proceed in terms of their place in the world will be a big driver of what the world, especially financial markets, looks like in the future.

The failure of anomaly indicators in finance
(Mathematical Investor)

I’ve been reading Tim Harford’s new book, The Data Detective and after reading it, I’ve come away quite comforted that the stumbling block to better AI and Machine Learning is really ourselves, the creator of the code.

What a show the meme stocks (or stonks?) have been. But I guess now that the show’s over, it’s back to regular programming.

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Pandemic-Era Central Banking Is Creating Bubbles Everywhere
(Bloomberg)

Nice piece that threads several areas where prices have increased significantly. It’s really chaos theory at work – I can understand SPACs, tech IPOs and bitcoin but home prices in Wellington, NZ?? I also like the phrase “central banking liquidity black hole”. Maybe that really is an apt description for the environment right now.

Squeezing Your Life into $2,600 a Month
(Investment Moats)

I think Kyith has a really great post. Future planning is often hard because of how bad people are at prediction. Another great point brought up is how we should always think of investments in terms of opportunity cost – if I invest in this and get X% returns p.a., what returns (Y% p.a) am I giving up?

Robinhood’s Customers Are Hedge Funds Like Citadel. Its Users Are the Product. (VICE)

A good look at how Robinhood and other brokers offer zero-commission trades.

Those firms make money by effectively seeing what the retail investors on Robinhood are going to do before they actually do it, and acting accordingly. Those firms are basically buying information that then informs their own trades.

I’m not saying that the model is broken or bad. I’m just saying that you have to know who the players in the game are and how the game’s being played. Then, you can use that to your advantage.

Money confessions: 9 Singaporeans share their portfolio asset allocation
(Asiaone)

Interesting read.

But don’t read too much into it because each of them probably aren’t representative of their age group. It’s also weird how they mistake the platform for the asset. Like why is robo-advisors even considered an asset class? Ditto for those that cited “regular savings plan” as an asset. Also, why do some of them consider funds as separate from stocks or bonds? Doesn’t it really depend on what kind of fund you hold? If you hold an equity fund, then you basically have exposure to equities.

Of course, some of them also made the eternal sin of classifying ILPs as an asset class and commingled the idea of protection from the plan with the returns on the plan. I really think the financial advisory space should do better by breaking down the returns from investment vs. protection because those are entirely different things.

Also, I realised that many people don’t consider they income from their job as part of their asset allocation. Human capital is one highly overlooked asset class. And the nuances are pretty important. For example, those in stable jobs (a.k.a iron rice bowls) should be taking on more exposure in risky assets (e.g. equities) since they have a bond-like income.

I’m not the first one to figure this out. This was part of the CFA level 3 syllabus when I took it and only one other wise colleague at work actually figured it out. Otherwise, I haven’t really heard many people mention this as part of asset allocation.

[31 Jan, 2L54pm: updated with new links]

This is going to be one of the millions of posts on the subject but I thought I should put it out anyway and my value on this subject is in bringing together all the different viewpoints on the subject.

What’s up with GME (and other meme stocks)?

First, we have to start with what happened. The short (pun intended!) story is that some time in 2020, some hedge funds (notably Melvin Capital and Citron Research) put it out there that they were short Gamestop (ticker: GME).

GME was already a name that was being floated around on the subreddit, Wallstreetbets (WSB), as a stock that some redditors were long either via the stock, call options, or both. Maybe it was due to a sense of nostalgia (many of these redditors on WSB grew up with Gamestop) or they correctly identified it as an opportunity to create a short squeeze (at one point, short sellers were short 148% of the stock, more on this later) and profit from this trade.

The momentum started building in January 2021 when the redditors on WSB started buying up swaths of stock and call options, thus pushing the price higher. This caused losses on the short sellers’ positions and presumably, short of these short sellers scrambled to cover their positions by buying the stock. This caused prices to go even higher, thus perpetuating a positive feedback loop for prices. This was the result of not just shorts having to buy stock to cover the shorts (i.e. a short squeeze) but market makers having to buy stock in order to remain market neutral to due an increase in buyers of call options (i.e. a gamma squeeze). ERN has a nice summary of the various market forces at work.

One of the main reasons that the redditors on WSB correctly identified that the short was ripe to squeeze was the fact that there were more shares shorted than the amount of shares available. In essence, the shorts had taken on a position that was highly leveraged as they would have to eventually return more stock than what was even in existence.

The squeeze was further fueled by billionaires such as Chamath joining the fray and when brokerages such as Robinhood started restricted the purchase of stock (thus limiting the squeeze), it drew outrage from WSB and got the attention of those in Washington (notably AOC, Warren and Cruz).

At this point, the story isn’t over. The SEC has said that it is looking into ensuring that retail investors get to trade and will be protected. The news has made international headlines (I joked that since our local paper, The Straits Times has reported on it, the ride’s probably over). On Friday, the stock initially traded much higher pre-market and then came down from those levels. However, the stock still closed around 60% higher compared to Thurday.

Did the David really stick it to Goliath?

The story behind WSB and GME has gotten so much attention because it’s a classic underdog story. It’s a story of how individuals may be weak but if they stand together, they can be so strong that forces worth billions of dollars can be forced to fold.

But is the story really that simple?

I feel that if you look beyond that narrative, you may find that things are a little more complicated. After all, one of the people that profited greatly from this episode is Ryan Cohen, the co-founder of Chewy.com who placed a huge bet on Gamestop being a turnaround story. But credit where credit is due, while he isn’t one of the small guys, Ryan Cohen was putting his money and resources on the line to try and turn around what he saw was something of value.

The lucky idiot in this story is Gamestop CEO George Sherman. His shares are now reportedly worth somewhere near $1b. This is a CEO who joined in 2019, given tons of stock options, was sitting in a sinking ship, and instead of drowning and going down with the ship, he’s now wealthier than ever before? Granted that this is all paper wealth and as CEO, he probably hasn’t even had enough time to put in place a turnaround plan while he had to deal with the external environment brought about by COVID-19, but still…He’s now been given a lifeline to recapitalise the company. His job has been made infinitely easier.

Also, I’m skeptical that the redditors on WSB managed to execute the squeeze without the any bigger forces at work. That would only work if their brokers extended tons more margin in order for them to leverage up. Either that or they used the gains in previously held positions like TSLA (another WSB favourite which saw massive gains in 2020) in order to take on position in GME.

WSB has tried the same squeeze on other names such as AMC, BB, BBBY, and NOK but those are unlikely to go as well as GME. Even then in those cases, look who’s benefited the most? Another lucky idiot. It’s not the small guy.

What’s next?

Now that the SEC is involved, it probably won’t end well for retail investors. Josh Brown tells the story of a similar situation that happened a 100 years ago. Given that the brokerages are restricting trading in these volatile stocks because their clearing houses have asked them to increase the amount of collateral to clear these trades.

In short, the market is already throwing sands in the wheels to slow down these trades. There’s going to be more friction when trading in these stocks and if there’s more friction, that’s simply going to take away the momentum. Without, the momentum, I think retail investors are going to find huge losses in the highly leveraged positions and then subsequently in the long positions themselves.

There are lots of very smart people discussing this story right now and I think if you really want to learn about what happened, I would check out the following:

I hope this helped.